1. MANAGERIAL ECONOMICS 12th EditionBy
Mark Hirschey

2. Nature and Scope of Managerial Economics
Chapter 1

3. 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

4. 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

5. 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.

7. 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.

9. 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.

10. 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

11. 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

12. 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.

13. 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.

15. 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.