MANAGERIAL ECONOMICS 11th Edition

By Mark Hirschey

Nature and Scope of Managerial Economics

Chapter 1

Chapter 1 OVERVIEW

How Is Managerial Economics Useful? Theory of the Firm Profit Measurement Why Do Profits Vary among Firms? Role of Business in Society Structure of this Text

Chapter 1 KEY CONCEPTS

managerial economics theory of the firm expected value maximization value of the firm present value optimize satisfice business profit normal rate of return

economic profit profit margin return on stockholders' equity frictional profit theory monopoly profit theory innovation profit theory compensatory profit theory

How Is Managerial Economics Useful?

Evaluating Choice Alternatives

Identify ways to efficiently achieve goals. Specify pricing and production strategies. Provide production and marketing rules to help maximize net profits. Managerial economics can be used to efficiently meet management objectives. Managerial economics can be used to understand logic of company, consumer, and government decisions.

Making the Best Decision

Theory of the Firm

Expected Value Maximization

Owner-managers maximize short-run profits. Primary goal is long-term expected value maximization. Resource constraints. Social constraints Alternative theory adds perspective. Competition forces efficiency. Hostile takeovers threaten inefficient managers.

Constraints and the Theory of the Firm

Limitations of the Theory of the Firm

Profit Measurement

Business Versus Economic Profit

Business (accounting) profit reflects explicit costs and revenues. Economic profit.

Profit

above a risk-adjusted normal return. Considers cash and noncash items.

Variability of Business Profits

Business profits vary widely.

Why Do Profits Vary Among Firms?

Disequilibrium
Rapid

Profit Theories

growth in revenues. Rapid decline in costs.

Compensatory

Profit Theories Better, faster, or cheaper than the competition is profitable.

Why Firms Exist

Role of Business in Society

Business is useful in satisfying consumer wants. Business contributes to social welfare

Social Responsibility of Business

Serve

customers. Provide employment opportunities. Obey laws and regulations.

Structure of this Text

Objectives
Understand

usefulness of economics in describing managerial behavior. Understand how economics can be used to improve managerial decisions. Appreciate vital role of business in society.