Baye 9e Chapter 01 (Concepts) PDF

CHAPTER 1 The Fundamentals of Managerial Economics © 2017 by McGraw-Hill Education. All Rights Reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Learning Objectives 1. Summariz...

CHAPTER 1 The Fundamentals of Managerial Economics © 2017 by McGraw-Hill Education. All Rights Reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw-Hill Education.  Learning Objectives 1. Summarize how goals, constraints, incentives, and market rivalry affect economic decisions. 2. Distinguish economic versus accounting profits and costs. 3. Explain the role of profits in a market economy. 4. Apply the five forces framework to analyze the sustainability of an industry’s profits. 5. Apply marginal analysis to determine the optimal level of a managerial control variable. 6. Identify and apply six principles of effective managerial decision making. © 2017 by McGraw-Hill Education. All Rights Reserved. 2  Introduction 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 firm’s output. – Directs the product price or quality decisions. © 2017 by McGraw-Hill Education. All Rights Reserved. 1-3  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. © 2017 by McGraw-Hill Education. All Rights Reserved. 1-4  Introduction Managerial Economics Defined 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? © 2017 by McGraw-Hill Education. All Rights Reserved. 1-5  The Economics of Effective Management Economics of Effective Management 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 © 2017 by McGraw-Hill Education. All Rights Reserved. 1-6  The Economics of Effective Management Identify Goals and Constraints Well-defined goals Firm’s overall goal is to maximize profits Constraints make it difficult to achieve goals – Available technology – Prices of inputs used in production © 2017 by McGraw-Hill Education. All Rights Reserved. 7  The Economics of Effective Management Recognize the Nature and Importance of 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. © 2017 by McGraw-Hill Education. All Rights Reserved. 1-8  The Economics of Effective Management Recognize the Nature and Importance of Profits The role of profits – Profits are a signal to resource holders where resources are most highly valued by society. © 2017 by McGraw-Hill Education. All Rights Reserved. 1-9  The Economics of Effective Management Five Forces and Industry Profitability © 2017 by McGraw-Hill Education. All Rights Reserved. 10  The Economics of Effective Management 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. © 2017 by McGraw-Hill Education. All Rights Reserved. 1-11  The Economics of Effective Management Understand Markets Two sides to every market transaction: buyer and 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 © 2017 by McGraw-Hill Education. All Rights Reserved. 1-12  Economics of Effective Management Use Marginal Analysis Given a control variable, 𝑄, of a managerial objective, denote the – total benefit as 𝐵 𝑄. – total cost as 𝐶 𝑄. Manager’s objective is to maximize net benefits: 𝑁 𝑄 =𝐵 𝑄 −𝐶 𝑄 © 2017 by McGraw-Hill Education. All Rights Reserved. 1-13  Economics of Effective Management Use Marginal Analysis How can the manager maximize net benefits? Use marginal analysis – Marginal benefit: 𝑀𝐵 𝑄 The change in total benefits arising from a change in the managerial control variable, 𝑄. – Marginal cost: 𝑀𝐶 𝑄 The change in the total costs arising from a change in the managerial control variable, 𝑄. – Marginal net benefits: 𝑀𝑁𝐵 𝑄 𝑀𝑁𝐵 𝑄 = 𝑀𝐵 𝑄 − 𝑀𝐶 𝑄 © 2017 by McGraw-Hill Education. All Rights Reserved. 1-14  Economics of Effective Management Use 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. © 2017 by McGraw-Hill Education. All Rights Reserved. 1-15  Learning Managerial Economics Learning Managerial Economics Practice, practice, practice … Learn terminology – Break down complex issues into manageable components. – Helps economics practitioners communicate efficiently. © 2017 by McGraw-Hill Education. All Rights Reserved. 1-16