2. Managerial Economics in Global Economy, 5th Edition by Dominick Salvatore
Types of customers: internal, external, investor and social

3. Chapter 1 The Nature and Scope of Managerial Economics

4. 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)

5. 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

6. 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

7. Cont’d
Salvatore -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

8. 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
As such it bridges economic theory and economics in practice.

9. From all the definition we can conclude
Managerial economics is the application of the economic theory and quantitative methods to get the optimal solution of the managerial decision making problems

10. Managerial Decision Problems
Economic theory Microeconomics Macroeconomics
Decision Sciences Mathematical Economics Econometrics
MANAGERIAL ECONOMICS Application of economic theory and decision science tools to solve managerial decision problems
Managerial problems are: product selection, pricing and output policies of the firm, product development and promotion strategy of the firm, the problem of hiring workers and their training, investment and financing problems….. The use of managerial economics to solve all the listed problems. The scope of managerial economics is not only limited to business firm but it applies to all the org. e.g a hospital management may want to provide standard medical facilities to all the patients in the presence of some constraints. These constraints are financial and other physical resources like doctor , nurses, technicians, drugs, number of beds etc. public university seeks to provide the standard education to as many students as possible given the constraints. Similarly, a Govt agency providing utilities to people on a lesser cost given the constraints. All these org use ME to solve their problems. Objectives and constraints might be different for different org but the decision making remains the same. ME has a vast scope to be used by any org.
Economic theory: Micro Economics is the study of economic behavior of individual decision making units such as individual consumers, resource owners and business firms. Economic theory usually begin with a MODEL. This abstracts from the many details surrounding an event and seeks to identify a few of the most important determinants of the event.
Macro Economics on the other hand is the study of TOTALS or Aggregates i.e. aggregate level of output, employment, consumption, investment and prices viewed as a whole in the economy.
ME uses essentially the tools of Micro economics but it doesn’t mean that macro economics is ignored. Firm operating in the economy has to consider the variables like aggregate demand, rate of inflation, and interest rate .
ME uses and applies economic theories and quantitative techniques like mathematical economics, econometrics and all other computational methods .mathematical economics is not the branch of economics but the application of maths in economics. Econometrics focuses on statistical techniques use on real world data.
All theoretical concepts will be converted into quantitative equations and functions .Quantitative techniques like optimization , for opt. tech , we would use differential calculus, linear programming, and game theory.
Mathematical Ecnomics: it expresses and analyzes economic models using the tools of mathemetics
Econommetrics: employes statistical methods to estimate and test economic models using empirical data(real world data).
e.G. Quantity demanded is a funtion of price QDx = f (Px,Y,Pr). By having the data about price of related goods, price of our product x and income of the consumer, the firm can estimate the demand of the product in the future, some times by using statiscal techniques.
OPTIMAL SOLUTIONS TO MANAGERIAL DECISION PROBLEMS

11. 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.
The theory of firm is the center piece and central theme of the Managerial economics. Transforming the inputs like labours, resources, rawmaterial in to goods to be presented in market for sale.
There are different forms of firms… sole proprieter ship, partnership and corporation (where the stock holders are the owners).Example Of Circular Flow Of Income.
Advantage of the firm is ..
It generates emplyement oppertunities, it pays taxes to the GOVT(which can be used by the govt to provide basic services such as national defence, education and health, infrastructure.

12. 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.

13. Figure 1 The Circular-Flow Diagram
Firms sell
Households buy
MARKETS
FOR
GOODS AND SERVICES
Revenue
Spending
Goods
and services
sold
Goods and
services
bought
FIRMS
Produce and sell
goods and services
Hire and use factors
of production
Buy and consume
goods and services
Own and sell factors
of production
HOUSEHOLDS
Households sell
Firms buy
MARKETS
FOR
FACTORS OF PRODUCTION
Factors of
production
Labor, land,
and capital
Wages, rent,
and profit
Income
= Flow of inputs
and outputs
= Flow of dollars

14. 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

15. The present value of all expected future profits
Value of the Firm
The present value of all expected future profits
Total revenue depends on sales or the demand for the firm’s output and the firm’s pricing decisions. These are the major responsibilities of the marketing department.
Total Cost depends on the technology of production and resource prices. These are the major responsibilities of production and personnel or human resource department.
The discount rate (r) depends of the perceived risk of the firm and on the cost of borrowing funds. These are the major responsibilities of the finance department.
These departments have to interact with each other.
For example: Marketing department can reduce cost associated with a given level of output by promoting off season sales.
The production and human resource departments can stimulate sales by quality improvements and the development of new products.
The accounts department can provide more timely information on sales and cost.
All these activities increase the efficiency of the firm and decrease its risk.

16. Alternative Theories (Page#11-13)
To be covered by the student ……
Sales maximization
Management utility maximization
Satisficing behavior
Sales max by William baumol : focusing on sales to satisfy the stockholders . Correlation between executive salaries and sales but not profit and salaries.
Management utility max. creates a problem of principle and agent
Saticifing beh: focus on satisfying goals, sales and profits.. As its difficult for the big companies to go for sales maximization.

17. 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.
In economics, an implicit cost, also called an imputed cost, implied cost, or notional cost, is the opportunity cost equal to what a firm must give up in order to use factors which it neither purchases nor hires. It is the opposite of an explicit cost, which is borne directly. ...
Explicit cost: its also known as accounting cost. Explicit cost is the monetary payment made to others to get resources owned by them
Implicit cost is also known as opportunity cost
Accounting profit ≥ Economic Profit

18. 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

19. 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
Why do firms earn different levels of profits.. Like above normal, normal and below normal profit.
Risk bearing theories of profit: Above normal profits are required to enter and remain in such fields as petroleum exploration with above average risk (high risk , high profit)
Frictional theory: Due to unanticipated shocks of demand and cost condition(like either demand goes up or cost goes down that results in profit) produce profits for some firms,
Monopoly theory of profit: Barriers are like economies of large scale, high capital requirement, and patents enables some firm to build monopoly situation and hence earn profit
Innovation theory of profit: successful innovation or modernization e.g. Micro soft has come with a block boster user interface graphics .(DEMAND BASED)
Managerial efficieny theory: earning profit because of managerial efficiency

20. 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.
Profit is considered to be a signal for a firm, more profit helps in not only expanding the out put but allows other firms to enter the market. Low profit firm might exit the market or to reduce the level of out put

21. 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

22. 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.

23. 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
International products: like brazilian coffee, japanese toyota, italian shoes bags, french perfumes.(globalization of economic activities), for the study of ME, international factors are important to be considered.FDIs transferes their technologies and capital .
Labour is cheaper in bangla desh, india, pakistan… in textile industries in developed countries have labour from the mentioned countries or the firms may have their branch in the host country to have the cheap labour services.
Firms should know the rules and regulation of WTO to produce products as well as to export them.. More than 150 countries are the member of WTO.

24. Questions & Discussion

25. For class discussion What is a firm? What are its advantages?
What is profit?
What are the functions of profit?
What are business ethics?

26. Appendix to be covered by students
Page#
Demand and supply
Equilibrium and price determination