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Manager
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is a person who directs resources to achieve a stated goal
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Manager
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includes all individuals who (1) direct the efforts of others, including those who delegate tasks within an organization such as a firm, a family, or a club; (2) purchase inputs to be used in the production of goods and services such as the output of a firm, food for the needy, or shelter for the homeless; or (3) are in charge of making other decisions, such as product price or quality.
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Economics
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the science of making decisions in the presence of scarce resources
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Resources
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simply anything used to produce a good or service or, more generally, to achieve a goal
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Managerial Economics
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-study of how to direct scarce resources in the way that most efficiently achieves a managerial
goal
-it describes methods useful for directing everything from the resources of a household to maximize household welfare to the resources of a firm to maximize profits
goal
-it describes methods useful for directing everything from the resources of a household to maximize household welfare to the resources of a firm to maximize profits
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Basic Principles of Effective Management
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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; and (6) use marginal analysis.
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Constraints
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-are an artifact of scarcity
-make it difficult for managers to achieve goals such as maximizing profits or increasing market share
-make it difficult for managers to achieve goals such as maximizing profits or increasing market share
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Overall Goal of Firms
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maximize profits or the firm's value
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Accounting Profit Definition
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-total amount of money taken in from sales minus the dollar cost of producing goods or services
-present on the firm's income statement
-present on the firm's income statement
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Accounting Profit Formula
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total revenue - explicit costs
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Total Revenue Formula
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Price x Quantity
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Economic Profit Definition
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difference between the total revenue and the total opportunity cost of producing the firm's goods or services
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Economic Profit Formula
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Total Revenue - Opportunity Costs
or
Total Revenue - (Explicit + Implicit Costs)
or
Total Revenue - (Explicit + Implicit Costs)
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Explicit Cost
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Accounting Cost
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opportunity cost
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includes both the explicit (or accounting) cost of the resource and the implicit cost of giving up the best alternative use of the resource
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opportunity cost
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-The best alternative that we forgo, or give up, when we make a choice or decision.
-cost of the explicit and implicit resources that are forgone when a decision is made
-cost of the explicit and implicit resources that are forgone when a decision is made
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Adam Smith
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-Father of modern economics
-wrote The Wealth of Nations
"It is not out of the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."
-wrote The Wealth of Nations
"It is not out of the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."
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Five Forces by Michael Porter
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1) entry, (2) power of input suppliers, (3) power of buyers, (4) industry rivalry, and (5) substitutes and complements
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Entry
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heightens competition and reduces the margins of existing firms in a wide variety of industry settings.
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Power of Input Suppliers
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Industry profits tend to be lower when suppliers have the power to negotiate favorable terms for their inputs
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Price Ceilings and other Controls
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methods of the government in order that constrain the prices of inputs
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Power of Buyers
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industry profits tend to be lower when customers or buyers have the power to negotiate favorable terms for the products or services produced in the industry
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Industry Rivalry
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sustainability of industry profits also depends on the nature and intensity of rivalry among firms competing in the industry
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Substitutes and Complements
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sustainability of industry profits also depend on the price and value of interrelated products and service
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Incentives
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-things that encourage people to work
-affect how resources are used and how hard workers work
-affect how resources are used and how hard workers work
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three sources of rivalry that exist in economic transactions
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consumer-producer rivalry, consumer-consumer rivalry, and producer-producer
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Consumer-Producer Rivalry
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a kind of rivalry that occurs because of the competing interests of consumers and producers
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Consumer-Consumer Rivalry
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-A rivalry that occurs among consumers
-reduces the negotiating power of consumers in the marketplace. It arises because of the economic doctrine of scarcity
-reduces the negotiating power of consumers in the marketplace. It arises because of the economic doctrine of scarcity
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Producer-Producer Rivalry
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-a form of rivalry that functions only when multiple sellers of a product compete in the marketplace
-Given that customers are scarce, producers compete with one another for the right to service the customers available.
-Given that customers are scarce, producers compete with one another for the right to service the customers available.
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Government
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-When agents on either side of the market find themselves disadvantaged in the mar- ket process, they frequently attempt to induce this body to intervene on their behalf
-plays a role in disciplining the market process
-plays a role in disciplining the market process
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present value (PV) of an amount received in the future
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is the amount that would have to be invested today at the prevailing interest rate to generate the given future value.
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Formula (Present Value)
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The present value of the income stream generated by a project minus the current cost of the project.
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net present value
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difference between the future value (FV) and the opportunity cost of waiting (OCW):
PV=FV-OCW
PV=FV-OCW
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Formula (Present Value of a Stream)
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CF/i
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This is reflected by the present value of a future payment
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CF/i
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Formula (Net Present Value)
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PV firm - current profits of firm
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PV Pertuity
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states that optimal managerial decisions involve comparing the marginal (or incremental) benefits of a decision with the marginal (or incremental) costs
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PV Perpetual Bond
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refers to the additional bene- fits that arise by using an additional unit of the managerial control variable
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PV FIRM
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additional cost incurred by using an additional unit of the managerial control variable
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PV Ex-dividend Firm
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means maximizing the value of the firm, which is the present value of current and future profits.
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Marginal Analysis
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To maximize net benefits, the manager should increase the managerial control variable to the point where marginal benefits equal marginal costs. This level of the managerial con- trol variable corresponds to the level at which marginal net benefits are zero; nothing more can be gained by further changes in that variable.
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Marginal benefit
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The additional revenues that stem from a yes-or-no decision.
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Marginal cost
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The additional costs that stem from a yes-or-no decision.
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profit maximization
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undefined
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Marginal Principle
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undefined
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incremental revenues
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undefined
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incremental costs
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