Managerial Economics and Theories of Economic Profits Quiz

Introduction to Managerial Economics

• Economics studies individuals and organizations engaged in the production, distribution, and consumption of goods and services.

• Microeconomics and macroeconomics are two broad categories of economics.

• Managerial economics applies economic concepts, theories, and methodologies to practical business problems to formulate rational managerial decisions.

• Managerial economics focuses on the application of microeconomic theory to business problems.

• Managerial economics is an application of the part of microeconomics that focuses on topics important to managers, such as demand, production, cost, pricing, market structure, and government regulation.

• Managerial economics provides a systematic, logical way of analyzing business decisions for both day-to-day operations and long-term planning decisions.

• Managerial economics can be used to evaluate resource allocation within a firm and to respond to various economic signals.

• The scope of managerial economics extends to economic concepts, theories, and tools of analysis used in analyzing the business environment and finding solutions to practical business problems.

• Operational problems include internal issues such as choice of business, product, size of the firm, technology, pricing, sales promotion, inventory management, and profit and capital management.

• Environmental issues include external issues related to the overall economic, social, and political atmosphere, such as economic policies, trends in production, income, employment, savings, and investment, and social organizations.

• The concept of the firm plays a central role in the theory and practice of managerial economics as an economic institution that organizes factors of production to produce goods and services that meet consumer demand.

• The circular flow of economic activity involves individuals and firms as fundamental participants in a market economy, interacting in product and factor markets to exchange goods, services, and resources.Theories of Economic Profits

• Accounting profit may only be enough to pay owners a normal profit for resource use.

• Frictional theory of economic profits explains how unanticipated changes in demand or cost conditions can lead to positive or negative economic profits.

• Example of frictional theory: ATM use increases, while the use of plastics and aluminum in automobiles decreases profits for steel manufacturers.

• Monopoly theory of economic profits states that high barriers to entry allow some firms to build monopoly positions, leading to above-normal profits for extended periods.

• Examples of high barriers to entry: economies of scale, high capital requirements, patents, or import protection.

• Innovation theory of economic profits explains how above-normal profits arise from successful invention or modernization.

• Examples of innovation theory: Microsoft Corporation's Graphical User Interface and McDonald's Corporation's early entry into the fast food business.

• Compensatory theory of economic profits describes above-normal rates of return as a reward for extraordinary success in meeting customer needs and maintaining efficient operations.

• Inefficient firms can expect to earn below-normal rates of return.

• Economic profit is recognized as an important reward for the entrepreneurial function of owners and managers.

• Theories of economic profits provide explanations for why some firms earn above-normal profits while others earn below-normal profits.

• Understanding these theories can help firms develop strategies to increase profits and achieve success in their industries.