MANAGER
MANAGER
RESOURCES
Anything used to produce a good or service or, more generally, to achieve a
goal.
(NOTE: Decisions are important because scarcity implies that by making one
choice, you give up another.)
ECONOMICS
MANAGERIAL ECONOMICS
-Is the study of how to direct scarce resources to the way that most
efficiently achieves a managerial goal
Example:
o -What does it cost you to read this book?
o -The price you paid the bookstore for the book is an explicit (or
accounting) cost, while the implicit cost is the value of what you are
giving up by reading the book.
o -Studying some other subject.
o -Watching TV
o -Your date with your boyfriend or girlfriend.
2. RECOGNIZE THE NATURE AND IMPORTANCE OF PROFITS/THE ROLE OF
PROFITS
3. UNDERSTAND INCENTIVES
-The key is to design a mechanism such that if the manager does what is in
his own interest, he will indirectly do what is best for your employees.
-Ex. Mr. O – opened a restaurant and hired a manager to run the business
so he could spend time doing the things he enjoys. When ask if his business was
doing well, he said that he had been losing money. When asked whether he
thought the manager was doing a good job, he said For the P3,750,000 salary I
pay the manager each year, the manager should be doing a job.
-Mr. O believes the manager “should be doing a good job.” But individuals
often are motivated by self-interest. This is not to say that people never act out of
kindness or charity, but rather that human nature is such that people naturally
tend to look after their own self-interest.
-Since Mr. O is not physically present at the restaurant to watch over the
manager, he has no way of knowing what the manager is up to. The manager
receives 3,750,000 per year regardless whether he puts in 12 hours or 2 hours a
day. The manager receives no reward for working hard and incurs no penalty if
he fails to make sound managerial decisions. The manager receives the same
3,750,000 regardless of the restaurant’s profitability.
4. UNDERSTAND MARKETS
-Two sides to every transactions in the market. For every buyer of a good
there is a corresponding seller.
-The final outcome of the market process, depends on the relative power of
buyers and sellers in the marketplace.
Formula (Present Value). The present value (PV) of a future value (FV) received
n years in the future is:
For example, the present value of $100 in 10 years if the interest rate is at 7
percent is:
6. MARGINAL ANALYSIS
-States that optimal managerial decisions involve comparing the marginal
(incremental)benefits of a decision with the marginal (incremental) costs.
INCREMENTAL BENEFITS – means amounts saved through avoiding costs.
INCREMENTAL COST –is the total cost incurred due to an additional unit of
product being produced.
Discrete decisions
-More generally, let B(Q) denote the total benefits derived from Q units of
some variable that is within the manager’s control. This is a very general idea:
B(Q) may be the revenue a firm generates from producing Q units of output; it
may be the benefits associated with distributing Q units of food to the needy; or,
in the context of our previous example, it may represent the benefits derived by
studying Q hours for an exam. Let C(Q) represent the total cost of the
corresponding level of Q. Depending on the nature of the decision problem, C(Q)
may be the total cost to a firm of producing Q units of output, the total cost to a
food bank of providing Q units of food to the needy, or the total cost to you of
studying Q hours for an exam.
Determining the Optimal level of a Control Variable: the Discrete Case
MARGINAL BENEFIT
o -the additional benefit arising from a unit increase in a particular
activity.
o -Is the advantage of enjoyment that is obtained by consuming one
additional unit of a product.
o -Is a maximum amount a consumer is willing to pay for an additional
good or services
MARGINAL COST
-The cost of producing one more unit of a good.
-Is the change in the total cost that arises when the quantity produced is
incremented by one unit; that is, it is the cost of producing one more unit of a
good.
NOTE: MARGINAL PRINCIPLE
-To maximize net benefits, the manager should increase the managerial
control variable to the point where marginal benefits equal marginal costs.
INCREMENTAL DECISIONS
-Sometimes managers are faced with proposals that require a simple
thumbs up or thumbs down decisions;
INCREMENTAL REVENUES – the additional revenues that stem from a yes-
or-no decision.
INCREMENTAL COSTS – the additional costs that stem from a yes-or-no
decision.
Ex. If you are the CEO of Slick Drilling Inc. and you must decide whether or
not to drill for crude oil around the Twin Lakes area in Michigan. Note that
your revenues increase by $183,200 if you adopt the project . To earn these
additional revenues, however, you must spend an additional $90,000 for
drill augers and $75,000 for additional temporary workers. The sum of
these costs - $165,000. Are you going to give your thumbs up or thumbs
down to the new project.
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