Slide 1Slide 2IntroductionThe ManagerEconomicsSlide 6Slide 7The Nature and Importance of ProfitsThe Role of ProfitsSlide 10Understand IncentivesSlide 12The Time Value of MoneyPresent Value Analysis 1Present Value Analysis IISlide 16Net Present ValueSlide 18Slide 19Present Value and Estimating Values of Firms ISlide 21Slide 22Slide 23Slide 24Slide 25Marginal Principle IIMarginal Analysis In ActionSlide 28Determining the Optimal Level of a Control Variable IISlide 30Slide 31Learning Managerial EconomicsConclusionCHAPTER 1The Fundamentals of Managerial Economics© 2014 by McGraw-Hill Education. All Rights Reserved.•Introduction–The manager–Economics–Managerial economics defined•Economics of Effective Management–Identifying goals and constraints–Recognize the nature and importance of profits–Understand incentives–Understand markets–Recognize the time value of money–Use marginal analysis•Learning managerial economicsCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-2Chapter OverviewChapter OneIntroduction•Chapter 1 focuses on defining managerial economics, and illustrating how it is a valuable tool for analyzing many business situations.•This chapter provides an overview of managerial economics.–How do accounting profits and economic profits differ? •Why is the difference important?–How do managers account for time gaps between costs and revenues?–What guiding principle can managers use to maximize profits?Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-3Chapter OverviewThe Manager•A person who directs resources to achieve a stated goal.–Directs the efforts of others.–Purchases inputs used in the production of the firm’s output.–Directs the product price or quality decisions.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-4IntroductionEconomics•The science of making decisions in the presence of scarce resources.–Resources are anything used to produce a good or service, or achieve a goal.–Decisions are important because scarcity implies trade-offs.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-5Introduction•The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.–Should a firm purchase components – like disk drives and chips – from other manufacturers or produce them within the firm?–Should the firm specialize in making one type of computer or produce several different types?–How many computers should the firm produce, and at what price should you sell them?Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-6IntroductionManagerial Economics Defined•Basic principles comprising 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.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-7Economics of Effective ManagementEconomics of Effective ManagementThe Nature and Importance of Profits•A typical firm’s objective is to maximize profits.•Accounting profit–Total amount of money taken in from sales (total revenue) minus the dollar cost of producing goods or services.•Economic profit–The difference between total revenue and cost opportunity cost.–Opportunity cost•The explicit cost of a resource plus the implicit cost of giving up its best alternative.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-8Economics of Effective ManagementThe Role of Profits•Profit Principle:–Profits are a signal to resource holders where resources are most highly valued by society.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-9Economics of Effective ManagementCopyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-10Power of Input Suppliers·Supplier Concentration·Price/Productivity of Alternative Inputs·Relationship-Specific Investments·Supplier Switching Costs·Government RestraintsPower ofBuyers·Buyer Concentration·Price/Value of Substitute Products or Services·Relationship-Specific Investments·Customer Switching Costs·Government RestraintsEntrySubstitutes & ComplementsIndustry Rivalry·Concentration·Price, Quantity, Quality, or Service Competition·Degree of DifferentiationLevel, Growth, and Sustainabilityof Industry Profits·Entry Costs·Speed of Adjustment·Sunk Costs·Economies of Scale·Network Effects·Reputation·Switching Costs·Government Restraints·Price/Value of Surrogate Products or Services·Price/Value of Complementary Products or Services·Network Effects·Government Restraints·Switching Costs·Timing of Decisions·Information·Government RestraintsEconomics of Effective ManagementFive Forces and Industry ProfitabilityUnderstand Incentives•Changes in profits provide an incentive to how resource holders use their resources.•Within a firm, incentives impact how resources are used and how hard workers work.–One role of a manager is to construct incentives to induce maximal effort from employees.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-11Economics of Effective Management•Two sides to every market transaction:–Buyer.–Seller.•Bargaining position of consumers and producers is limited by three rivalries in economic transactions:–Consumer-producer rivalry.–Consumer-consumer rivalry.–Producer-producer rivalry.•Government and the market.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-12Economics of Effective ManagementUnderstand MarketsThe Time Value of Money •Often a gap exists between the time when costs are borne and benefits received.–Managers can use present value analysis to properly account for the timing of receipts and expenditures.Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-13Economics of Effective ManagementPresent Value Analysis 1•Present value of a single future value–The amount that would have to be invested today at the prevailing interest rate to generate the given future value:–Present value reflects the difference between the future value and the opportunity cost of waiting:• Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.1-14Economics of Effective ManagementPresent Value Analysis II•Present value of a stream of