Economics for Managers, 11th Edition by McGuigan, Moyer, & Harris

PowerPoint Lecture Slides prepared by Richard D. Marcus
University of Wisconsin - Milwaukee

2008 Thomson * South-Western

Slide 1

Chapter 1 Introduction & Goals of the Firm
» Introduction

» » » » »

Structure of Decision Models Profit’s Role Agency Problems & Solutions Not-for-Profit Organizations Why Corporations Have Succeeded Over Other Organizational Forms
Slide 2

What is Managerial Economics?

Integrates and applies microeconomic theory and methods to decision making problems faced by private, public, and not-for-profit organizations. Managerial economics deals with microeconomic reasoning on real world problems such as pricing decisions, selecting the best strategy in different competitive environments, and making efficient choices.
Slide 3

To Expand Capacity or Not?
• Should Toyota expand its capacity? In part, it must consider current and future demand and what other firms are likely to do. • Capacity for making cars is a long term project, so Toyota should think in terms of the present value (PV) of future profits. • Objective Function:
» Max PV of profits {S1, S2} » S1 could be expand capacity and S2 not to expand yet capacity at this time.

• Decision Rule:
» Choose S1 if PV {Profits of S1 } > PV { Profits of S2 } » Choose S2 if PV { Profits of S1 } < PV { Profits of S2 } » If equal profits, then flip a coin
Slide 4

The Decision-Making Process
(Figure 1.2) 1. Establish Objectives 2. Identify the Problem 3. Examine Alternative Solutions
Consider Societal Constraints

4. Analyze Alternatives and Select the Best!

Consider Organizational & Input Constraints

5.Perform Sensitivity Analysis 6. Implement and Monitor the Decision

Slide 5

The Role of Profits
• Economic Profit is the difference between revenues and total economic cost