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Managerial Economics

Managerial economics is the application of economic theory and decision-making tools to help managers solve problems and make optimal decisions. It examines how organizations can most efficiently achieve their goals. The primary goal of a firm is to maximize its value or wealth by combining resources to produce and sell goods and services, while reducing transaction costs. Profit signals guide the allocation of society's resources, with high profits indicating demand for more of a product and low profits indicating less demand. The environment for managerial economics is changing due to globalization and technological advances.

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31 views

Managerial Economics

Managerial economics is the application of economic theory and decision-making tools to help managers solve problems and make optimal decisions. It examines how organizations can most efficiently achieve their goals. The primary goal of a firm is to maximize its value or wealth by combining resources to produce and sell goods and services, while reducing transaction costs. Profit signals guide the allocation of society's resources, with high profits indicating demand for more of a product and low profits indicating less demand. The environment for managerial economics is changing due to globalization and technological advances.

Uploaded by

Sahauddin Sha
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Meaning and Scope of Managerial Economics

Chapter 1

Managerial Economics Defined




The application of economic theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently.

Managerial Decision Problems Economic theory Microeconomics Macroeconomics Decision Sciences Mathematical Economics Econometrics

MANAGERIAL ECONOMICS Application of economic theory and decision science tools to solve managerial decision problems OPTIMAL SOLUTIONS TO MANAGERIAL DECISION PROBLEMS

Theory of the Firm




Combines and organizes resources for the purpose of producing goods and/or services for sale. Internalizes transactions, reducing transactions costs. Primary goal is to maximize the wealth or value of the firm.

Value of the Firm


The present value of all expected future profits
n Tn Tt T1 T2  L  ! PV ! 1 2 n (1  r ) (1  r ) (1  r ) (1  r ) t t !1

n Tt TRt  TCt Value of Firm ! ! t (1  r ) (1  r )t t !1 t !1

Alternative Theories


Sales maximization
Adequate rate of profit

Management utility maximization


Principle-agent problem Principle-

Satisficing behavior

Definitions of Profit


Business Profit: Total revenue minus the explicit or accounting costs of production. Economic Profit: Total revenue minus the explicit and implicit costs of production. Opportunity Cost: Implicit value of a resource in its best alternative use.

Theories of Profit
    

RiskRisk-Bearing Theories of Profit Frictional Theory of Profit Monopoly Theory of Profit Innovation Theory of Profit Managerial Efficiency Theory of Profit

Function of Profit


Profit is a signal that guides the allocation of societys resources. High profits in an industry are a signal that buyers want more of what the industry produces. Low (or negative) profits in an industry are a signal that buyers want less of what the industry produces.

The Changing Environment of Managerial Economics




Globalization of Economic Activity


Goods and Services Capital Technology Skilled Labor

Technological Change
Telecommunications Advances The Internet and the World Wide Web

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