C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 1 1

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 2 2

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 3 Managerial Economics Defined The application of economic theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently. –applications of economic theory –quantitative methods –statistical methods

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 4

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 5 Economic Theory Microeconomics –Study of the economic behavior of individual decision-making units. –Relevance to Managerial Economics Macroeconomics –Study of the total or aggregate level of output, income, employment, consumption, investment, and prices for the economy viewed as a whole.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 6 Decision Sciences Mathematical Economics –Expresses and analyzes economic models using the tools of mathematics. Econometrics –Employs statistical methods to estimate and test economic models using empirical data.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 7 Economic Methodology Economic Models –Abstract from details –Focus on most important determinants of economic behavior – cause and effect Evaluating Economic Models –A model is accepted if it predicts accurately and if the predictions follow logically from the assumptions.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 8

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 9 Theory of the Firm Combines and organizes resources for the purpose of producing goods and/or services for sale. Internalizes transactions, reducing transactions costs. Economic theory assumes that the primary goal of managers is to maximize the value of the firm.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 10 Value of the Firm The present value of all expected future profits

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 11 Alternative Theories Sales maximization –Adequate rate of profit Management utility maximization –Principle-agent problem Satisficing behavior

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 12 Definitions of Profit Business or Accounting 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.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 13 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

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 14 Social Function of Profit Profit is a signal that guides the allocation of society’s resources. 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.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 15 Business Ethics Identifies types of behavior that businesses and their employees should not engage in. Source of guidance that goes beyond enforceable laws.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 16 The Changing Environment of Managerial Economics Globalization of Economic Activity –Goods and Services –Capital –Technology –Skilled Labor Technological Change –Telecommunications Advances –The Internet and the World Wide Web

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 17

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 18

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 19 Appendix to Chapter 1

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 20 Law of Demand A decrease in the price of a good, all other things held constant, will cause an increase in the quantity demanded of the good. An increase in the price of a good, all other things held constant, will cause a decrease in the quantity demanded of the good.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 21 Change in Quantity Demanded Quantity Price P0P0 Q0Q0 P1P1 Q1Q1 An increase in price causes a decrease in quantity demanded.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 22 Change in Quantity Demanded Quantity Price P0P0 Q0Q0 P1P1 Q1Q1 A decrease in price causes an increase in quantity demanded.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 23 Changes in Demand Change in Buyers’ Tastes Change in Buyers’ Incomes –Normal Goods –Inferior Goods Change in the Number of Buyers Change in the Price of Related Goods –Substitute Goods –Complementary Goods

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 24 Change in Demand Quantity Price P0P0 Q0Q0 Q1Q1 An increase in demand refers to a rightward shift in the market demand curve.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 25 Change in Demand Quantity Price P0P0 Q1Q1 Q0Q0 A decrease in demand refers to a leftward shift in the market demand curve.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 26 Law of Supply A decrease in the price of a good, all other things held constant, will cause a decrease in the quantity supplied of the good. An increase in the price of a good, all other things held constant, will cause an increase in the quantity supplied of the good.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 27 Change in Quantity Supplied Quantity Price P1P1 Q1Q1 P0P0 Q0Q0 A decrease in price causes a decrease in quantity supplied.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 28 Change in Quantity Supplied Quantity Price P0P0 Q0Q0 P1P1 Q1Q1 An increase in price causes an increase in quantity supplied.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 29 Changes in Supply Change in Production Technology Change in Input Prices Change in the Number of Sellers

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 30 Change in Supply Quantity Price P0P0 Q1Q1 Q0Q0 An increase in supply refers to a rightward shift in the market supply curve.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 31 Change in Supply Quantity Price P0P0 Q1Q1 Q0Q0 A decrease in supply refers to a leftward shift in the market supply curve.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 32 Market Equilibrium Market equilibrium is determined at the intersection of the market demand curve and the market supply curve. The equilibrium price causes quantity demanded to be equal to quantity supplied.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 33 Market Equilibrium Quantity Price P Q D S

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 34 Market Equilibrium Quantity Price P0P0 Q0Q0 D0D0 S0S0 Q1Q1 P1P1 D1D1 An increase in demand will cause the market equilibrium price and quantity to increase.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 35 Market Equilibrium Quantity Price P1P1 Q1Q1 S0S0 Q0Q0 P0P0 D0D0 D1D1 A decrease in demand will cause the market equilibrium price and quantity to decrease.

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 36 Market Equilibrium Quantity Price P0P0 Q0Q0 D0D0 S0S0 Q1Q1 P1P1 An increase in supply will cause the market equilibrium price to decrease and quantity to increase. S1S1

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 37 Market Equilibrium Quantity Price P1P1 Q1Q1 D0D0 Q0Q0 P0P0 A decrease in supply will cause the market equilibrium price to increase and quantity to decrease. S1S1 S0S0

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 38

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 39

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 40

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 41

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 42

C opyright  2007 by Oxford University Press, Inc. PowerPoint Slides Prepared by Robert F. Brooker, Ph.D.Slide 43