Managerial Economics in a

Global Economy, 5th Edition

by
Dominick Salvatore
Chapter 1
The Nature and Scope
of Managerial Economics

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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.

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Managerial Decision Problems

Economic theory
Microeconomics
Macroeconomics

Decision Sciences
Mathematical Economics
Econometrics

MANAGERIAL ECONOMICS
Application of economic theory
and decision science tools to solve
managerial decision problems
OPTIMAL SOLUTIONS TO
MANAGERIAL DECISION PROBLEMS
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Theory of the Firm

Combines and organizes resources for
the purpose of producing goods and/or
services for sale.
Internalizes transactions, reducing
transactions costs.
Primary goal is to maximize the wealth
or value of the firm.
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Value of the Firm

The present value of all expected future profits
n
1
2
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t 1
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t
TRt TCt
Value of Firm

t
t
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t 1
t 1
n

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Alternative Theories
Sales maximization
Adequate rate of profit

Management utility maximization

Principle-agent problem

Satisficing behavior

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Definitions of Profit
Business 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.

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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

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Function of Profit
Profit is a signal that guides the
allocation of societys 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.

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Business Ethics
Identifies types of behavior that
businesses and their employees should
not engage in.
Source of guidance that goes beyond
enforceable laws.

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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

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