managerial economics in global economy, 5 th edition by dominick salvatore
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Managerial Economics in Global Economy, 5th Edition
byDominick Salvatore
Chapter 1
The Nature and Scopeof Managerial Economics
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Recommeneded books
Managerial economics in a global economy by Dominick salvator 5th ed
Managerial Eco. By Mark Hirschey 11th ed.
Theory and problems of managerial economics by salavator, sham series (quite useful)
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Referenec material
Managerial economics,economic tools for today’s decision maker, 5th edition by Paul G.keat, philip.k.Y. yound,banar jee publisher,pearson edition,2009
Managerial economics and business strategy,6th edi. Micheal R. Baye, printice hall publiher
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Some Definitions of Managerial Eco.Joel dean who is the author of the first
managerial economics text book “The use of economic analysis in the formulation of business policies”
Hirschey defines : Managerial economics applies economic theory and methods to business and administrative decision making
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Cont’dSalvatore -The application of economic
theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently.
Douglas - “Managerial economics is .. the application of economic principles and methodologies to the decision-making process within the firm or organization
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Online encyclopedia
Managerial economics is a branch of economics that applies micro economic analysis to decision making methods of business and other management units.
It draws heavily from quantitative techniques such as regression analysis and correlation, lagrangian calculas
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From all the definition we can concludeManagerial economics is the
application of the economic theory and quantitative methods to get the optimal solution of the managerial decision making problems
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Managerial Decision Problems
Economic theoryMicroeconomicsMacroeconomics
Decision SciencesMathematical
EconomicsEconometrics
MANAGERIAL ECONOMICSApplication of economic
theoryand decision science tools to
solvemanagerial decision
problemsOPTIMAL SOLUTIONS TO
MANAGERIAL DECISION PROBLEMS
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Theory of the Firm
The firm is an organization that Combines and organizes resources for the purpose of producing goods and/or services for sale.
Primary goal is to maximize the wealth or value of the firm.
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Circular Flow of National Income in two Sector Economy
we assume: There are only two sectors in economy Household sector and Business sector The business sector hires the service of factors of
production owned by household sector and pays for those services in terms of wage, rent and interest to household sector.
The household sector buys goods and services from business sector and spends its entire income on consumption
in this way the income of household sector become the revenue of business sector and national income circulates.
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Spending
Goods andservicesbought
Revenue
Goodsand servicessold
Labor, land,and capital
Income
= Flow of inputs and outputs
= Flow of dollars
Factors ofproduction
Wages, rent,and profit
FIRMS•Produce and sellgoods and services•Hire and use factorsof production
•Buy and consumegoods and services•Own and sell factorsof production
HOUSEHOLDS
•Households sell•Firms buy
MARKETSFOR
FACTORS OF PRODUCTION
•Firms sell•Households buy
MARKETSFOR
GOODS AND SERVICES
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Theroy of firm
The model of business is called the theory of firm, in its simplist version, the firm is thought to have profit maximistion as it primary goal.
Today,the emphsis on profit has been broadend to inclued uncertainity and the time value of money. In this more complete model, the primary goal of the firm is long term expected value maximisation
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Value of the Firm
The present value of all expected future profits
1 21 2
1(1 ) (1 ) (1 ) (1 )
nn tn t
t
PVr r r r
1 1(1 ) (1 )
n nt t tt t
t t
TR TCValueof Firm
r r
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Alternative Theories (Page#11-13)To be covered by the student ……
Sales maximization
Management utility maximization
Satisficing behavior
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Definitions of Profit
Business 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.
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Problem……
A woman managing photocopying establishment for $25000 per year decides to open her own duplicating place. Her revenue during the first year of operation is $120,000, and her expenses are as follows;
Calculate a) The explicit costs b) The implicit cost c) the business profit d) the economic profit
Salaries to hired help $ 45,000
Supplies 15,000
Rent 10,000
Utilities 1,000
Interest on bank loan 10,000
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Theories of Profit
Risk-Bearing Theories of Profit
Frictional Theory of Profit
Monopoly Theory of Profit
Innovation Theory of Profit
Managerial Efficiency Theory of Profit
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Function of Profit
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.
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Role of business in society
Why firms exist
Businesses help satisfy customers want
Businesses contribute to social welfare
Social responsibility of the firm
Serve customers
Provide employment opportunities
Pay taxes
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Business Ethics (case study)
Identifies types of behavior that businesses and their employees should not engage in.
Source of guidance that goes beyond enforceable laws.
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The Changing Environment of Managerial Economics Globalization of Economic Activity
Goods and Services
Capital
Technology
Skilled Labor
WTO
Technological Change
Telecommunications Advances
The Internet and the World Wide Web
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Questions & Discussion
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For class discussion
What is a firm?
What are its advantages?
What is profit?
What are the functions of profit?
What are business ethics?
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Appendix to be covered by students Page# 31 -36
Demand and supply
Equilibrium and price determination