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Managerial Economics
Definitions of Economics
According to Adam Smith (1723-1790), hailed as the Father of Economics, saw economics as .an enquiry into the nature and causes of the wealth of nations. According to Alfred Marshall (1842-1924) the study of mankind in the everyday business of life. According to Lionel Robbins (1898-1984) the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
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Basic Assumptions
Ceteris Paribus (Latin Phrase) All other things being equal. The term is most often used in isolating description of a particular event from other potential environmental variables. Ex: Demand and price Rationality Consumers and Producers measure and compare the costs and benefits of a decision before going ahead. Ex: whether to train the existing workers or recruit new workers for the newly opened unit of the firm
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Managerial Economics
Microeconomics
Study of behavior of individual economic agents
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Market-supplied resources
Owned by others & hired, rented, or leased
Owner-supplied resources
Owned & used by the firm
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Explicit Costs
Monetary payments to owners of market-supplied resources
Implicit Costs
Nonmonetary opportunity costs of using owner-supplied resources
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Impli it
f r- ppli r O The returns forgone by not taking the owners resources to market
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Opportunity cost of using land or capital owned by the firm Opportunity cost of owners time spent managing or working for the firm
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Accounting profit does not subtract implicit costs from total revenue Firm owners must cover all costs of all resources used by the firm
Objective is to maximize economic profit
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Risk premium
Accounts for risk of not knowing future profits The larger the rise, the higher the risk premium, & the lower the firms value
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Moral Hazard
When either party to an agreement has incentive not to abide by all its provisions & one party cannot cost effectively monitor the agreement
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Price-setting firm
Can set price of its product Has a degree of market power, which is ability to raise price without losing all sales
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What is a Market?
A market is any arrangement through which buyers & sellers exchange goods & services Markets reduce transaction costs
Costs of making a transaction other than the price of the good or service
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Market Structures
Market characteristics that determine the economic environment in which a firm operates
Number & size of firms in market Degree of product differentiation Likelihood of new firms entering market
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Perfect Competition
Large number of relatively small firms Undifferentiated product No barriers to entry
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Monopoly
Single firm Produces product with no close substitutes Protected by a barrier to entry
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Monopolistic Competition
Large number of relatively small firms Differentiated products No barriers to entry
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Oligopoly
Few firms produce all or most of market output Profits are interdependent
Actions by any one firm will affect sales & profits of the other firms
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Globalization of Markets
Economic integration of markets located in nations around the world
Provides opportunity to sell more goods & services to foreign buyers Presents threat of increased competition from foreign producers
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