- Production, distribution and consumption of goods and

services (done by any business, non-profit org, admin

units)
- Is the study of how individuals and societies choose to
utilize scarce resources to satisfy Unlimited wants
- SCARCITY - refers to the limitations placed on
production of goods and services because factors of
production are finite
 Land – refers to all natural resources ( wildlife, minerals,
timber, water, air and gas deposits)
 Labor – refers to the physical and intellectual abilities of
people to produce goods and services.
 Capital – manufactured commodities that are used to produce
goods and services for final consumption
- financial capital – refers to stocks, bonds,
certificates of deposits, savings accounts and cash.
 Entrepreneurial Ability – refers to the ability to recognize
profitable opportunities and the willingness and ability to
assume the risk in organizing land, labor and capital
 Trade offs
 That which is sacrificed when a choice is made is the next
best alternative
 Highest value alternative forgone whenever a choice is made
 Macroeconomics – looks at the big picture
- the study of aggregate economic behavior
- concerned with such issues as national income,
employment, inflation, national output, economic growth,
interest rates and international trade
 Microeconomics – is the study of the behavior and interaction
of individual economic agent.
- the study of individual economic behavior
- concerned with output and input markets, product
pricing, input utilization, production costs, market structure,
capital budgeting, profit maximization, production technology
and so on
 Is the application of economic theory and quantitative
methods (mathematics and statistics) to the managerial
decision-making process.
 Is applied microeconomics with special emphasis on those
topics of greatest interest and importance to managers.
 Synthesis of microeconomic theory and quantitative methods
to find optimal solutions to managerial decision-making
problems
Managerial Economics is a tool
for improving Management
Decision Making
 Management Decision Problems
• Product selection, output and pricing
• Internet strategy
• Organizational design
• Product development and promotion strategy
• Worker hiring and training
• Investment and financing

Economic Theory Quantitative Methods

• Numerical Analysis
• Marginal Analysis
• Statistical Estimation
• Theory of Consumer Demand
• Theory of the firm • Forecasting procedures
• Industrial organization and firm • Game-Theory concepts
behavior • Optimization theory
• Public choice theory • Information Systems

Managerial Economics
Use of economic concepts and quantitative methods
to solve management decision problems

Optimal solutions to specific

organizational objectives
 Helps managers recognize how economic forces
affect organizations and describes economic
consequences of managerial behavior
 It also links economic concepts and quantitative
methods to develop vital tools for managerial
decision making
 Identifies ways to achieve goals efficiently
 Provides production and marketing rules that permit
the company to maximize net profits once it has
achieved growth or market share objectives
 Managerial Economics is applicable to different types of
organizations

Profit, non-profit, government

organization Provide goods and services
Revenue – the total monetary value of the goods and service
sold ( tangible or intangible)

Cost – the collective expenses incurred to generate revenue

over a period of time, expressed in monetary value.
Explicit Cost – refers to the actual expenses of the firm in
purchasing or hiring the inputs the company needs

Implicit Cost – refers to value of inputs being owned by the firm

and used in its own production process.

Variable cost – cost that varies with input

- changes in accordance with the volume of production
Fixed cost – cost that does not vary with output
- remains constant regardless of the volume of production
 When revenue generated by the business exceeds the cost
incurred in operating the business = profit
COST – REVENUE = PROFIT

Short Run – the use of at least one factor of production cannot

be changed
Long Run – all the factors can be changed
 Basic model of business
 Firms are useful for producing and distributing goods and
services
 Business enterprise represents a series of contractual
relationships that specify the rights and responsibilities of
various parties
 Firms are thought to have profit maximization as its primary
goal
 The theory of the firm is the microeconomic concept founded
in neoclassical economics that states that firms exist and
make decisions to maximize profits. Firms interact with the
market to determine pricing and demand and then allocate
resources according to models that look to maximize net
profits.
 Inthe theory of the firm, the behavior of any
business entity is said to be driven by profit
maximization. This theory governs decision
making in a variety of areas including resource
allocation, production technique, pricing
adjustments, and volume production.
 The theory of the firm works side by side with
the theory of the consumer, which states that
consumers seek to maximize their overall utility. In
this case, utility refers to the perceived value a
consumer places on a good or service, sometimes
referred to as the level of happiness the customer
experiences from the good or service.
 Society

Investors

Suppliers

FIRM
Employees
Management

Customers
 The firms owner-manager is assumed to be working to
maximize the firm’s short-run profits.
 The emphasis on profits has been broadened to encompass
uncertainty and the time value of money.
 The primary goal of the firm is long-term EXPECTED VALUE
MAXIMIZATION ( optimization of profits in light of uncertainty
and the time value of money)
 Value of the firm – present value of the firm’s expected future
net cash flows
 Here, π1, π2, . . . πn represent expected profits in each
year, t, and i is the appropriate interest, or discount, rate. The
final form for Equation is simply a shorthand expression in
which sigma (Σ) stands for “sum up” or “add together.” The
term
means, “Add together as t goes from 1 to n the
values of the term on the right.” or Equation, the
process is as follows: Let t = 1 and find the value of
the term π1/(1 + i)1, the present value of year 1
profit; then let t = 2 and calculate π2/(1 + i)2, the
present value of year 2 profit; continue until t = n,
the last year included in the analysis; then add up
these present-value equivalents of yearly profits to
find the current or present value of the firm.
Because profits (π) are equal to total revenues (TR)
minus total costs (TC),
 This expanded equation can be used to examine how the
expected value maximization model relates to a firm’s various
functional departments. The marketing department often has
primary responsibility for product promotion and sales (TR);
the production department has primary responsibility for
product development costs (TC); and the finance department
has primary responsibility for acquiring capital and, hence, for
the discount factor (i) in the denominator. Important overlaps
exist among these functional areas. The marketing
department can help reduce costs associated with a given
level of output by influencing customer order size and timing.
The production department can stimulate sales by improving
quality.
 Other departments, for example, accounting, human
resources, transportation, and engineering, provide
information and services vital to sales growth and cost
control. The determination of TR and TC is a complex task
that requires recognizing important interrelations among the
various areas of firm activity. An important concept in
managerial economics is that managerial decisions should be
analyzed in terms of their effects on value, as expressed in
Equations.