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 normal rate of return managerial economics economic profit profit margin return on stockholders' equity frictional profit theory monopoly profit theory innovation profit theory compensatory profit theory managerial economics theory of the firm expected value maximization value of the firm present value optimize satisfice business profit

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 widely.

Profit Business profit is the residual of sales revenue minus the explicit cost of doing business Normal rate of return is average profit necessary to attract and retain investment Economic profit is business profit minus the implicit cost of capital and any other owner provided inputs Frictional profit is abnormal profits observed following unanticipated changes in demand or cost conditions

5. Monopoly profit is above-normal profits caused by barriers to entry that limit competition 6. Innovation profit is above-normal profits that follow successful invention or modernization 7. Compensatory profit is above-normal rates of return that reward efficiency Profit margin is business profit expressed as a percentage of sales Return on stock-holders’ equity is accounting net income divided by the book value of total assets minus total liabilities

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.

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.

Structure of this Text Objectives Learn usefulness of economics in describing managerial behavior. Appreciate how economics can be used to improve managerial decisions. Understand vital role of business in society.