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commerce 4th
grade
Assuit university
Dominick Salvatore
Dominick Salvatore
.Dominick Salvatore is Distinguished Professor of Economics and the Director of the Ph.D. Program in Economics at Fordham University in New York City
Office Address
Dealy Hall 521
Mailing Address
Fordham University
Department of Economics
5/F Dealy Hall
441 East Fordham Road
Bronx, NY 10458
Contact
Phone: (718) 817 3606
Fax: (914) 337 3355
Email: salvatore@fordham.edu
Research Assistant
Katie Jajtner
kjajtner@fordham.edu
Management decision
problems
Decision science tools
Economic theory
Mathematical economics
Micro economics
econometrics
Macro economics
[notes in
Managerial
economics
Managerial
economicsedited by "
Macro economics " the study of the total or aggregate level of output , income ,
employment , consumption , investment and prices for the economy viewed as a
" whole
Both microeconomic and macroeconomic theories are the most important -1
element in managerial economic
Economic theories seeks to predict and explain economic behavior -2
Economic theories usually begin with a model , this abstracts from the many -3
details surrounding an event and seeks to identify a few of the most important
determinates of the events
the firm uses the models of economic theory to maximize it's aim of " -4
maximizing profit", if this model predicts the behavior of the firm accurately
the methodology of economics is to accept a theory or model if it predicts -5
accurately and if the prediction follows logically from the assumption
relationship to the decision sciences-2
Managerial economic is also closely related to the decision science, these"
utilize the tools of mathematical economics and econometrics to construct and
estimate decision models aimed at determining the optimal behavior of the
"firm
Mathematical economics" "is used to formalize the economic models"
"postulated by economic theory
Econometrics" application of statistical tools particularly regression analysis "
"to real world data to estimate the models postulated by economic theory and
"forecasting
:For example
Economic theory postulates that the quantity demanded of a commodity is a
function of or depend on the price of the commodity "P" , The income of
"consumer "Y", and price of related commodities "Pc , Ps
Assuming constant tastes
Q d = f ( P , Y , Pc ,Ps )
By collecting data on Q , P , Y , Pc , Ps for a particular commodity , we can
estimate the empirical " econometric relationship, forecasting future demand
for a commodity is essential in order to achieve the goal or objective of the
"firm most efficiently " profit maximization
Managerial economics " refer to the application of economic theory and
decision science tools to find the optimal solution to managerial decision
" problems
managerial economics and relationship to the functional areas of business -3
administration studies
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the firm will reach a point where the cost of supplying additional -4
services within the firm exceeds the cost of purchasing these
services from other firms
Function of the firm
The function of the firm is to purchase resources or inputs of labor "-1
services, capital, and raw materials in order to transform them into
"goods and services for sale
The owner of these resources use the income result from selling -2
these resources to purchase goods and services produced by firms
The objective and value of the firm
managerial economics begins by postulating a theory of the firm, -1
which is uses to analyze managerial decision making
the theory of the firm was based on the assumption that the goal -2
or objective of the firm was to maximize current or short-term profits
firms sacrifice short-term profits for the sake of increasing future-3
or long-term profits
Some examples
.expenditures on research and development-1
.new capital equipment-2
.enhanced promotional campaign-3
The theory of the firm postulates that
the primary goal or objective of the firm is to maximize the wealth "
" or value of the firm
This means that "future profits must be discounted to present
because money of profit in future is worth less than money of profit
today
Formally stated, the wealth or value of the firm is given by
p . v=
1
1
(1+r )
2
2
(1+r )
+ +
n
p . v=
t=1
etc
n
n
(1+r )
t
(1+r )t
.considered
= the appropriate discount rate used to find the present value of future
profit
n
sum or add all the (1+r )t resulting from substituting the value of 1 to n
t =1
for t
Since profits are equal to total revenue " TR" minus "TC" , equation can be
written
Page | 5
t =1
TR t TC t
(1+ R)T
TR " depend on sales or the demand for the firms output and firms pricing
decision
Tc"depend on the technology of production and resources
Constraints on the operation of the firm
Resources constraints
These constraints arise from
limitation on the availability of-1
essential inputs
firms mayn't able to hire as many-2
skilled worker as it wants
firms may not be able to acquire all -3
the specific raw material it demand
also face limitation on factory and-4
warehouse space
limitation in the quantity of capital-5
funds available for a given project
government agencies and not for-6
profit organizations also face similar
resource constraints
legal constraints
These constraints take the form of
minimum wage laws-1
health and safety standards-2
pollution emission standards-3
law and regulations that prevent-4
firms from employing
Society imposes these constraints on
firms in order to modify their behavior
and make it more nearly consistent
with broad social welfare goals
Constrained optimization
It means that how the firm maximizes it's wealth or values within these "
constrained", where the firm want to minimize costs and other objectives subject
to the constraints it faces
Limitation on the theory of the firm
the theory of the firm which postulates that " the goal or objective of the "
firm is to maximize wealth or the value of the firm has been criticized as
" being much too narrow and unrealistic
: Other theories postulate that the primary objective of the firm is
the maximization of sales-1
the maximization of management utility-2
the maximization of satisfying behavior-3
:Business profit
Refers to the total revenue of the firm minus the explicit costs "," "
"accounting costs
Are the actual expenditure of the firm to purchase or hire inputs required "
"costs production
Page | 6
Theories of profit
Risk-bearing theories of profit-1
For the firm, to enter and remain in business, above normal profit is required
in the fields such as petroleum exploration, where there are above average
risks
frictional theory of profit-2
Profit arise as a result of friction or disturbances from long-term equilibrium
that is , in long run , perfectly competitive equilibrium , firms tend to earn
only a normal return " adjusted for risk " or zero economic profit on their
" investment " TR - ( EC + I C) = ZERO
Page | 7
BUT in short run there may be economic profit or loss , on other hand when
losses are incurred , some firms leave the industry , this leads to a higher
prices and the elimination of the losses
monoploy theory of profit-3
Some firms with monopoly power can restrict output and charge higher
prices than under perfect competition monopoly power arises from
controlling the supply of raw materials, large scale production, from
ownership of patents or from government restrictions that prohibit
competition
innovation theory of profit-4
the innovation theory of profit postulates that " economic "profit is the "
" reward for the introduction of a successful innovation
For example : steven jobs , the founder of the apple computer company , become a
millionaire in the course of a few years by introducing the apple computer in 1977
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