ECONOMICS FOR MANAGERS By Mark Hirschey

Introduction 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. Provide production and marketing rules to help maximize net profits. Making the Best Decision Managerial economics can be used to efficiently meet management objectives. Managerial economics can be used to understand logic of company, 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.

Why Do Profits Vary Among Firms? Disequilibrium Profit Theories Rapid growth in revenues. Rapid decline in costs. Compensatory Profit Theories Better, faster, or cheaper than the competition is profitable.

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

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