2. The Nature and Scope of Managerial Economics
Chapter 1:
The Nature and Scope of Managerial Economics

3. Managerial Economics Defined
The application of economic theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently.
applications of economic theory
quantitative methods
statistical methods
computational methods

5. Economic Theory Microeconomics Macroeconomics
Study of the economic behavior of individual decision-making units.
Relevance to Managerial Economics.
Macroeconomics
Study of the total or aggregate level of output, income, employment, consumption, investment, and prices for the economy viewed as a whole.

6. Decision Sciences Mathematical Economics Econometrics
Expresses and analyzes economic models using the tools of mathematics.
Econometrics
Employs statistical methods to estimate and test economic models using empirical data.

7. Economic Methodology Economic Models Evaluating Economic Models
Abstract from details
Focus on most important determinants of economic behavior – cause and effect
Evaluating Economic Models
A model is accepted if it predicts accurately and if the predictions follow logically from the assumptions.

9. The Theory of the Firm
Combines and organizes resources for the purpose of producing goods and/or services for sale.
Internalizes transactions, reducing transactions costs.
Economic theory assumes that the primary goal of managers is to maximize the value of the firm.

10. The present value of all expected future profits
Value of the Firm
The present value of all expected future profits

11. Alternative Theories Sales maximization
Adequate rate of profit
Management utility maximization
Principle-agent problem
Satisficing behavior

12. Definitions of Profit
Business or Accounting Profit: Total revenue minus the explicit or accounting costs of production.
Economic Profit: Total revenue minus the explicit and implicit costs of production.
Opportunity Cost: Implicit value of a resource in its best alternative use.

13. Theories of Profit Risk-Bearing Theories of Profit
Frictional Theory of Profit
Monopoly Theory of Profit
Innovation Theory of Profit
Managerial Efficiency Theory of Profit

14. Social Function of Profit
Profit is a signal that guides the allocation of society’s resources.
High profits in an industry are a signal that buyers want more of what the industry produces.
Low (or negative) profits in an industry are a signal that buyers want less of what the industry produces.

15. Business Ethics
Identifies types of behavior that businesses and their employees should not engage in.
Source of guidance that goes beyond enforceable laws.

16. The Changing Environment of Managerial Economics
Globalization of Economic Activity
Goods and Services
Capital
Technology
Skilled Labor
Technological Change
Telecommunications Advances
The Internet and the World Wide Web