01 intro to managerial economics
TRANSCRIPT
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Module 1
Introduction to
Managerial Economics
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INTRODUCTION
How does managerial economics differfrom regular economics?
There is no difference in the theory;standard economic theory provides thebasis for managerial economics.
The difference is in the way theeconomictheory is applied.
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What is managerial economics?
Managerial economics is the use ofeconomic analysis to make business decisions
involving the best use (allocation) of anorganizations scarce resources
Managerial economics is (mostly) appliedmicroeconomics (normative microeconomics)
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Managerial economics deals with
How decisions should be made bymanagers to achieve the firms goals -
in particular, how to maximize profit.
(Also government agencies and
nonprofit institutions benefit fromknowledge of economics, i.e. efficientrecourse allocation is important forthem too...)
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Relationship between ManagerialEconomics and Related Disciplines
ManagementDecision Problems
Economic ConceptsManagerialEconomics
Optimal Solutions to Managerial
Decision Problems
ManagementDecision Problems
ManagerialEconomics
Optimal Solutions to Managerial
Decision Problems
Decision Sciences
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Managerial Economics Use of Economic Concepts and Decision
Science Methodology to Solve Managerial
Decision Problems
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Circular Flow of Economic
Activity Individuals and firms are fundamental
participants in a market economy
They interact in two arenas Product market Factor market
Prices and profits serve as signals for
regulating flow of money and resourcesthrough factor market and flows of moneyand goods through product market
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Firm
An entity/organization which organizesfactors of production to produce goods and
services that will meet the demands ofindividual consumers and other firms
Types
Sole proprietorship
Partnerships
Corporations
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Firm: Rationale for
existence Firms exist as organizations because
the total cost of producing any rate of
output is lower than if the firm did notexist
Reasons
Transaction costs (external transactionsversus internal operations)
Government intervention
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THE GOALS OF A FIRM
Economic Goals:
Maximizing or Satisficing
1. Profit2. Market share
3. Revenue growth
4. Return on investment
5. Technology
6. Customer satisfaction
7. Shareholder value
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THE GOALS OF A FIRM continued
Non-economic Objectives:
1. A good place for our employees to work
2. Provide good products/services to our
customers
3. Act as a good citizen in our society
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Optimal Decision:
Given the goal(s) that the firm ispursuing, the optimal decision in
managerial economics is one thatbrings the firm closest to this goal.
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Roles of Managers:
Making decisions and processinginformation are the two primary tasks
of managers.Examples:
Whether or not to close down a branch ofthe firm?
Whether or not a store or restaurant shouldstay open more hours a day?
How a hospital can treat more patientswithout a decrease in patient care?
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Roles of Managers continued
How a government agency can bereorganized to be more efficient?
Whether to install an in-housecomputer rather than pay for outsidecomputing services?
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All these, as well as many othermanagerial decisions require the use of
basic economics.
Economic theory helps decision makersto know what information is necessary inorder to make the decision and how toprocess and use that information.
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Questions that managers must answer:
Should our firm be in this business?
If so, what price and output levels achieve
our goals?How can we maintain a competitive
advantage over our competitors? Cost-leader?
Product Differentiation?
Outsourcing, alliances, mergers, acquisitions?
International Dimensions?
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Questions that managers must answer:
What are the economic conditions in aparticular market?
Market Structure? Supply and Demand Conditions?
Technology?
Government Regulations?
International Dimensions? Future Conditions?
Macroeconomic Factors?
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Profit measurement
Profit = revenue - cost
Accounting profit = Revenue Explicit costs
Economic profit = Revenue (Explicit cost+ Implicit costs)
Implicit costs are costs associated with foregoneopportunities (opportunity cost of resources in
particular use) Opportunity cost is the value foregone (possible in next
best use)
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Profit maximization
Profit in current period
Profit over longer period
Present value analysis
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Expression of Economic
Relationship Economic relationship can be
expressed in following three ways:
Table
Equation
Graph