PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc.

c. (Adapted by OUP India, 2008) Slide 1

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 2
 Managerial Economics
Defined
• The application of economic theory and
the tools of decision science to examine
how an organization can achieve its
aims or objectives most efficiently.
– applications of economic theory
– quantitative methods
– statistical methods
– computational methods

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 3
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 4
 Economic Theory
• Microeconomics
– Study of the economic behavior of
individual decision-making units.
– Relevance to Managerial Economics
• Macroeconomics
– Study of the total or aggregate level of
output, income, employment, consumption,
investment, and prices for the economy
viewed as a whole.
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 5
 Decision Sciences
• Mathematical Economics
– Expresses and analyzes economic models
using the tools of mathematics.
• Econometrics
– Employs statistical methods to estimate
and test economic models using empirical
data.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 6
 Economic Methodology
• Economic Models
– Abstract from details
– Focus on most important determinants of
economic behavior – cause and effect
• Evaluating Economic Models
– A model is accepted if it predicts accurately
and if the predictions follow logically from
the assumptions.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 7
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 8
 Theory of the Firm
• Combines and organizes resources for
the purpose of producing goods and/or
services for sale.
• Internalizes transactions, reducing
transactions costs.
• Economic theory assumes that the
primary goal of managers is to
maximize the value of the firm.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 9
 Value of the Firm
The present value of all expected future profits

π1 π2 πn n
πt
PV = + +L+ =∑
(1 + r ) (1 + r )
1 2
(1 + r ) n
t =1 (1 + r ) t

πt n n
TRt − TCt
Value of Firm = ∑ =∑
t =1 (1 + r ) t
t =1 (1 + r ) t

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 10
 Alternative Theories
• Sales maximization
– Adequate rate of profit
• Management utility maximization
– Principle-agent problem
• Satisficing behavior

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 11
 Definitions of Profit
• Business or Accounting Profit: Total
revenue minus the explicit or
accounting costs of production.
• Economic Profit: Total revenue minus
the explicit and implicit costs of
production.
• Opportunity Cost: Implicit value of a
resource in its best alternative use.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 12
 Theories of Profit
• Risk-Bearing Theories of Profit
• Frictional Theory of Profit
• Monopoly Theory of Profit
• Innovation Theory of Profit
• Managerial Efficiency Theory of Profit

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 13
 Social Function of Profit
• Profit is a signal that guides the
allocation of society’s resources.
• High profits in an industry are a signal
that buyers want more of what the
industry produces.
• Low (or negative) profits in an industry
are a signal that buyers want less of
what the industry produces.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 14
 Business Ethics
• Identifies types of behavior that
businesses and their employees should
not engage in.
• Source of guidance that goes beyond
enforceable laws.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 15
 The Changing Environment of
Managerial Economics
• Globalization of Economic Activity
– Goods and Services
– Capital
– Technology
– Skilled Labor
• Technological Change
– Telecommunications Advances
– The Internet and the World Wide Web

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 16
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 17
 Contd

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 18
 (contd)

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 19
 Appendix to Chapter 1

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 20
 Law of Demand
• A decrease in the price of a good, all
other things held constant, will cause an
increase in the quantity demanded of
the good.
• An increase in the price of a good, all
other things held constant, will cause a
decrease in the quantity demanded of
the good.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 21
 Change in Quantity
Demanded
Price
An increase in price
causes a decrease in
quantity demanded.
P1

P0

Quantity
Q1 Q0
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 22
 Change in Quantity
Demanded
Price
A decrease in price
causes an increase in
quantity demanded.

P0

P1

Quantity
Q0 Q1
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 23
 Changes in Demand
• Change in Buyers’ Tastes
• Change in Buyers’ Incomes
– Normal Goods
– Inferior Goods
• Change in the Number of Buyers
• Change in the Price of Related Goods
– Substitute Goods
– Complementary Goods

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 24
 Change in Demand

Price An increase in demand

refers to a rightward shift
in the market demand
curve.

P0

Quantity
Q0 Q1
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 25
 Change in Demand

Price A decrease in demand

refers to a leftward shift
in the market demand
curve.

P0

Quantity
Q1 Q0
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 26
 Law of Supply
• A decrease in the price of a good, all
other things held constant, will cause a
decrease in the quantity supplied of the
good.
• An increase in the price of a good, all
other things held constant, will cause an
increase in the quantity supplied of the
good.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 27
 Change in Quantity Supplied
A decrease in price
Price causes a decrease in
quantity supplied.

P0

P1

Quantity
Q1 Q0
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 28
 Change in Quantity Supplied
An increase in price
Price causes an increase in
quantity supplied.

P1

P0

Quantity
Q0 Q1
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 29
 Changes in Supply

• Change in Production Technology

• Change in Input Prices
• Change in the Number of Sellers

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 30
 Change in Supply
An increase in supply
refers to a rightward shift
Price in the market supply curve.

P0

Quantity
Q0 Q1
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 31
 Change in Supply
A decrease in supply refers
to a leftward shift in the
Price market supply curve.

P0

Quantity
Q1 Q0
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 32
 Market Equilibrium
• Market equilibrium is determined at the
intersection of the market demand
curve and the market supply curve.
• The equilibrium price causes quantity
demanded to be equal to quantity
supplied.

PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 33
 Market Equilibrium
Price

D S

Quantity
Q
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 34
 Market Equilibrium
Price

D0 D1 S0
An increase in demand
will cause the market
P1
equilibrium price and
P0 quantity to increase.

Quantity
Q0 Q1
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 35
 Market Equilibrium
Price

D1 D0 S0
A decrease in demand
will cause the market
P0
equilibrium price and
P1 quantity to decrease.

Quantity
Q1 Q0
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 36
 Market Equilibrium
Price An increase
in supply
D0 S0 S1 will cause
the market
equilibrium
price to
P0 decrease and
P1 quantity to
increase.

Quantity
Q0 Q1
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 37
 Market Equilibrium
Price A decrease
in supply
D0 S1 S0 will cause
the market
equilibrium
price to
P1 increase and
P0 quantity to
decrease.

Quantity
Q1 Q0
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 38
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 39
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 40
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 41
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 42
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 43
PowerPoint Slides Prepared by Robert F. Brooker, Ph.D. Copyright  2007 by Oxford University Press, Inc. (Adapted by OUP India, 2008) Slide 44