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Lesson 09

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Rizwan Ahmed
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Ms Talat Yazdani

Lecture 1
Managerial
Economics in a
Global Economy

Dominick
Salvatore

Fifth Ed
Managerial
Economics

Mark Hirschey
Eleventh Ed
Text Books
1. Managerial Economics in a Global
Economy, 5th Edition, Dominick Salvatore,
Publisher: Oxford University Press, 2004.

2. Managerial Economics, 11th Edition,


Mark Hirschey, Publisher: Thomson/South-
Western, 2006.
Reference Material
1. Managerial Economics, Economic Tools
for Today’s Decision Maker, 5 th Edition, Paul G.
keat, Phillip K.Y. Young, Banerjee, Publisher:
Pearson Education, 2009

2. Managerial Economics and Business


Strategy, 6th Edition, Michael R. Baye,
Publisher: Prentice Hall, 2009.
3. Managerial Economics, 6th Edition, D N
Dwivedi, Publisher: Vikas Publising House,
2002.
Joel Dean-, author of the first managerial
eco textbook, defines managerial economics
as “the use of economic analysis in the
formulation of business policies”

Hirschey - “Managerial economics applies


economic theory and methods to business and
administrative decision-making.”

Salvatore - “Managerial economics refers to


the application of economic theory and the
tools of analysis of decision science to
examine how an organization can achieve its
objectives most effectively.”
What is Managerial Economics?
Managerial economics is a branch of
economics that applies microeconomic
analysis to decision methods of businesses
or other management units. As such, it
bridges economic theory and economics in
practice. It draws heavily from
quantitative techniques such as regression
analysis and correlation, Lagrangian
calculus
The application of economic theory
and the tools of decision science to
examine how an organization can
achieve its aims or objectives most
efficiently.

•applications of economic theory


•quantitative methods
•statistical methods
•computational methods
Microeconomics
Study of the economic
behavior of individual
decision-making units.
Relevance to Managerial
Economics
Macroeconomics
Study of the total or
aggregate level of output,
income, employment,
consumption, investment, and
prices for the economy
viewed as a whole.
•Mathematical Economics
Expresses and analyzes
economic models using the
tools of mathematics.
•Econometrics
Employs statistical methods
to estimate and test economic
models using empirical data.
Mathematical Economics

Functional form
QDX = f(PX, Y, Pr)
Scope of Managerial Economics
Managerial economics has applications in both profit
and not-for-profit sectors. For example, an
administrator of a nonprofit hospital seeks to provide
the best medical care possible given limited medical
staff, equipment, and related resources. Using the
tools and concepts of managerial economics, the
administrator can determine the optimal allocation of
these limited resources. In short, managerial
economics helps managers arrive at a set of
operating rules that help in the efficient use of scarce
human and capital resources. By following these
rules, businesses, nonprofit organizations, and
government agencies are able to meet their
objectives efficiently.
Expected Value
Maximization
•Owner-managers maximize
short-run profits.
•Primary goal is long-term
expected value
maximization.
Constraints and the Theory
of the Firm
•Resource constraints.
•Social constraints.
•The theory of firm is the center-piece
and central theme of Managerial
economics.
• A firm is an organization that
combines and organizes resources for
the purpose of producing goods and/or
services for sale.
•Internalizes transactions, reducing
transactions costs.
•Economic theory assumes that the
primary goal of managers is to
Theory of the Firm
The model of business is called the theory of
the firm. In its simplest version, the firm is
thought to have profit maximization as its
primary goal.
Today, the emphasis on profits has been
broadened to include uncertainty and the
time value of money. In this more complete
model, the primary goal of the firm is long-
term expected value maximization.
The present value of all expected future profits

1 2 n n
t
PV  1
 2
  n
 t
(1  r ) (1  r ) (1  r ) t 1 (1  r )

t
n n
TRt  TCt
Value of Firm  t
 t
t 1 (1  r ) t 1 (1  r )
Constraints and the Theory of the Firm

 Managerial decisions are often made in light of


constraints imposed by technology, resource
scarcity, contractual obligations, laws, and
regulations.

 Organizations frequently face limited availability


of essential inputs, such as skilled labor, raw
materials, energy, specialized machinery, and
warehouse space.
Alternative Theories of the Firm

Sales maximization
Adequate rate of profit
Management utility maximization
Principle-agent problem
Satisficing behavior
•Business or Accounting Profit:
Total revenue minus the explicit
or accounting costs of
production.

•Economic Profit: Total revenue


minus the explicit and implicit
costs of production.
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
Social Function of Profit
 Profit is a signal that guides the allocation of
society’s resources.
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.

Economic profits are one of the most important


factors affecting the allocation of scarce
economic resources.
•Why Firms Exist

Businesses help satisfy


consumer wants.
Businesses contributes to social
welfare
•Social Responsibility of Business

Serve customers.
Provide employment
opportunities.
Pay Taxes
Obey laws and regulations.
The Changing Environment of Managerial
Economics
Globalization of Economic Activity
Goods and Services
Capital
Technology
Skilled Labor
WTO, GATT 1947
AOA, ATC, TRIPS, TRIMS

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