INTRODUCTION

  Definition of Managerial Economics Application of economic tools and techniques to business and administrative decision-making; another term for the title of this course, namely economic analysis for agribusiness and management. Helps decision-makers recognize how economic forces affect organizations and describes the economic consequences of managerial behavior. How? By linking economic concepts and quantitative methods to develop tools for managerial decision- making. Simply put, managerial economics uses economic concepts and quantitative methods to solve managerial problems. We place emphasis on the practical application of economic analysis to managerial decision problems; the primary virtue of managerial economics lies in its usefulness. NATURE AND SCOPE OF MANAGERIAL ECONOMICS

  Economic concepts:  influence which products to produce, which costs to consider, and the prices to charge;  necessitates the collection, organization, and analysis of information.  Emphasis is placed on microeconomic topics, although macroeconomic relations have implications for managerial decision-making as well. ECONOMIC CONCEPTS

 1)Optimization techniques (calculus-based and linear programming) 2)Statistical relations 3)Demand analysis and estimation (through regression) 4)Forces of demand and supply 5)Forecasting of firm activities (sales, production, demand, prices) 6)Risk analysis Economic decision-making requires the following:

  Firms are useful for producing and distributing goods and services  Motivation for firms:  profit maximization or expected value maximization; free enterprise depends upon profits and the profit motive  Expected value of maximization:  optimization of profits in light of uncertainty and time value of money. FIRMS

  VALUE OF THE FIRM + …

  Suppose that Chevron Corporation makes projections of profits (expected profits) over the next five years:   2011 = $18,690 million   2012 = $15,560 million   2013 = $14,935 million   2014 = $20,125 million   2015 = $24,585 million EXAMPLE: VALUE OF THE FIRM

 EXAMPLE, CONT. 85,653

  Expected value maximization relates to the various functional departments of the firm; also illustrates the value of forecasting  TR: marketing department, primary responsibility for promotion and sales  TC: production department, primary responsibility for costs  i : finance department, primary responsibility for the acquisition of capital and hence the discount factor i. EXPECTED VALUE MAXIMIZATION

 TOTAL REVENUE AND TOTAL COSTS

  Skilled labor  Raw materials  Energy  Specialized machinery  Warehouse space  Amount of investment funds available for a particular project or activity  Legal /contractual restrictions  Consequently, optimization techniques with constraints are important in decision-making  Linear programming  Calculus-based optimization FIRM FACES CONSTRAINTS

  Business Profit:  = TR – TC  the residual of sales revenue minus the explicit costs of doing business.  Economic Profit:  = business profit minus the implicit costs of capital and any other owner-provided inputs  reflects the opportunity cost for the effort of the owner-entrepreneur. PROFIT MEASUREMENT

  Opportunity Costs:  Owner-provided inputs are a notable part of business profits, especially among small businesses.  Profit Margin:  = business profit (net income)/sales,  Expressed as a percent PROFIT MEASUREMENT

 EXAMPLE: PROFIT MARGIN b

  Return on Equity(ROE)  business profit (net income)/equity  Expressed as a percent  Equity  total assets – total liabilities = net worth=equity EQUITY

 EXAMPLE: ROE