Managerial Economics:: Theory, Applications, and Cases
Managerial Economics:: Theory, Applications, and Cases
Managerial Economics:: Theory, Applications, and Cases
Chapter 1
INTRODUCTION
OBJECTIVES
• Managerial Objective
• Make choices that increase the value of the firm.
• The value of the firm is defined as the present value of
future profits.
THE THEORY OF THE FIRM
• Managerial Choices
• Influence total revenue by managing demand
• Influence total cost by managing production
• Influence the relevant interest rate by managing
finances and risk
• Managerial Constraints
• Available technologies
• Resource scarcity
• Legal or contractual limitations
MANAGERIAL CONSTRAINTS
• If she worked these hours for her previous firm, she would
have earned $65,000.
• And if she had invested the capital she used to begin her
business in some alternative investment, she could have
earned $24,000.
• Let’s say in 2012 her start-up firm earned an accounting
profit of $100,000. Her fi rm’s profit in the managerial
economics world is $100,000 - $65,000 - $24,000 =
$11,000 rather than the $100,000 shown in accounting
statements.
WHAT IS PROFIT?
• Innovation
• Producing products that are better than existing
products in terms of functionality, technology, and style
• Risk Taking
• Future outcomes and their likelihoods are unknown, as
are the reactions of rivals.
• Exploiting Market Inefficiencies
• Building barriers to entry, employing sophisticated
pricing strategies, diversifying, and making good
strategic production decisions
THE PRINCIPAL–AGENT PROBLEM
• Market
• A group of firms and individuals that interact with each
other to buy or sell a good
• Part of an economy’s infrastructure
• A social institution that exists to facilitate economic
exchange
• Relies on binding, enforceable contracts
DEMAND SIDE OF A MARKET
• Demand Function
• Quantity demanded relative to price, holding other
possible influences constant
• Negative slope
• Period of time
• Shifts in demand
THE DEMAND SIDE OF THE MARKET
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MARKET DEMAND CURVE FOR COPPER
• Supply Function
• Quantity supplied relative to price, holding other
possible influences constant
• Positive slope
• Period of time
• Shifts in supply
• Other influences (held constant)
• Technology
• Cost of production inputs (Land, Labor, Capital)
THE MARKET SUPPLY CURVE FOR COPPER,
WORLD MARKET
Managerial Economics, 8e
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MARKET SUPPLY CURVE
• Disequilibrium
• Price is too high
• Excess supply
• Surplus
• Causes price to fall
• Price is too low
• Excess demand
• Shortage
• Causes price to rise
EQUILIBRIUM PRICE
• Equilibrium Price
• Quantity demanded is equal to quantity supplied.
• Price is stable.
• The market is in balance because everyone who wants
to purchase the good can, and every seller who wants
to sell the good can.
EQUILIBRIUM PRICE OF COPPER, WORLD
MARKET
Managerial Economics, 8e
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ACTUAL PRICE
• Invisible Hand
• No governmental agency is needed to induce producers
to drop or increase their prices.
• If actual price is above equilibrium price, there will be
a surplus that puts downward pressure on the actual
price.
ACTUAL PRICE
• Increase in Demand
• Represented by a rightward or upward shift in the
demand curve
• Result of a change that makes buyers willing to
purchase a larger quantity of a good at the current price
and/or to pay a higher price for the current quantity
• Will create a shortage and cause the equilibrium price to
increase
WHAT IF THE DEMAND CURVE SHIFTS?
• Decrease in Demand
• Represented by a leftward or downward shift in the
demand curve
• Result of a change that makes buyers purchase a
smaller quantity of a good at the current price and/or
continue to buy the current quantity only if the price is
reduced
• Will create a surplus and cause the equilibrium price to
decrease
EFFECTS OF LEFTWARD AND RIGHTWARD SHIFTS OF THE
DEMAND CURVE ON THE EQUILIBRIUM PRICE OF COPPER
Managerial Economics, 8e
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WHAT IF THE DEMAND CURVE SHIFTS
• Increase in Supply
• Represented by a rightward or downward shift in the
supply curve
• Result of a change that makes sellers willing to offer a
larger quantity of a good at the current price and/or to
offer the current quantity at a lower price
• Will create a surplus and cause the equilibrium price to
decrease
WHAT IF THE DEMAND CURVE SHIFTS
• Decrease in Supply
• Represented by a leftward or upward shift in the supply
curve
• Result of a change that makes sellers willing to offer a
smaller quantity of a good at the current price and/or to
offer the current quantity at a higher price
• Will create a shortage and cause the equilibrium price to
increase
EFFECTS OF LEFTWARD AND RIGHTWARD SHIFTS OF THE
SUPPLY CURVE ON THE EQUILIBRIUM PRICE OF COPPER
Managerial Economics, 8e
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LIFE DURING A MARKET MOVEMENT
• 2. The market price for crude oil fluctuated widely during 2008. What
supply and demand factors contributed to these fluctuations? Is the
petroleum market subject to any of the same factors cited as
influencing agricultural markets?
HOMEWORK
• Problems 3, 4, 6, 7, 9