Managerial Economics

Principles and Worldwide Applications, 7th Edition

Dominick Salvatore & Ravikesh Srivastava

Chapter 1: 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.

applications of economic theory quantitative methods statistical methods computational methods

Economic Theory
Macroeconomics

Study of the total or aggregate level of output, income, employment, consumption, investment, and prices for the economy viewed as a whole. Study of the economic behavior of individual decision-making units. Relevance to Managerial Economics.

Microeconomics

Decision Sciences
Mathematical

Economics

Expresses and analyzes economic models using the tools of mathematics. Employs statistical methods to estimate and test economic models using empirical data.

Econometrics

Economic Methodology
Economic

Models

Abstract from details Focus on most important determinants of economic behavior cause and effect

Evaluating

Economic Models

A model is accepted if it predicts accurately and if the predictions follow logically from the assumptions.

The Theory of the Firm

Combines

and organizes resources for the purpose of producing goods and/or services for sale. Internalizes transactions, reducing transactions costs. Economic theory assumes that the primary goal of managers is to maximize the value of the firm.

Value of the Firm

The present value of all expected future profits

Alternative Theories
Sales

maximization utility maximization

Adequate rate of profit

Management

Principle-agent problem

Satisficing

behavior

Definitions of Profit
Business

or Accounting 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.

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

Social Function of Profit

Profit

is a signal that guides the allocation of societys 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.

Business Ethics
Identifies

types of behavior that businesses and their employees should not engage in. Source of guidance that goes beyond enforceable laws.

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

Appendix: Solving Managerial Problems Using Spreadsheets

Using the test scores in column B to the right, we can calculate the mean, median, mode, sample variance, sample standard deviation, and coefficient of variation of the data. The next table shows the formulas used. You can either write out the entire formula or use Excel function commands.

Appendix: Solving Managerial Problems Using Spreadsheets

A histogram of the data can also be created. Choose ToolsData Analysis. In the resulting dialog box, select Histogram and click OK. For the input range, select the data from B1 to B10. Also check the Chart Output and Cumulative Percentage boxes, as seen in the following figure. The last figure shows the results.