Managerial Economics Defined

Managerial Economics Defined - Transcript

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 mathematical economics econometrics

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Economic Theories for Managers
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
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Decision Science Theories
Mathematical Economics
Expresses and analyzes economic models i e economic theories using the tools of mathematics

Econometrics
Uses statistical methods to estimate and test economic models using empirical data

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Economic Methodology
Economic Models
Abstract from details e g demand function from demand theory 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
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Decision Making Process

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Functions and Objective of the Firm
Combines and organizes resources for the purpose of producing goods and or services for sale Internalizes transactions reducing transactions costs e g contracts with labor to perform a number of tasks for specific wages and fringe benefits Economic theory assumes that the primary objective of the firm or managers of the firm is to maximize the wealth of its shareholders stake holders
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Firm s Responsibility Towards

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Value of the Firm
The prime goal of each firm is to maximize the value i e present value of the firm The present value PV of all expected future profits
n 1 2 n t PV L 1 2 n 1 r 1 r 1 r 1 r t t 1

n t TRt TCt Value of Firm t t t 1 1 r t 1 1 r n

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Alternative Goals of the Firm
Sales maximization after an adequate rate of profit to satisfy stockholders William Baumol Separation of management from ownership in recent years lead to management utility maximization Oliver Williamson
Principal owner Agent manager problem

Satisficing behavior to strive for satisfactory goals such as sales market share etc Richard Cyert James March
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Types 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 or opportunity cost of production

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Theories of Profit
Theories of profit justify why a firm should charge economic profit

Risk Bearing Theory of Profit e g petroleum exploration by Reliance company in Godavari Basin Frictional Theory of Profit e g oil companies loss in 1973 1979 Monopoly Theory of Profit Innovation Theory of Profit Managerial Efficiency Theory of Profit
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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
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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 e g Corporate Social Responsibility
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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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The Basics of Demand Supply and Equilibrium

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Law of Demand
A decrease in the price of a normal good all other things held constant will cause an increase in the quantity demanded of the good An increase in the price of a normal good all other things held constant will cause a decrease in the quantity demanded of the good
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Change in Quantity Demanded
Price An increase in price causes a decrease in quantity demanded

P1 P0

Q1
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Q0

Quantity
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Change in Quantity Demanded
Price A decrease in price causes an increase in quantity demanded

P0 P1 Q0
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Q1

Quantity
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Change 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
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Change in Demand
Price An increase in demand refers to a rightward shift in the market demand curve

P0

Q0
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Q1

Quantity
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Change in Demand
Price A decrease in demand refers to a leftward shift in the market demand curve

P0

Q1
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Q0

Quantity
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Law of Supply
A decrease in the price of a normal good all other things held constant will cause a decrease in the quantity supplied of the good An increase in the price of a normal good all other things held constant will cause an increase in the quantity supplied of the good
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Change in Quantity Supplied
Price A decrease in price causes a decrease in quantity supplied

P0 P1

Q1
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Q0

Quantity
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Change in Quantity Supplied
Price An increase in price causes an increase in quantity supplied

P1 P0

Q0
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Q1

Quantity
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Change in Supply
Change in Production Technology Change in Input Prices Change in the Number of Sellers

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Slide 27

Change in Supply
Price An increase in supply refers to a rightward shift in the market supply curve

P0

Q0
PowerPoint Slides Prepared by Robert F Brooker Ph D

Q1

Quantity
Slide 28

Copyright 2007 by Oxford University Press Inc

Change in Supply
Price A decrease in supply refers to a leftward shift in the market supply curve

P0

Q1
PowerPoint Slides Prepared by Robert F Brooker Ph D

Q0

Quantity
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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
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Market Equilibrium
Price D S

P

Q
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Quantity
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Market Equilibrium
Price D0 P1 P0 D1 S0 An increase in demand will cause the market equilibrium price and quantity to increase

Q0 Q1
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Quantity
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Market Equilibrium
Price D1 P0 P1 D0 S0 A decrease in demand will cause the market equilibrium price and quantity to decrease

Q1 Q0
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Quantity
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Market Equilibrium
Price D0 S0 S1 An increase in supply will cause the market equilibrium price to decrease and quantity to increase

P0 P1 Q0 Q1
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Quantity
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Market Equilibrium
Price D0 S1 S0 A decrease in supply will cause the market equilibrium price to increase and quantity to decrease

P1 P0 Q1 Q0
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Quantity
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Thanks

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