MANAGERIAL ECONOMICS

12th Edition

By Mark Hirschey

Nature and Scope of Managerial Economics

Chapter 1

Chapter 1 OVERVIEW
How

Is Managerial Economics Useful? Theory of the Firm Profit Measurement Why Do Profits Vary among Firms? Role of Business in Society Structure of this Text

Chapter 1 KEY CONCEPTS

managerial economics theory of the firm expected value maximization value of the firm present value optimize satisfice business profit

normal rate of return economic profit profit margin return on stockholders' equity frictional profit theory monopoly profit theory innovation profit theory compensatory profit theory

How Is Managerial Economics Useful?

Evaluating Choice Alternatives

Identify ways to efficiently achieve goals. Specify pricing and production strategies. Spell out production and marketing rules to maximize profits.
Managerial economics helps meet management objectives efficiently. Managerial economics shows the logic of consumer, and government decisions.

Making the Best Decision

Theory of the Firm

Expected Value Maximization

Owner-managers maximize short-run profits. Primary goal is long-term expected value maximization. Resource constraints. Social constraints.
Alternative theory adds perspective. Competition forces efficiency. Hostile takeovers threaten inefficient managers.

Constraints and the Theory of the Firm

Limitations of the Theory of the Firm

Profit Measurement
Business

Versus Economic Profit

Business (accounting) profit reflects explicit costs and revenues. Economic profit.
Profit above a risk-adjusted normal return. Considers cash and noncash items.

Variability

of Business Profits

Business profits vary widely.

Why Do Profits Vary Among Firms?

Disequilibrium

Profit Theories Unexpected revenue growth. Unexpected cost savings. Compensatory Profit Theories Profits accrue to firms that are better, faster, or cheaper than the competition.

Role of Business in Society

Why

Firms Exist

Businesses help satisfy consumer wants. Businesses contributes to social welfare

Social

Responsibility of Business

Serve customers. Provide employment opportunities. Obey laws and regulations.

Structure of this Text

Objectives

Learn usefulness of economics in describing managerial behavior. Appreciate how economics can be used to improve managerial decisions. Understand vital role of business in society.