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NASUHA NORDIN
FUNDAMENTALS
OF MA NA GERI AL
ECONOMI CS
MODULE 1A
MANAGER
BUSINESS
ECONOMICS
The science of making decisions in the
presence of scarce resources
MANAGERIAL
ECONOMICS
How to
direct scarce
resources in
achieving
managerial
goals in most
efficient way
Identifying goals
and constraints
Recognize the
nature and
importance of
profits
Understand
incentives
Understand
markets
Recognize the
time value of
money
Use marginal
analysis
F U N DA M E N TA L S
O F M A N AG E R I A L
ECONOMICS
Basic principles of
effective management
GOAL
Maximize benefit
Students of MBA
Manager
CONSTRAINTS
Scarcity of resources
REVENUE
COST
$100 X 10 units
ACCOUNTING PROFIT
$1,000
$ 600
$ 400
E C O N O M I C P RO F I T
(-)
REVENUE
$100 X 10 units
OPPORTUNITY COST
ECONOMIC PROFIT
$1,000
$ 600
$ 400
OPPORTUNITY COST:
The explicit cost of resources plus the implicit
cost of giving up its best alternatives
Entry Costs
Speed of Adjustment
Sunk Costs
Economies of Scale
Power of
Input Suppliers
Supplier Concentration
Price/Productivity of
Alternative Inputs
Relationship-Specific
Investments
Supplier Switching Costs
Government Restraints
Level, Growth,
and Sustainability
of Industry Profits
Industry Rivalry
Concentration
Price, Quantity, Quality,
or Service Competition
Degree of Differentiation
Network Effects
Reputation
Switching Costs
Government Restraints
Switching Costs
Timing of Decisions
Information
Government
Restraints
Power of
Buyers
Buyer Concentration
Price/Value of Substitute
Products or Services
Relationship-Specific
Investments
Customer Switching Costs
Government Restraints
HUMAN
RESOURCES
INCENTIVES
PROFIT
U N D E R S TA N D
INCENTIVES
Changes in profits
provide an incentive to
how resource holders
use their resources.
UNDERSTAND MARKETS
PRODUCER
PRODUCER
MARKET
CONSUMER
CONSUMER
RIVALRY
PRODUCER CONSUMER
PRODUCER PRODUCER
CONSUMER - CONSUMER
The amount that would have to be invested today at the prevailing interest rate (i) to
generate the given future value (FV)
The present value of the income stream generated by a project minus the current
cost of the project (C0)
PRESENT VALUE OF
INDEFINITELY LIVE ASSETS Present value of decisions that indefinitely generate cash flow
PRESENT VALUE
AND ESTIMATING When dividend are immediately paid out of current profits,
VALUES OF FIRM the present value of the firm is ( at ex-dividend)
MARGINAL BENEFIT
MB(Q) = B(Q)
MARGINAL COST
The change in the total cost form a change in the managerial control variable
MC(Q) = C(Q)
B(Q)
MARGINAL NET
BENEFIT
N(Q)
C(Q)
Control
Variable
MB(Q)
Total Cost
(MC(Q)
Marginal
Benefit
Marginal Cost
Marginal principle
To maximize net benefits, the manager should increase the managerial control
variable up to the point where marginal benefits equal marginal costs.
This level of the managerial control variable corresponds to the level at which
marginal net benefits are zero; nothing more can be gained by further changes
in that variable.
MB(Q) = MC(Q),
and
What value of
makes
functions.
zero?
Total benefits
Total costs
Maximum net
benefits
Quantity
(Control Variable)
Net benefits
Maximum
net benefits
Slope =
( )
=0
Quantity
(Control Variable)
Marginal
benefits, costs
and net benefits
Maximum net
benefits
Quantity
(Control Variable)
Incremental Decisions
Incremental revenues
Incremental costs
Thumbs up decision
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CONCLUSION
Make sure you include all costs and benefits when making decisions
(opportunity costs).
When decisions span time, make sure you are comparing apples to apples
(present value analysis).
Optimal economic decisions are made at the margin (marginal analysis).