Managerial Economics in
Global Economy, 5th
Edition
by
Dominick Salvatore
Chapter 1
The Nature and Scope
of Managerial Economics
Recommeneded books
Managerial economics in a global
economy by Dominick salvator 5th ed
Managerial Eco. By Mark Hirschey
11th ed.
Theory and problems of managerial
economics by salavator, sham series
(quite useful)
Referenec material
Managerial economics,economic
tools for today’s decision maker, 5th
edition by Paul G.keat, philip.k.Y.
yound,banar jee publisher,pearson
edition,2009
Managerial economics and business
strategy,6th edi. Micheal R. Baye,
printice hall publiher
Some Definitions of Managerial Eco.
Joel dean who is the author of the first
managerial economics text book “The
use of economic analysis in the
formulation of business policies”
Hirschey defines : Managerial
economics applies economic theory
and methods to business and
administrative decision making
Cont’d
 Salvatore -The application of economic
theory and the tools of decision science to
examine how an organization can achieve
its aims or objectives most efficiently.
 Douglas - “Managerial economics is .. the
application of economic principles and
methodologies to the decision-making
process within the firm or organization
Online encyclopedia
 Managerial economics is a branch of
economics that applies micro economic
analysis to decision making methods
of business and other management
units.
 It draws heavily from quantitative
techniques such as regression analysis
and correlation, lagrangian calculas
From all the definition we can conclude
Managerial economics is the
application of the economic theory
and quantitative methods to get the
optimal solution of the managerial
decision making problems
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
 The firm is an organization that Combines
and organizes resources for the purpose
of producing goods and/or services for
sale.
 Primary goal is to maximize the wealth or
value of the firm.
Circular Flow of National Income in two Sector Economy
we assume:
 There are only two sectors in economy
 Household sector and
 Business sector
 The business sector hires the service of factors of
production owned by household sector and pays for
those services in terms of wage, rent and interest to
household sector.
 The household sector buys goods and services from
business sector and spends its entire income on
consumption
in this way the income of household sector become
the revenue of business sector and national income
circulates.
12
FIGURE 1 THE CIRCULAR-FLOW DIAGRAM
MARKETS
FOR
GOODS AND SERVICES
•Firms sell
Goods
•Households buy
and services
sold
Revenue
Wages, rent,
and profit
Goods and
services
bought
HOUSEHOLDS
•Buy and consume
goods and services
•Own and sell factors
of production
FIRMS
•Produce and sell
goods and services
•Hire and use factors
of production
Factors of
production
Spending
Labor, land,
MARKETS
and capital
FOR
FACTORS OF PRODUCTION
•Households sell
•Firms buy
Income
= Flow of inputs
and outputs
= Flow of dollars
13
Theroy of firm
 The model of business is called the theory
of firm, in its simplist version, the firm is
thought to have profit maximistion as it
primary goal.
 Today,the emphsis on profit has been
broadend to inclued uncertainity and the
time value of money. In this more
complete model, the primary goal of the
firm is long term expected value
maximisation
Value of the Firm
The present value of all expected future
profits
Alternative Theories (Page#11-13)
To be covered by the student ……
 Sales maximization
 Management utility maximization
 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.
Problem……
 A woman managing photocopying establishment for
$25000 per year decides to open her own duplicating place.
Her revenue during the first year of operation is $120,000,
and her expenses are as follows;

Salaries to hired help
$ 45,000
Supplies
15,000
Rent
10,000
Utilities
1,000
Interest on bank loan
10,000
 Calculate a) The explicit costs b) The implicit cost c) the
business profit d) the economic profit
Theories of Profit
Risk-Bearing Theories of Profit
Frictional Theory of Profit
Monopoly Theory of Profit
Innovation Theory of Profit
Managerial Efficiency Theory of Profit
Function of Profit
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.
Role of business in society
 Why firms exist
Businesses help satisfy customers
want
Businesses contribute to social
welfare
Social responsibility of the firm
Serve customers
Provide employment opportunities
Pay taxes
Business Ethics (case study)
Identifies types of behavior that
businesses and their employees
should not engage in.
Source of guidance that goes
beyond enforceable laws.
The Changing Environment of Managerial
Economics
 Globalization of Economic Activity
 Goods and Services
 Capital
 Technology
 Skilled Labor
 WTO
 Technological Change
 Telecommunications Advances
 The Internet and the World Wide Web
Questions & Discussion
For class discussion
 What is a firm?
 What are its advantages?
 What is profit?
 What are the functions of profit?
 What are business ethics?
Appendix to be covered by students
 Page# 31 -36
 Demand and supply
 Equilibrium and price determination