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4/17/2013,#,Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Chapter 1,The Fundamentals of,Managerial Economics,Introduction,The,m,anager,Economics,Managerial economics,d,efined,Economics of Effective Management,Identifying goals and constraints,Recognize the nature and importance of profits,Understand incentives,Understand markets,Recognize the time value of money,Use marginal analysis,Learning managerial economics,1-,2,Chapter,Overview,Chapter One,Introduction,Chapter 1 focuses on defining managerial economics, and illustrating how it is a valuable tool for analyzing many business situations.,This chapter provides an overview of managerial economics.,How do accounting profits and economic profits differ?,Why is the difference important?,How do managers account for time gaps between costs and revenues?,What,guiding principle can,managers use to maximize profits?,1-,3,Chapter Overview,The Manager,A person who directs resources to achieve a stated goal.,Directs the efforts of others.,Purchases inputs used in the production of the firms output.,Directs the product price or quality decisions.,1-,4,Introduction,Economics,The science of,making decisions,in the presence of,scarce resources,.,Resources,are anything used to produce a good or service, or achieve a goal.,Decisions,are important because scarcity implies trade-offs.,1-,5,Introduction,The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.,Should a firm purchase components like disk drives and chips from other manufacturers or produce them within the firm?,Should the firm specialize in making one type of computer or produce several different types?,How many computers should the firm produce, and at what price should you sell them?,1-,6,Introduction,Managerial Economics Defined,Basic principles comprising effective management:,Identify goals and constraints.,Recognize the nature and importance of profits.,Understand incentives.,Understand markets.,Recognize the time value of money.,Use marginal analysis.,1-,7,Economics of Effective Management,Economics of Effective Management,The Nature and Importance of Profits,A typical firms objective is to maximize profits.,Accounting profit,Total amount of money taken in from sales (total revenue) minus the dollar cost of producing goods or services.,Economic profit,The difference between total revenue and cost,opportunity,cost.,Opportunity cost,The explicit cost of a resource plus the implicit cost of giving up its best alternative.,1-,8,Economics of Effective Management,The Role of Profits,Profit Principle:,Profits are a signal to resource holders where resources are most highly valued by society.,1-,9,Economics of Effective Management,1-,10,Power of,Input Suppliers,Supplier Concentration,Price/Productivity of Alternative Inputs,Relationship-Specific Investments,Supplier Switching Costs,Government Restraints,Power of,Buyers,Buyer Concentration,Price/Value of Substitute Products or Services,Relationship-Specific Investments,Customer Switching Costs,Government Restraints,Entry,Substitutes & Complements,Industry Rivalry,Concentration,Price, Quantity, Quality,or Service Competition,Degree of Differentiation,Level, Growth,and Sustainability,o,f,Industry Profits,Entry Costs,Speed of Adjustment,Sunk Costs,Economies of Scale,Network Effects,Reputation,Switching Costs,Government Restraints,Price/Value of Surrogate Products or Services,Price/Value of Complementary Products or Services,Network Effects,Government Restraints,Switching Costs,Timing of Decisions,Information,Government Restraints,Economics of Effective Management,Five Forces and Industry Profitability,Understand Incentives,Changes in profits provide an,incentive,to how resource holders use their resources.,Within a firm, incentives impact how resources are used and how hard workers work.,One role of a manager is to construct incentives to induce maximal effort from employees.,1-,11,Economics of Effective Management,Two sides to every market transaction:,Buyer.,Seller.,Bargaining position of consumers and producers is limited by three rivalries in economic transactions:,Consumer-producer rivalry.,Consumer-consumer rivalry.,Producer-producer rivalry.,Government and the market.,1-,12,Economics of Effective Management,Understand Markets,The Time Value of Money,Often a gap exists between the time when costs are borne and benefits received.,Managers can use,present value analysis,to properly account for the timing of receipts and expenditures.,1-,13,Economics of Effective Management,Present Value Analysis 1,Present value of a,single,future value,The amount that would have to be invested today at the prevailing interest rate to generate the given future,value,:,Present value reflects the difference between the,future value,and the,opportunity cost of waiting,:,1-,14,Economics of Effective Management,Present Value Analysis II,Present value of a,stream of,future values,or,1-,15,Economics of Effective Management,Consider a project that returns the following income stream:,Year 1, $10,000; Year 2, $50,000; and Year 3, $100,000.,At an annual interest rate of 3 percent, what is the present value of this income stream?,1-,16,Economics of Effective Management,The Time Value of Money in Action,Net Present Value,The present value of the,income stream,generated by a project minus the current cost of the project:,1-,17,Economics of Effective Management,Present value of decisions that indefinitely generate cash flows:,Present value of this perpetual income stream when the same cash flow is generated,:,1-,18,Economics of Effective Management,Present Value of Indefinitely Lived Assets,Profit maximization principle,Maximizing profits means maximizing the value of the firm, which is the present value of current and future profits.,1-,19,Economics of Effective Management,Present Value and Profit Maximization,Present Value and Estimating Values of Firms I,The value of a firm with,current profits, with,no dividends paid out,and,expected,constant profit growth rate,of,(assuming,) is:,1-,20,Economics of Effective Management,When dividends are immediately paid out of current profits, the present value of the firm is (at ex-dividend date):,1-,21,Economics of Effective Management,Present Value and Estimating Values of Firms II,Short-term and long-term profits principle,If the growth rate in profits is less than the interest rate and both are constant, maximizing current (short-term) profits is the same as maximizing long-term profits.,1-,22,Economics of Effective Management,Short-Term versus Long-term Profits,Given a control variable, of a managerial objective, denote the,total benefit as,.,t,otal cost as,.,Managers objective is to maximize net benefits:,1-,23,Economics of Effective Management,Marginal Analysis,How can the manager maximize net benefits?,Use marginal analysis,Marginal benefit:,The change in total benefits arising from a change in the managerial control variable,.,Marginal cost:,The change in the total costs arising from a change in the managerial control variable,.,Marginal net benefits,:,1-,24,Economics of Effective Management,Using Marginal Analysis,Marginal principle,To maximize net benefits, the manager should increase the managerial control variable up to the point where marginal benefits equal marginal costs. This level of the managerial control variable corresponds to the level at which marginal net benefits are zero; nothing more can be gained by further changes in that variable.,1-,25,Economics of Effective Management,Marginal Analysis Principle I,Marginal Principle II,Marginal principle (calculus alternative),Slope of a continuous function is the derivative /marginal value of that function:,1-,26,Economics of Effective Management,Marginal Analysis In Action,It is estimated that the benefit and cost structure of a firm is:,Find the,and,functions.,What value of,makes,zero?,1-,27,Economics of Effective Management,1-,28,Quantity,(Control Variable),Total benefits,Total costs,0,Slope =,Slope =,Maximum total benefits,Maximum net,benefits,Economics of Effective Management,Determining the Optimal Level of a Control Variable,1-,29,Quantity,(Control Variable),Net benefits,0,Maximum,net benefits,Slope =,Economics of Effective Management,Determining the Optimal Level of a Control Variable II,1-,30,Quantity,(Control Variable),Marginal,benefits, costs,and net benefits,0,Maximum net,benefits,Economics of Effective Management,Determining the Optimal Level of a Control Variable III,Incremental revenues,The additional revenues that stem from a yes-or-no decision.,Incremental costs,The additional costs that stem from a yes-or-no decision.,“Thumbs up” decision,.,“Thumbs down” decision,.,1-,31,Economics of Effective Management,Incremental Decisions,Learning Managerial Economics,Practice, practice, practice ,Learn terminology,Break down complex issues into manageable components.,Helps economics practitioners communicate efficiently.,1-,32,Learning Managerial Economics,Conclusion,Make sure you include all costs and benefits when making decisions (opportunity costs).,When decisions span time, make sure you are comparing apples to apples (present value analysis).,Optimal economic decisions are made at the margin (marginal analysis).,1-,33,Conclusion,
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