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MANAGER

The document discusses key concepts in managerial economics including scarcity, opportunity costs, profits, incentives, and marginal analysis. It explains that managerial economics uses economic principles to help managers make optimal decisions given scarce resources. The document outlines 6 principles of effective management: identifying goals and constraints, understanding the role of profits, incentives, markets, time value of money using present value analysis, and using marginal analysis to determine optimal levels of decision variables.

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0% found this document useful (0 votes)
164 views

MANAGER

The document discusses key concepts in managerial economics including scarcity, opportunity costs, profits, incentives, and marginal analysis. It explains that managerial economics uses economic principles to help managers make optimal decisions given scarce resources. The document outlines 6 principles of effective management: identifying goals and constraints, understanding the role of profits, incentives, markets, time value of money using present value analysis, and using marginal analysis to determine optimal levels of decision variables.

Uploaded by

zealous
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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 MANAGER

o -Manager generally has responsibility for his own actions as well as


for the actions of individuals, machines,, and other inputs under the
manager’s control.
o -Is the science of making decisions in the presence of scarce
resources.
 ECONOMICS
-Is the science making decisions in the making presence of scarce resources

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

6 PRINCIPLES OF MANAGERIAL FUNCTION THAT COMPRISE EFFECTIVE


MANAGEMENT
 Identify goals and constraints;
 Recognize the nature and importance of profits;
 Understand incentives;
 Understand markets;
 Recognize the time value of money;
 Use marginal analysis.
6 PRINCIPLES OF MANAGERIAL FUNCTION THAT COMPRISE EFFECTIVE
MANAGEMENT

1. Identify goals and constraints;


-The first step in making sound decisions is to have well-defined goals
because achieving different goals entails making different decisions.
-If your goal is to maximize your grade in this course rather than maximize
your overall grade point average, your study habits will differ accordingly.
-Constraints make it difficult for managers to achieve goals such as
maximizing profits or increasing market share.
-Constraints include such as the available technology and the prices of
inputs used in production.

ECONOMIC VERSUS ACCOUNTING PROFITS

 ACCOUNTING PROFIT – is the total amount of money taken from sales


(total revenue, or price times quantity sold) minus the dollar cost of
producing goods or services.
 ECONOMIC PROFITS – are the difference between the total revenue and
total opportunity cost of producing the firm’s goods or services.
 OPPORTUNITY COST – The cost of the explicit and implicit resources that
are forgone when a decision is made

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

Misconception to the firm’s goal of maximizing profits. Individuals who


want to maximize profits often considered self-interested.
Book of Adam Smith’s “The Wealth of Nations”. He is saying that by
pursuing its self-interest-the goal of maximizing profits-a firm ultimately meets
the needs of society.
When firms in a given industry earn economic profits, the opportunity cost
to resource holders outside the industry increases.

5 FORCES FRAMEWORK PIONEERED BY MICHAEL PORTER


FIVE CATEGORIES OR FORCES THAT IMPACT THE SUSTAINABILITY OF INDUSTRY
PROFITS:
1. Entry
2. Power of input suppliers,
3. Power of buyers
4. Industry rivalry
5. Substitutes and complements

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.

THREE SOURCES OF RIVALRY THAT EXIST IN ECONOMIC TRANSACTIONS:

 CONSUMER-PRODUCER RIVALRY – occurs because of competing interests


of consumers and producers. Consumers attempt to negotiate or locate low
prices, while producers attempt to negotiate high prices.

 CONSUMER-CONSUMER RIVALRY – arises because of the economic


doctrine of scarcity. When limited quantities of goods are available,
consumers will compete with one another for the right to purchase the
available goods.

 PRODUCER-PRODUCER RIVALRY – functions only when multiple sellers of a


product compete in the marketplace. Given that customers are scarce,
producers compete with one another for the right to service the customers
available.
THREE SOURCES OF RIVALRY THAT EXIST IN ECONOMIC TRANSACTIONS:
5. RECOGNIZE THE TIME VALUE OF MONEY
-The timing of many decisions involves a gap between the time when the
costs of a project are borne and the time when the benefits of the project are
received.
-To properly account for the timing of receipts and expenditures, the
manager must understand present value analysis.

PRESENT VALUE ANALYSIS (PV)


-The amount that would have to be invested today at the prevailing interest
rate to generate the given future value.

Formula (Present Value). The present value (PV) of a future value (FV) received
n years in the future is:

Where i is the rate of interest

For example, the present value of $100 in 10 years if the interest rate is at 7
percent is:

NET PRESENT VALUE


-The present value of the income stream generated by a project minus the
current cost of the project.
Formula (Net Present value). Suppose that by sinking Co dollars into a
project today, a firm will generate income of FV1 one year in the future, FV2 two
years in the future, and so on for n years. If the interest rate is I, the Net Present
Value of the project is
ex. The manager of Automated product is contemplating the purchase of a
new machine that will cost $300,000 and has a useful life of five years. The
machine will yield (year-end) cost reductions to Automated Products of $50,000
in year 1, $60,000 in year 2, $75,000 in year 3, and $90,000 in year 4 and 5. What
is the present value of the cost savings of the machine if the interest rate is 8
percent? Should the manager purchase the machine?
-By spending $300,000 today on a new machine, the firm will reduce costs
by $365,000 over five years. The present value of the cost savings is only:

The Net Present value of the new machine :


NPV = PV – Co = $284,679-$300,000 = -$15,321

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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