1. Managerial Economics Introduction Managerial Economics:
Describes the economic forces that shape the internal and external environments of a business firm.
Prescribes rules for managerial decision-making that furthers the objective of the firm.
Traditional economic theory “explains” economic phenomena and makes “what if” or conditional predictions
Managerial economics “describes” the economic forces what shape the internal and external economic environments and
It “prescribes rules for managerial decision-making that further the goal of the firm
What’s the goal of the firm?

2. A Decision-Making Model
Objectives
Define the
problem
Alternative
Solutions
Social
constraints
Evaluation
Organizational
and input
constraints
Implement and
monitor the
decision

3. Objective of the Firm Not market share Not growth Not revenue
Not empire building
Not name recognition
Not state-of-the-art technology
These are the right answer to the wrong question. If the question was: What are the means effective in achieving the objective of the firm, then these are the correct answers. But the question is not about the means but rather about the fundamental objective of the firm. Do not make Type III error – asking the wrong question. Type I error – wrongly convict an innocent person; Type II error – failure to convict a guilty person

4. What’s the objective of the firm?
The objective of the firm is to maximize the value of the firm.
Value of the firm is the true measure of business success (of course, from a for-profit perspective.)
Two questions:
1. How is the “value of the firm” defined and measured?
2. How do managers go about adding value to the firm?

5. Managerial Economics Q1- What’s the value of the firm?
“The present value of the firm’s future net earnings.”
  n
V = [ ] + [ ] [ ]
(1+r) (1+r) (1+r)n t
=  [ ] , t = 1, 2, ... , N
(1+r)t

6. Managerial Economics Q2 - How should a manager go about adding value?
A good map or a travel guide to the “curious land of the Econ” should help.

7. Profit = Total Rev - Total Cost
Managerial Economics
A Useful Map
Profit = Total Rev - Total Cost
 = P . Qd - AC . Qs

8. (Why are profits necessary?)
Theories of Profits
(Why are profits necessary?)
Risk-Bearing Theory of Profit - Profits (normal profits) are necessary to compensate for the risk that entrepreneurs take with their capital and efforts
Dynamic Equilibrium (Frictional) Theory - Profits, especially extraordinary profits, are the result of our economic system’s inability to adjust instantaneously to unanticipated changes in market conditions.

9. Theories of Profits
Monopoly Theory - Profits are the result of some firm’s ability to dominate the market
Innovation Theory - Extraordinary profits are the rewards for successful innovations
Managerial Efficiency Theory - Extraordinary profits can result from exceptionally managerial skills of well-managed firms.

10. Managerial Actions Controllable factors (internal environment):
Productions
Technology
Marketing Mix
Employment Policies
Investment Strategies
Capital structure

11. Non-Controllable factors(external environment):
Managerial Actions
Non-Controllable factors(external environment):
Level of Economic activities
Economic Regulations
Unions
Global Business conditions
BOP and Exchange rate changes

12. Terminology Issues The Marginality analysis Economic Profits
Accounting Profits
Cash flows

13. The Principle of Marginality$
$1,000 MC MB
Hospital Days 1 2 3 4

14. The Principle of Opportunity Cost
Costs are opportunities sacrificed. To be precise, the opportunity cost of a choice or decision is measured by the highest valued alternative that will be given up.
Cost is not always the monetary expense
Cost is often implicit rather than explicit

15. Significance of the Opportunity Cost Concept
Accounting profits = Net revenue – Accounting costs (dollar costs of goods and services)
Reported on the firms income statement
Economic profits = Net revenue – Opportunities Costs
Economic profits and opportunity costs are critical to decision making

16. More examples of useful concepts
The principal-agent or the agency problems:
Moral hazard

17. What’s Managerial Economics?
Managerial economics is not a separate management discipline
Rather, it is a logical and useful tool for framing and solving management problems.

18. Outline for this Course
Microeconomics Way of Thinking
Sellers, Production, Costs
Consumers, Value and Demand
Markets and Pricing

19. What will we learn?
useful economic principles for sound economic decision-making in a management context.
the basics of the demand side of the market and which factors influence the buyers’ behavior.
the fundamentals of the market’s supply side -laws of production and how these laws impact a firm’s costs.
how firms’ costs and buyers’ demand together determine the firm’s price and net profit.