Chapter 1 - Managers, profits, and markets. After studying this chapter you will be able to: Explain the role of economic theory in managerial economics, contrast routine business practices (or tactics) with strategic decisions, list seven economic forces that influence the long-run profitability of firms, measure the explicit opportunity cost of using market-supplied resources to produce goods or services,. | Chapter 1 Managers, Profits, and Markets Managerial 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 Microeconomics Study of behavior of individual economic agents 1- Economic 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 firm 1- Total 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 resources 1- Economic Cost of Using Resources (Figure ) + = 1- Types of Implicit Costs Opportunity cost of cash provided by owners Equity capital Opportunity cost of . | Chapter 1 Managers, Profits, and Markets Managerial 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 Microeconomics Study of behavior of individual economic agents 1- Economic 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 firm 1- Total 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 resources 1- Economic Cost of Using Resources (Figure ) + = 1- Types 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 firm 1- Economic Profit versus 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 economic profit 1- Maximizing 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 value 1- Maximizing 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- Separation of Ownership & Control .
