Introduction to Managerial Economics Session 01 Dr Sumudu Perera Nature and scope of Managerial Economics Goals and Constraints of business organizations The Theory of the firm The ID: 1027997
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1. BEC 30325: MANAGERIAL ECONOMICS Introduction to Managerial Economics Session 01Dr. Sumudu Perera
2. Nature and scope of Managerial EconomicsGoals and Constraints of business organizationsThe Theory of the firmThe nature and importance of profitEconomic Profit and Accounting Profit Quantitative techniques in Managerial EconomicsSession Outline
3. Managerial EconomicsManagerial Economics is the integration of economic theory with decision science tools, so as to make decision making effective and efficient.The application of economic theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently.
4. Managerial Economics deals with:“How decisions should be made by managers to achieve the firm’s goals-in particular, how to maximize profit”
5. Managerial Decision ProblemsEconomic theoryMicroeconomicsMacroeconomicsDecision SciencesMathematical EconomicsEconometricsMANAGERIAL ECONOMICSApplication of economic theoryand decision science tools to solvemanagerial decision problemsOPTIMAL SOLUTIONS TOMANAGERIAL DECISION PROBLEMS
6. Economics Vs. Managerial EconomicsEconomicsStudy of economic theoryBelongs to positive economicsExamine the human behavior on using scarce resources on unlimited needs and wantsLimited ScopeManagerial EconomicsApplication of economic theory Belongs to normative economicsStudy the way of applying economic theory for decision making in firmsWide scopeDepartment of Business Economics, FMSC, USJP6
7. Why is Managerial Economics Important?To estimate economic relationshipsTo make decisions related to internal issuesEffectively utilize resources (What/how much/how/to whom, to produce)PricingFace price and non-price competitions Maximizing sales, revenues, profitsTo identify the impact of external factors on the firmTo use theoretical concepts in economics to actual behavior of firmsA powerful “analytical engine”.Department of Business Economics, FMSC, USJP7
8. Theory of the FirmCombines and organizes resources for the purpose of producing goods and/or services for sale.Internalizes transactions, reducing transactions costs.Primary goal is to maximize the wealth or value of the firm.
9. Example -Theory of the Firm Mr. Smith, an entrepreneur decides to set up a company by recruiting people to work for wages, by purchasing a property for the workplace machinery for the factory. He believes that it is very much efficient and less costly to run a business through a firm, rather than him doing everything alone.He believes that a general contract agreed with laborers to perform a number of tasks for specific wages and benefits is less costly than specific contacts for each task undertaken.He can also internalize many functions such as Finance, Marketing, IT, Research and Development etc without giving those tasks to external parties.
10. Value of the FirmThe present value of all expected future profits
11. Alternative TheoriesSales maximization Adequate rate of profitManagement utility maximization Principle-agent problemSatisficing behavior
12. Definitions of ProfitBusiness / 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.
13. Example –Accounting vs Economic profitMaya is in the final year of the University and she has lectures only during the evening. Therefore she has free time to engage in an internship programme. She got the opportunity to work at a bank which pays Rs. 12000 per month. If she is to undertake the internship she has to incur extra travelling and food cost of Rs. 3000 per month. However Maya decides to bake cakes at home and sell for private parties. She earns Rs. 25000 per month by making cakes. The costs that she has to incur are given below;Ingredients Rs.4000Packaging Rs.500Electricity Rs.250Find out the accounting profit and economic profit of carrying out the cake business.
14. Function of ProfitProfit is a signal that guides the allocation of society’s 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.
15. The Changing Environment of Managerial EconomicsGlobalization of Economic ActivityGoods and ServicesCapitalTechnologySkilled LaborTechnological ChangeTelecommunications AdvancesThe Internet and the World Wide Web
16. Numerical analysisStatistical estimationForecastingGame theoryOptimizationSimulationDecision Science ToolsDepartment of Business Economics, FMSC, USJP16
17. Basic Training: Rules of DifferentiationConstant Function Rule: Y = f(X) =0Power Function Rule:Sum-and-Differences RuleProduct Rule
18. Quotient RuleChain RuleDepartment of Business Economics, FMSC, USJP18