Jamil Malik

1. Nature and Scope of
Managerial Economics

2. Chapter 1
OVERVIEW
 How Is Managerial Economics Useful?
 Theory of the Firm
 Profit Measurement
 Why Do Profits Vary among Firms?
 Role of Business in Society
 Structure of this Text

3. Chapter 1
KEY CONCEPTS
 managerial economics
 theory of the firm
 expected value
maximization
 value of the firm
 present value
 optimize
 satisfice
 business profit
 normal rate of return
economic profit
profit margin
return on stockholders'
equity
frictional profit theory
monopoly profit theory
innovation profit theory
compensatory profit theory

4. How Is Managerial Economics
Useful?
 Evaluating Choice Alternatives
 Identify ways to efficiently achieve goals.
 Specify pricing and production strategies.
 Provide production and marketing rules to help
maximize net profits.
 Making the Best Decision
 Managerial economics can be used to efficiently
meet management objectives.
 Managerial economics can be used to understand
logic of company, consumer, and government
decisions.

6. Theory of the Firm
 Expected Value Maximization
 Owner-managers maximize short-run profits.
 Primary goal is long-term expected value maximization.
 Constraints and the Theory of the Firm
 Resource constraints.
 Social constraints
 Limitations of the Theory of the Firm
 Alternative theory adds perspective.
 Competition forces efficiency.
 Hostile takeovers threaten inefficient managers.

8. Profit Measurement
 Business Versus Economic Profit
 Business (accounting) profit reflects
explicit costs and revenues.
 Economic profit.
 Profit above a risk-adjusted normal return.
 Considers cash and noncash items.
 Variability of Business Profits
 Business profits vary widely.

9. Why Do Profits Vary
Among Firms?
 Disequilibrium Profit Theories
 Rapid growth in revenues.
 Rapid decline in costs.
 Compensatory Profit Theories
 Better, faster, or cheaper than the
competition is profitable.

10. Role of Business in
Society
 Why Firms Exist
 Business is useful in satisfying consumer
wants.
 Business contributes to social welfare
 Social Responsibility of Business
 Serve customers.
 Provide employment opportunities.
 Obey laws and regulations.

12. Structure of this Text
 Objectives
 Understand usefulness of economics in
describing managerial behavior.
 Understand how economics can be
used to improve managerial decisions.
 Appreciate vital role of business in
society.