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Managerial Economics in Global Economy, 5th Edition

byDominick Salvatore

Chapter 1

The Nature and Scopeof Managerial Economics

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Recommeneded books

Managerial economics in a global economy by Dominick salvator 5th ed

Managerial Eco. By Mark Hirschey 11th ed.

Theory and problems of managerial economics by salavator, sham series (quite useful)

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Referenec material

Managerial economics,economic tools for today’s decision maker, 5th edition by Paul G.keat, philip.k.Y. yound,banar jee publisher,pearson edition,2009

Managerial economics and business strategy,6th edi. Micheal R. Baye, printice hall publiher

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Some Definitions of Managerial Eco.Joel dean who is the author of the first

managerial economics text book “The use of economic analysis in the formulation of business policies”

Hirschey defines : Managerial economics applies economic theory and methods to business and administrative decision making

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Cont’dSalvatore -The application of economic

theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently.

Douglas - “Managerial economics is .. the application of economic principles and methodologies to the decision-making process within the firm or organization

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Online encyclopedia

Managerial economics is a branch of economics that applies micro economic analysis to decision making methods of business and other management units.

It draws heavily from quantitative techniques such as regression analysis and correlation, lagrangian calculas

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From all the definition we can concludeManagerial economics is the

application of the economic theory and quantitative methods to get the optimal solution of the managerial decision making problems

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Managerial Decision Problems

Economic theoryMicroeconomicsMacroeconomics

Decision SciencesMathematical

EconomicsEconometrics

MANAGERIAL ECONOMICSApplication of economic

theoryand decision science tools to

solvemanagerial decision

problemsOPTIMAL SOLUTIONS TO

MANAGERIAL DECISION PROBLEMS

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Theory of the Firm

The firm is an organization that Combines and organizes resources for the purpose of producing goods and/or services for sale.

Primary goal is to maximize the wealth or value of the firm.

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Circular Flow of National Income in two Sector Economy

we assume: There are only two sectors in economy Household sector and Business sector The business sector hires the service of factors of

production owned by household sector and pays for those services in terms of wage, rent and interest to household sector.

The household sector buys goods and services from business sector and spends its entire income on consumption

in this way the income of household sector become the revenue of business sector and national income circulates.

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Spending

Goods andservicesbought

Revenue

Goodsand servicessold

Labor, land,and capital

Income

= Flow of inputs and outputs

= Flow of dollars

Factors ofproduction

Wages, rent,and profit

FIRMS•Produce and sellgoods and services•Hire and use factorsof production

•Buy and consumegoods and services•Own and sell factorsof production

HOUSEHOLDS

•Households sell•Firms buy

MARKETSFOR

FACTORS OF PRODUCTION

•Firms sell•Households buy

MARKETSFOR

GOODS AND SERVICES

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Theroy of firm

The model of business is called the theory of firm, in its simplist version, the firm is thought to have profit maximistion as it primary goal.

Today,the emphsis on profit has been broadend to inclued uncertainity and the time value of money. In this more complete model, the primary goal of the firm is long term expected value maximisation

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Value of the Firm

The present value of all expected future profits

1 21 2

1(1 ) (1 ) (1 ) (1 )

nn tn t

t

PVr r r r

1 1(1 ) (1 )

n nt t tt t

t t

TR TCValueof Firm

r r

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Alternative Theories (Page#11-13)To be covered by the student ……

Sales maximization

Management utility maximization

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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Problem……

A woman managing photocopying establishment for $25000 per year decides to open her own duplicating place. Her revenue during the first year of operation is $120,000, and her expenses are as follows;

Calculate a) The explicit costs b) The implicit cost c) the business profit d) the economic profit

Salaries to hired help $ 45,000

Supplies 15,000

Rent 10,000

Utilities 1,000

Interest on bank loan 10,000

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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

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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Role of business in society

Why firms exist

Businesses help satisfy customers want

Businesses contribute to social welfare

Social responsibility of the firm

Serve customers

Provide employment opportunities

Pay taxes

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Business Ethics (case study)

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

WTO

Technological Change

Telecommunications Advances

The Internet and the World Wide Web

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Questions & Discussion

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For class discussion

What is a firm?

What are its advantages?

What is profit?

What are the functions of profit?

What are business ethics?

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Appendix to be covered by students Page# 31 -36

Demand and supply

Equilibrium and price determination