Download A manager is a person who directs resources to achieve a stated

INTRODUCTION TO MANAGERIAL ECONOMICS
 A manager is a person who directs resources to achieve a stated goal.
 Economics is the science of making decisions in the presences of scarce resources
 Managerial Economics is the study of how to direct scarce resources in way that most
efficiently achieves a managerial goal.
 managerial economics is the analysis of major management decisions using the tools of
economics
 Assumptions of Economics
 scarcity of resources
 Rational self interest
the baker provides bread not because he is pious, but because of rational self-interest
which leads to the invisible hand in the economy
 profit maximisation
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 examples of decisions management may face include: determining prices and output to
maximise profits.
 firms battling for market share in a multitude of regional markets-price wars
 government decision to fund a public project- are guided by principle of cost benefit
analysis and not profit motives.
 Steps to decision making

defining the problem of the manager-is it minimising pollution, or is it responding
to changing market conditions

problem definition is prerequisite for problem management

determine the objective-profit is the principle of private sector decisions

Explore other alternatives what are the alternative courses of action
 what are the variables under the decision maker's control
 what constraints limit the choice of options

Predict the consequences of each alternative action
 may use models to predict consequences in complicated cases.
 most models rests on economics relationships
 other models may rest on statistical, legal or scientific relationship

Make a choice
 after doing all the analyses, the decision makers must choose decision that best
achieves firms objectives

Perform Sensitivity Analysis
 management must do sensitivity analysis to determine how profits will be
affected if outcomes differ. for instance price cuts
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ECONOMIC VS ACCOUNTING PROFITS
 Accounting profits
 total revenues (sales) minus kwacha cost of producing goods or
services
 reported on the firm's income statement.
 Economic profits
 total revenue minus total opportunity cost
 Opportunity cost
 Accounting cost
-The explicit costs of the resources needed to produce goods or
services.
-reported on the firm's income statement
 opportunity cost
- The cost of the explicit and implicit resources that are foregone
when a decision is made.
-Implicit cost: the cost of giving up the best alternative use of the
resource
 Economic Profits
- Total revenue minus total opportunity cost.
Example
Suppose you own a building to run a restaurant and food supplies are the only accounting
costs.
- At the end of the year, costs for food $20k and revenues $100k
- Hence accounting profits are $80k but these overstate your economic profits.
Here opportunity cost is
-Cost of your time (you could have worked for somebody else, earning, say $30k)
- Cost of capital (you could have rented the building, earning, say $100k)
Economic profits are then negative, i.e. you should not run the business
−$50 = $100k − $20k − $30k − $100k
Profits as signals
 Profits signal to resource holders where resources are most highly valued by society.
- Resources will flow into industries that are most highly valued by society. A common
misperception is that the firm’s goal of maximizing profits is necessarily bad for profits
- Adam Smith, The Wealth of Nations: “It is not out of the benevolence of the butcher, the
brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” -
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Individuals (firms and households) pursuing their self-interest, maximizes total welfare of
society (very influential paradigm in economics, in reality unclear whether it holds or not)
 Market Interactions
Consumer-Producer Rivalry
- Consumers attempt to locate low prices, while producers attempt to charge high prices.
Consumer-Consumer Rivalry
- Scarcity of goods reduces consumers’ negotiating power as they compete for the right to
those goods.
Producer-Producer Rivalry
- Scarcity of consumers causes producers to compete with one another for the right to service
customers.
The Role of Government
- Disciplines the market process.
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