Professional Documents
Culture Documents
Business Strategy
Chapter 1
The Fundamentals of Managerial
Economics
McGraw-Hill/Irwin
Michael R. Baye, Managerial Economics and
Business Strategy
1-2
Overview
I. Introduction
II. The Economics of Effective Management
1-3
Managerial Economics
Manager
Economics
Managerial Economics
1-4
Economic Profits
1-5
Opportunity Cost
Accounting Costs
Opportunity Cost
Economic Profits
1-6
1-7
Profits as a Signal
Profits signal to resource holders where
resources are most highly valued by society.
1-8
Market Interactions
Consumer-Producer Rivalry
Consumer-Consumer Rivalry
Producer-Producer Rivalry
1-9
1-10
PV
FV
1 i
Examples:
1-11
1-12
PV
FV
1 i
Equivalently,
FV
1 i
n
. . .
FVt
PV
t
t 1 1 i
FV
1 i
1-13
NPV
FV
FV
1 i
. . .
FV
1 i
If
Decision Rule:
NPV < 0: Reject project
NPV > 0: Accept project
1 i
1-14
PVPerpetuity
CF
CF
CF
...
2
3
1 i 1 i 1 i
CF
1-15
t
1
2
PVFirm 0
...
t
1 i 1 i
t 1
1 i
This means the present value of current and future profits, so the
firm is maximizing its value.
Marginal (Incremental)
Analysis
Control Variable Examples:
Output
Price
Product Quality
Advertising
R&D
1-16
1-17
Net Benefits
Net Benefits = Total Benefits - Total Costs
Profits = Revenue - Costs
1-18
B
MB
Q
Slope (calculus derivative) of the total benefit
curve.
1-19
C
MC
Q
Slope (calculus derivative) of the total cost
curve
1-20
Marginal Principle
To maximize net benefits, the managerial
control variable should be increased up to
the point where MB = MC.
MB > MC means the last unit of the control
variable increased benefits more than it
increased costs.
MB < MC means the last unit of the control
variable increased costs more than it
increased benefits.
Costs
Slope =MB
Benefits
B
Slope = MC
Q*
1-21
Slope = MNB
Q*
1-22
1-23
Conclusion
Make sure you include all costs and benefits
when making decisions (opportunity cost).
When decisions span time, make sure you
are comparing apples to apples (PV
analysis).
Optimal economic decisions are made at the
margin (marginal analysis).