MANAGERIAL
th
ECONOMICS 11 Edition
By
Mark Hirschey
Nature and Scope of
Managerial Economics
Chapter 1
Chapter 1
OVERVIEW
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How Is Managerial Economics Useful?
Theory of the Firm
Profit Measurement
Why Do Profits Vary among Firms?
Role of Business in Society
Structure of this Text
Chapter 1
KEY CONCEPTS
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managerial economics
theory of the firm
expected value
maximization
value of the firm
present value
optimize
satisfice
business profit
normal rate of return
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economic profit
profit margin
return on stockholders'
equity
frictional profit theory
monopoly profit theory
innovation profit theory
compensatory profit
theory
How Is Managerial Economics
Useful?
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Evaluating Choice Alternatives
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Identify ways to efficiently achieve goals.
Specify pricing and production strategies.
Provide production and marketing rules to
help maximize net profits.
Making the Best Decision
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Managerial economics can be used to
efficiently meet management objectives.
Managerial economics can be used to
understand logic of company, consumer, and
government decisions.
Theory of the Firm
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Expected Value Maximization
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Constraints and the Theory of the Firm
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Owner-managers maximize short-run profits.
Primary goal is long-term expected value
maximization.
Resource constraints.
Social constraints
Limitations of the Theory of the Firm
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Alternative theory adds perspective.
Competition forces efficiency.
Hostile takeovers threaten inefficient managers.
Profit Measurement
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Business Versus Economic Profit
Business (accounting) profit reflects
explicit costs and revenues.
 Economic profit.
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 Profit
above a risk-adjusted normal return.
 Considers cash and noncash items.
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Variability of Business Profits
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Business profits vary widely.
Why Do Profits Vary
Among Firms?
 Disequilibrium
Profit Theories
 Rapid growth in revenues.
 Rapid decline in costs.
 Compensatory Profit Theories
 Better, faster, or cheaper than
the competition is profitable.
Role of Business in
Society
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Why Firms Exist
Business is useful in satisfying consumer
wants.
 Business contributes to social welfare
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Social Responsibility of Business
Serve customers.
 Provide employment opportunities.
 Obey laws and regulations.
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Structure of this Text
 Objectives
 Understand
usefulness of
economics in describing managerial
behavior.
 Understand how economics can be
used to improve managerial
decisions.
 Appreciate vital role of business in
society.