MANAGERIAL ECONOMICS 12th 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. Spell out production and marketing rules to maximize profits. Making the Best Decision Managerial economics helps meet management objectives efficiently. Managerial economics shows the logic of consumer, and government decisions.

Theory of the Firm Expected Value Maximization Owner-managers maximize short-run profits. Primary goal is long-term expected value maximization. Constraints and the Theory of the Firm Resource constraints. Social constraints. Limitations of the Theory of the Firm Alternative theory adds perspective. Competition forces efficiency. Hostile takeovers threaten inefficient managers.

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.

Why Do Profits Vary Among Firms? Disequilibrium Profit Theories Unexpected revenue growth. Unexpected cost savings. Compensatory Profit Theories Profits accrue to firms that are better, faster, or cheaper than the competition. Innovative Efficient Role of Profit

Role of Business in Society Why Firms Exist Businesses help satisfy consumer wants. Businesses contributes to social welfare Social Responsibility of Business Serve customers. Provide employment opportunities. Obey laws and regulations.