WelcomeSlide 2Managerial Economics & TheoryMicroeconomicsStrategic DecisionsSlide 6Economic Cost of ResourcesTotal Economic CostTypes of Implicit CostsEconomic Cost of Using Resources (Figure 1.2)Economic Profit vs. Accounting ProfitMaximizing the Value of a FirmMaximizing the Value of a FirmSome Common Mistakes Managers MakeBerle and Means view1Separation of Ownership & ControlCorporate Control MechanismsPrice-Takers vs. Price-SettersWhat is a Market?Market StructuresPerfect CompetitionMonopolyMonopolistic CompetitionOligopoly1-1WelcomeECON 6313Managerial EconomicsFall semester, 2011Professor Chris BrownChapter 1: Managers, Profits, and MarketsMcGraw-Hill/IrwinCopyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.1-3Managerial Economics & Theory•Managerial economics applies microeconomic theory to business problems•How to use economic analysis to make decisions to achieve firm’s goal of profit maximization•Economic theory helps managers understand real-world business problems•Uses simplifying assumptions to turn complexity into relative simplicity1-4Microeconomics•Microeconomics•Study of behavior of individual economic agents•Business practices or tactics•Using marginal analysis, microeconomics provides the foundation for understanding everyday business decisions•Industrial organization•Specialized branch of microeconomics focusing on behavior & structure of firms & industries•Provides foundation for understanding strategic decisions through application of game theory1-5Strategic Decisions•Strategic decisions seek to shape or alter the conditions under which a firm competes with its rivals•Increase/protect firm’s long-run profit•While routine business practices are necessary for the goal of profit-maximization, strategic decisions are generally optimal actions managers can take as circumstances permit1-6Economic Forces that Promote Long-Run Profitability (Figure 1.1)1-7Economic Cost of Resources•Opportunity cost of using any resource is:•What firm owners must give up to use the resource•Market-supplied resources•Owned by others & hired, rented, or leased•Owner-supplied resources•Owned & used by the firm1-8Total Economic Cost•Total Economic Cost•Sum of opportunity costs of both market-supplied resources & owner-supplied resources•Explicit Costs•Monetary payments to owners of market-supplied resources•Implicit Costs•Nonmonetary opportunity costs of using owner-supplied resources1-9Types of Implicit Costs•Opportunity cost of cash provided by owners•Equity capital•Opportunity cost of using land or capital owned by the firm•Opportunity cost of owner’s time spent managing or working for the firm1-10Economic Cost of Using Resources (Figure 1.2)E x p l i c i t C o s t so fM a r k e t - S u p p l i e d R e s o u r c e sT h e m o n e t a r y p a y m e n t s t o r e s o u r c e o w n e r sT o t a l E c o n o m i c C o s tT h e t o t a l o p p o r t u n i t y c o s t s o f b o t h k i n d s o f r e s o u r c e sI m p l i c i t C o s t so fO w n e r - S u p p l i e d R e s o u r c e sT h e r e t u r n s f o r g o n e b y n o t t a k i n gt h e o w n e r s ’ r e s o u r c e s t o m a r k e t+=1-11Economic Profit vs. Accounting Profit Economic profit = Total revenue – Total economic cost = Total revenue – Explicit costs – Implicit costs Accounting profit = Total revenue – Explicit costs•Accounting profit does not subtract implicit costs from total revenue•Firm owners must cover all costs of all resources used by the firm•Objective is to maximize profit1-12Maximizing the Value of a Firm•Value of a firm•Price for which it can be sold•Equal to net present value of expected future profit•Risk premium•Accounts for risk of not knowing future profits•The larger the rise, the higher the risk premium, & the lower the firm’s value1-13Maximizing the Value of a Firm•Maximize firm’s value by maximizing profit in each time period•Cost & revenue conditions must be independent across time periods•Value of a firm = 1 2211 1 1 1( ) ( ) ( ) ( )TT TT tt...r r r rp p p p=+ + + =+ + + +�1-14Some Common Mistakes Managers Make•Never increase output simply to reduce average costs•Pursuit of market share usually reduces profit•Focusing on profit margin won’t maximize total profit•Maximizing total revenue reduces profit•Cost-plus pricing formulas don’t produce profit-maximizing prices1-15Berle and Means view11 Adolph Berle and Gardiner Means. The Modern Corporation and Private Property•The gigantic, publicly-owned, vertically integrated corporation has displaced the small, owner managed business as the dominant form of economic organization.•Given the separation of ownership and control indicative of modern corporatism, a large share of economic resources are under the control of the professional management class—i.e., owners, or shareholders, are “passive.”•There is no guarantee that the interests of shareholders and managers will coalesce—i.e., managers may be interested in objectives other than value maximization(e.g., growth of the firm, power, job security or perquisites). V MAX1-16Separation of Ownership & Control•Principal-agent problem•Conflict that arises when goals of management (agent) do not match goals of owner (principal)•Moral Hazard•When either party to an agreement has incentive not to abide by all its provisions & one party cannot cost effectively monitor the agreement1-17Corporate Control Mechanisms•Require managers to hold stipulated amount of firm’s equity•Value-based compensation•Increase percentage of outsiders serving on board of directors•Finance corporate investments with debt instead of equity1-18Price-Takers vs. Price-Setters•Price-taking firm•Cannot set price of its product •Price is determined strictly by market forces of demand & supply•Price-setting firm•Can set price of its product•Has a degree of market power, which is ability to raise price without losing all sales1-19What is a Market?•A market is any arrangement through which buyers & sellers exchange goods & services•Markets reduce transaction costs•Costs of making a transaction other than the price of the good or service1-20Market Structures•Market characteristics that determine the economic environment in which a firm operates•Number & size of firms in
View Full Document