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The Fundamentals Of Managerial Economics

The Fundamentals Of Managerial Economics. Task:. Read: Chapter 1, The Fundamentals Of Managerial Economics. The Manager. A person who directs resources to achieve a stated goal. Economics. The science of making decisions in the presence of scare resources.

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The Fundamentals Of Managerial Economics

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  1. The Fundamentals Of Managerial Economics

  2. Task: Read: Chapter 1, The Fundamentals Of Managerial Economics.

  3. The Manager • A person who directs resources to achieve a stated goal.

  4. Economics • The science of making decisions in the presence of scare resources.

  5. Managerial Economics Defined • The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.

  6. The Economics Of Effective Management An effective manager must: 1. Identify goals and constraints. 2. Recognize the nature and importance of profits. 3. Understand incentives. 4. Understand markets. 5. Recognize the time value of money. 6. Use marginal analysis.

  7. Identify Goals And Constraints • Have well defined goals. • Face constraints.

  8. Recognize The Nature And Importance Of Profits • The overall goal of most firm is to maximize profits or the firm’s value. • Economic profits: The difference between total revenue and total opportunity cost.

  9. Recognize The Nature And Importance Of Profits (continued) • Opportunity cost: The cost of the explicit and implicit resources that are forgone when a decision is made.

  10. Recognize The Nature And Importance Of Profits (continued) • The five forces framework and industry profitability: 1. Entry. 2. Power of input suppliers. 3. Power of buyer. 4. Industry rivalry. 5. Substitutes and complements.

  11. Recognize The Nature And Importance Of Profits (continued) • The five forces framework and industry profitability: Entry:: - Entry costs. - Speed of adjustment. - Sunk costs. - Economies of scale. - Network effects. - Reputation. - Switching costs. - Government restraints.

  12. Recognize The Nature And Importance Of Profits (continued) • The five forces framework and industry profitability: Power of input suppliers:: - Supplier concentration. - Price/productivity of alternative inputs. - Relationship specific investments. - Supplier switching costs. - Government restraints.

  13. Recognize The Nature And Importance Of Profits (continued) • The five forces framework and industry profitability: Power of Buyers:: - Buyer concentration. - Price/value of substitute products or services. - Relationship specific investment. - Customer switching costs. - Government restraints.

  14. Recognize The Nature And Importance Of Profits (continued) • The five forces framework and industry profitability: Substitutes and complements:: - Price/value of surrogate products or services. - Price/value of complementary products or services. - Network effects. - Government restraints.

  15. Recognize The Nature And Importance Of Profits (continued) • The five forces framework and industry profitability: Industry rivalry:: - Concentration. - Price, quantity, quality, or service competition. - Degree of differentiation. - Switching costs. - Timing of decisions. - Information. - Government restraints.

  16. Understand Incentives • Incentives affect how resources are used and how hard workers work. • No reward for working hard and incurs no penalty if he fails to make sound managerial decisions.

  17. Understand Markets: 1. Consumer-Producer Rivalry. - Consumers attempt to negotiate or locate low prices. - Producers attempt to negotiate high prices.

  18. Understand Markets (continued): 2. Consumer-Consumer Rivalry. - When limited quantities of goods are available, consumers will compete with one another for the right to purchase the available goods. - An example: auction.

  19. Understand Markets (continued): 3. Producer-Producer Rivalry. - Given that consumers are scarce, producers compete with one another for the right to service the customers available.

  20. Understand Markets (continued): 4. Government And The Market.

  21. Recognize The Time Value Of Money

  22. Use Marginal Analysis • Marginal analysis: States that optimal managerial decisions involve comparing the marginal benefits of a decision with the marginal costs.

  23. Figure 1-2 Page 23

  24. Case: An engineering firm recently conducted a study to determine its revenue and cost structure. The results of the study are as follows: TR(Y) = 300 Y – 6 Y2 TR = Total Revenue Y = Output TC(Y) = 4 Y2 TC = Total Cost Y = Output

  25. Case (continued): MR (Marginal Revenue) =? MC (Marginal Cost) =? Optimal Y? (when MR = MC). Profit? MR = 300 – 12Y MC = 8Y MR = MC 300 -12Y = 8Y

  26. Case (continued): 300 -12Y = 8Y -12Y-8Y = -300 -20Y = -300 20Y = 300 Y = 300/20 = 15

  27. Case (continued): Profit = TR – TC Profit = 2250

  28. Homework: No. 3 Page 27.

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