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 McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 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 Economic theory helps managers understand real-world business problems Uses simplifying assumptions to turn complexity into relative simplicity Microeconomics 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 theory Assume Profit Maximization What about? Steakholders Social concerns Environmental concerns Do | Chapter 1: Managers, Profits, and Markets McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. 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 Economic theory helps managers understand real-world business problems Uses simplifying assumptions to turn complexity into relative simplicity Microeconomics 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 theory Assume Profit Maximization What about? Steakholders Social concerns Environmental concerns Do these concerns influence profits? Short or long run profit maximization? This is a false choice Maximize the value of the firm The value of the firm is equal to the present value of the future stream of profits Emphasis on short or long term will depend on: Time value of money (cost of funds) Market structure Uncertainty Economic Forces that Promote Long-Run Profitability (Figure ) 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 risk, the higher the risk premium, & the lower the firm’s value 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 = Possible Profit Streams Time Profits Limit Pricing Short-run profit max 0 Strategic Decisions Strategic decisions seek to shape or alter the .
