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Basic Principles that Comprise 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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Manager
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a person who directs resources to achieve a stated goal
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Economics
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the science of making decisions in the presence of scarce resources
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Managerial Economics
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the study of how to direct scarce resources in the way that most efficiently achieves a managerial goal
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Economic Profits
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the difference between total revenue and total opportunity cost
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Opportunity Cost
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the explicit cost of a resource plus the implicit cost of giving up its best alternative use
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Profits are a Signal
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Profits signal to resource holders where resources are most highly valued by society
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"Five Forces" Framework
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This framework organizes many complex managerial economics issues into five categories or "forces" that impact the sustainability of industry profits. 1. entry; 2. power of input supplies; 3. power of buyers; 4. industry rivalry; 5. substitutes and complements.
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Entry
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Entry 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. Supplier power tends to be low when inputs are relativity standardized and relationship specific investments are minimal.
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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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The 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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The level of sustainability in industry profits also depend on the price and value of interrelated products and services.
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Consumer-Producer Rivalry
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occurs because of the competing interest of consumers and producers. Consumers attempt to negotiate or locate low prices, and producers attempt to negotiate high prices.
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Consumer-Consumer Rivalry
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reduces the negotiating power of consumers int he marketplace. It arises because of the economic doctrine of scarcity.
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Producer-Producer Rivalry
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Given that customers are scarce, producers compete with one another for the right to service the customers available.
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Present Value
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The amount that would have to be invested today at the prevailing interest rate to generate the given future value.
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Net 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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Profit Maximization
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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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states that optimal managerial decisions involve comparing the marginal benefits of a decision with the marginal costs.
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Marginal Benefit
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the change in total benefits arising from a change in the managerial control variable.
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Marginal Cost
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the change in total costs arising from a change in the managerial control variable Q.
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Marginal Principle
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to maximize net benefits, the manager should increase the managerial control variable up to the point where marginal benefits equal marginal costs. This level of managerial control 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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Incremental Revenues
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the additional revenues that stem from a yes or no decision.
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Incremental Costs
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the additional costs that stem from a yes or no decision
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