Copyright 2008 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinManagerial Economics, 9eManagerial EconomicsThomasMauriceninth editionCopyright 2008 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/IrwinManagerial Economics, 9eManagerial EconomicsThomasMauriceninth editionChapter 1Managers, Profits, and MarketsManagerial EconomicsManagerial EconomicsManagerial Economics & TheoryManagerial economics applies microeconomic theory to business problemsHow to use economic analysis to make decisions to achieve firms goal of profit maximizationMicroeconomicsStudy of behavior of individual economic agents2Managerial EconomicsManagerial EconomicsEconomic Cost of ResourcesOpportunity cost of using any resource is:What firm owners must give up to use the resourceMarket-supplied resourcesOwned by others & hired, rented, or leasedOwner-supplied resourcesOwned & used by the firm3Managerial EconomicsManagerial EconomicsTotal Economic CostTotal Economic CostSum of opportunity costs of both market-supplied resources & owner-supplied resourcesExplicit CostsMonetary payments to owners of market-supplied resourcesImplicit CostsNonmonetary opportunity costs of using owner-supplied resources4Managerial EconomicsManagerial EconomicsEconomic Cost of Using Resources (Figure 1.1)+=5Managerial EconomicsManagerial EconomicsTypes of Implicit CostsOpportunity cost of cash provided by ownersEquity capitalOpportunity cost of using land or capital owned by the firmOpportunity cost of owners time spent managing or working for the firm6Managerial EconomicsManagerial EconomicsEconomic Profit versus Accounting ProfitEconomic profit= Total revenue Total economic cost = Total revenue Explicit costs Implicit costsAccounting profit = Total revenue Explicit costs Accounting profit does not subtract implicit costs from total revenue Firm owners must cover all costs of all resources used by the firmObjective is to maximize economic profit7Managerial EconomicsManagerial EconomicsMaximizing the Value of a FirmValue of a firmPrice for which it can be soldEqual to net present value of expected future profitRisk premiumAccounts for risk of not knowing future profitsThe larger the rise, the higher the risk premium, & the lower the firms value8Managerial EconomicsManagerial EconomicsMaximizing the Value of a FirmMaximize firms value by maximizing profit in each time periodCost & revenue conditions must be independent across time periodsValue of a firm = 9Managerial EconomicsManagerial EconomicsSeparation of Ownership & ControlPrincipal-agent problemConflict that arises when goals of management (agent) do not match goals of owner (principal)Moral HazardWhen either party to an agreement has incentive not to abide by all its provisions & one party cannot cost effectively monitor the agreement10Managerial EconomicsManagerial EconomicsCorporate Control MechanismsRequire managers to hold stipulated amount of firms equityIncrease percentage of outsiders serving on board of directorsFinance corporate investments with debt instead of equity11Managerial EconomicsManagerial EconomicsPrice-Takers vs. Price-SettersPrice-taking firmCannot set price of its product Price is determined strictly by market forces of demand & supplyPrice-setting firmCan set price of its productHas a degree of market power, which is ability to raise price without losing all sales12Managerial EconomicsManagerial EconomicsWhat is a Market?A market is any arrangement through which buyers & sellers exchange goods & servicesMarkets reduce transaction costsCosts of making a transaction other than the price of the good or service13Managerial EconomicsManagerial EconomicsMarket StructuresMarket characteristics that determine the economic environment in which a firm operatesNumber & size of firms in marketDegree of product differentiationLikelihood of new firms entering market14Managerial EconomicsManagerial EconomicsPerfect CompetitionLarge number of relatively small firmsUndifferentiated productNo barriers to entry15Managerial EconomicsManagerial EconomicsMonopolySingle firmProduces product with no close substitutesProtected by a barrier to entry16Managerial EconomicsManagerial EconomicsMonopolistic CompetitionLarge number of relatively small firmsDifferentiated productsNo barriers to entry17Managerial EconomicsManagerial EconomicsOligopolyFew firms produce all or most of market outputProfits are interdependentActions by any one firm will affect sales & profits of the other firms18Managerial EconomicsManagerial EconomicsGlobalization of MarketsEconomic integration of markets located in nations around the worldProvides opportunity to sell more goods & services to foreign buyersPresents threat of increased competition from foreign producers19