The Nature and Scope of Managerial Economics

Managerial Economics Defined
The application of economic theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently

Theory of the Firm
•Combines and organizes resources for the purpose of producing goods and/or services for sale.
•Internalizes transactions, reducing transactions costs.
•Primary goal is to maximize the wealth or value of the firm.


Definitions of Profit
•Business Profit: Total revenue minus the explicit or accounting costs of production.
•Economic Profit: Total revenue minus the explicit and implicit costs of production.
Opportunity Cost: Implicit value of a resource in its best alternative use
Alternative Theories
•Sales maximization
–Adequate rate of profit
•Management utility maximization
–Principle-agent problem
•Satisficing behavior

Theories of Profit

•Risk-Bearing Theories of Profit
•Frictional Theory of Profit
•Monopoly Theory of Profit
•Innovation Theory of Profit
•Managerial Efficiency Theory of Profit


Function of Profit
•Profit is a signal that guides the allocation of society’s resources.
•High profits in an industry are a signal that buyers want more of what the industry produces.
•Low (or negative) profits in an industry are a signal that buyers want less of what the industry produces.

The Changing Environment of Managerial Economics
•Globalization of Economic Activity
–Goods and Services
–Capital
–Technology
–Skilled Labor
•Technological Change
–Telecommunications Advances
–The Internet and the World Wide Web


Managerial Economics Defined
The application of economic theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently

Theory of the Firm
•Combines and organizes resources for the purpose of producing goods and/or services for sale.
•Internalizes transactions, reducing transactions costs.
•Primary goal is to maximize the wealth or value of the firm.


Definitions of Profit
•Business Profit: Total revenue minus the explicit or accounting costs of production.
•Economic Profit: Total revenue minus the explicit and implicit costs of production.
Opportunity Cost: Implicit value of a resource in its best alternative use
Alternative Theories
•Sales maximization
–Adequate rate of profit
•Management utility maximization
–Principle-agent problem
•Satisficing behavior

Theories of Profit

•Risk-Bearing Theories of Profit
•Frictional Theory of Profit
•Monopoly Theory of Profit
•Innovation Theory of Profit
•Managerial Efficiency Theory of Profit


Function of Profit
•Profit is a signal that guides the allocation of society’s resources.
•High profits in an industry are a signal that buyers want more of what the industry produces.
•Low (or negative) profits in an industry are a signal that buyers want less of what the industry produces.

The Changing Environment of Managerial Economics
•Globalization of Economic Activity
–Goods and Services
–Capital
–Technology
–Skilled Labor
•Technological Change
–Telecommunications Advances
–The Internet and the World Wide Web