MANAGERIAL

th
ECONOMICS 11 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  economic profit
 theory of the firm  profit margin
 expected value  return on stockholders'
maximization equity
 value of the firm  frictional profit theory
 present value  monopoly profit theory
 optimize  innovation profit theory
 satisfice  compensatory profit
 business profit theory
 normal rate of return
 How Is Managerial Economics
Useful?
 Evaluating Choice Alternatives
 Identify ways to efficiently achieve goals.
 Specify pricing and production strategies.
 Provide production and marketing rules to
help maximize net profits.
 Making the Best Decision
 Managerial economics can be used to
efficiently meet management objectives.
 Managerial economics can be used to
understand logic of company, consumer, and
government decisions.
 Theory of the Firm
 Expected Value Maximization
 Owner-managers maximize short-run profits.
 Primary goal is long-term expected value
maximization.
 Constraints and the Theory of the Firm
 Resource constraints.
 Social constraints
 Limitations of the Theory of the Firm
 Alternative theory adds perspective.
 Competition forces efficiency.
 Hostile takeovers threaten inefficient managers.
 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
 Rapid growth in revenues.

 Rapid decline in costs.

 Compensatory Profit Theories

 Better, faster, or cheaper than

the competition is profitable.
 Role of Business in
Society
 Why Firms Exist
 Business is useful in satisfying consumer
wants.
 Business contributes to social welfare

 Social Responsibility of Business

 Serve customers.
 Provide employment opportunities.

 Obey laws and regulations.

 Structure of this Text
 Objectives
 Understand usefulness of
economics in describing managerial
behavior.
 Understand how economics can be
used to improve managerial
decisions.
 Appreciate vital role of business in
society.