Managerial Economics Chapter 1

Firms produce what percent of all goods and services consumed in the US? (The remainder is produced by the government and not-for-profit organizations)

80%

Model

A formal or mathematical statement of an economic theory

February 2004

An anti-smoking treaty was signed which restricted advertising and marketing practices. International sales slowed down as well.

The Decision Making Process

Define the problem Determine the objective Identify possible solutions Select the best possible solution Implement the decision

Marlboro Friday

Friday April 2, 1993 Phillip Morris took the unusual step of cutting the price of Marlboro cigarettes and its other premium brands by 20 percent.

4 Components of today's revolution

Globalization Information Technology and Computer Networks Dismantling of traditional managerial hierarchies Creation of a new information economy

Function of profit

High profits are the signal that consumers want more of the output of the industry. Lower profits or losses are the signal that consumers want less of the commodity and/or that production methods are not efficient.

Sarbanes-Oxley Act

In July 2002 this was passed to provide much tougher regulations on corporate governance and accounting oversight. Prohibits accounting firms from providing consulting and some auditing services to the same client, it increased penalties for securities fraud and destroying evidence, and it requires CEO'S AND CFO's to certify the firm's financial reports.

Theory of firm behavior

The most important section of chapter 1, since the theory of firm behavior is the centerpiece and central theme of managerial economics.

Risk-Bearing theories of Profit

above-normal returns (economic profits) are required by firms to enter and remain in such fields as petroleum.

The functional areas of business administration studies

accounting, finance, marketing, personnel or human resource management, and production. These disciplines study the business environment in which the firm operates and, such, they provide the background for managerial decision making.

Firm

an organization that combines and organizes resources for the purpose of producing goods and/or services for sale.

Econometrics

applies statistical tools (regression analysis) to real-world data to estimate the models postulated by economic theory and for forecasting.

explicit cost

are the actual out of pocket expenditures of the firm to purchase or hire the inputs it requires in production. Includes: wages to hire labor, interest on borrowed capital, rent on land and buildings, and the expenditures on raw material.

economic profit

equals the revenue of the firm minus its explicit costs and implicit costs.

Proprietorships

firms owned by 1 individual

Partnerships

firms owned by 2 or more individuals

Information superhighway

individuals, researchers, firms, and consumers can hook up with libraries, databases, and marketing information and have at their fingertips a vast amount of information as never before.

Corporations

owned by stockholders

implicit costs

refer to the vale of the inputs owned and used by the firm in its own production processes. Include: the salary that the entrepreneur could earn from working for someone else in a similar capacity and the return that the firm could earn from investing its capital and renting its land and other inputs to other firms.

Economic theory

refers to microeconomics and macroeconomics

business profit

refers to the revenue of the firm minus the explicit or accounting costs of the firm.

Business ethics

seeks to proscribe behavior that businesses, firm managers, and workers should not engage in. Is a source of guidance beyond enforceable law.

Internet

simply net..a collection of nearly 1 billion computers throughout the world linked together in a service called WWW.

Monopoly theory of profit

some firms with monopoly power can restrict output and charge higher prices than under perfect competition, thereby earning a profit. Monopoly power may arise from the firm's owning and controlling the entire supply of a raw material required for the production of the commodity.

July 2009

the Family Smoking Prevention and Tobacco Control Act was passed in the Us, which granted the US food and drug administration (FDA) authority to regulate tobacco products and put restrictions on tobacco marketing and advertising.

principal-agent problem

the agent(manager) may be more interested in maximizing his or her benefits than maximizing the principles(owners) interest.

managerial economics

the application of economic theory and the tools of analysis of decision science to examine how an organization can achieve its aims or objectives most efficiently. application of economic theory and decision science tools to find the optimal solution to managerial decision problems.

transaction costs

the extra cost (beyond the price of the purchase) in terms of money, time, or inconvenience of conducting a transaction. Firms exist to avoid many transaction costs.

Circular flow of economic activity

the flow of resources from resource owners to business firms and the reverse flow of goods and services from the latter to the former. Money flows from firms to resource owners to pay for resources and back to firms in payment for goods and services.

constrained optimization

the primary goal or objective of the firm is to maximize wealth or the value of the firm subject to the constraints it faces.

Globalization of economic activity

the setting up of production facilities and/or the purchase of components and parts, as well as the sale of commodities in other nations.

Microeconomics

the study of the economic behavior of of "individual" decision-making units, such as individual consumers, resource owners, and business firms, in a free-enterprise system.

Macroeconomics

the study of the total or aggregate level of output, income, employment, consumption, investment, and prices for the economy "viewed as a whole."

satisficing behavior

the theory of the firm that postulates that managers are not able to maximize profits but can strive only for some satisfactory goal in terms of sales, profits, growth, market share, and so on.

Innovation theory of profit

this theory postulates that (economic) profit is the reward for the introduction of a successful innovation. Ex: steve jobs introducing apple.

Managerial efficiency theory of profit

this theory rests on the observation that if the average firm tends to earn only a normal return on its investment in the long run, firms that are more efficient than the average would earn above-normal returns and (economic) profits.

Frictional theory of Profit

this theory stresses that profits arise as a result of friction or disturbances from long-run equilibrium. In the long run, perfectly competitive firms tend to earn only a normal return (adjusted for risk) or zero (economic) profit on their investment.

Mathematical economics

used to formalize (to express in equation form) the economic models postulated by economic theory.