MANAGERIAL ECONOMICS
14th Edition
BY
MARK HIRSCHEY AND ERIC BENTZEN
Nature and
Scope of
Managerial
Economics
CHAPTER 1
Chapter 1
OVERVIEW

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
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normal rate of return
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.
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Specify pricing and production strategies.
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Spell out production and marketing rules
to maximize profits.
Making the Best Decision

Managerial economics helps meet
management objectives efficiently.
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Managerial economics shows the logic of
consumer, and government decisions.
Theory of the Firm

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
 Business
Versus Economic Profit
 Business
(accounting) profit
reflects explicit costs and
revenues.
 Economic profit.
 Profit
above a risk-adjusted normal
return.
 Considers cash and noncash items.
 Variability
 Business
of Business Profits
profits vary widely.
Why Do Profits Vary
Among Firms?
 Disequilibrium
Unexpected
Profit Theories
revenue
growth.
Unexpected cost savings.
 Compensatory Profit Theories
Profits accrue to firms that
are better, faster, or
cheaper than the
competition.
Role of Business in
Society
 Why
Firms Exist
 Businesses
help satisfy consumer
wants.
 Businesses contributes to social
welfare
 Social
Responsibility of Business
 Serve customers.
 Provide employment
opportunities.
 Obey laws and regulations.
Structure of this
Text
 Objectives
 Learn
usefulness of economics
in describing managerial
behavior.
 Appreciate how economics
can be used to improve
managerial decisions.
 Understand vital role of
business in society.