1. Chapter One Introduction

2. 1. Meaning of Managerial Economics Managerial economics is “the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management”. Managerial economics is a study of application of managerial skills in economics. It helps in anticipating, determining and resolving potential problems. These problems may pertain to costs, prices or forecasting future market.

3. 1. Meaning of Managerial Economics ( cont.) Managerial economics is the application of economic theory and methodology to decision-making problems faced by both public and private institutions. Managerial economics bridges the gap between 'theories' and 'practice'.

4. 2.The Theory of The Firm To understand the behavior of managers, we must understand the behavior of the firm. Although management styles differ greatly in millions of firms all over the world, there is little variance in the goals of managers. The goal of any manager is to increase the value of his organization.

5. 3. What Is Profit Accounting Profits – Total revenue (sales) minus dollar cost of producing goods or services – Reported on the firm’s income statement Economic Profits – Total revenue minus total opportunity cost – The difference in the two concepts reflects the difference in their focus

6. 4.Why Managers Need To Know Economics Managers are responsible for achieving the objective of the firm to the maximum possible extent with the limited resources placed at their disposal. Resources like capital, workforce and material are limited and scarce. There are legal constraints facing managers.

7. 4.Why Managers Need To Know Economics (cont.) Choice of business and the nature of products, Choice of size of the firm, Choice of technology, Choice of price, How to promote sales, How to face competition, How to decide on new investments, How to manage profit and capital,

8. 5.Principal-agent Problem Occurs when owners can only imperfectly monitor the behavior of employees Occurs when managers achieve their own objectives, even though this decreases the profit of the owners. In other words, one person, the principal, hires an agent (e.g. a sales or finance manager) to perform tasks on his behalf but he cannot ensure that the agent performs them in precisely the way the principal would like. The decisions and the performance of the agent are impossible and/ or expensive to monitor and the incentives of the agent may differ from those of the principal.