Introduction to Managerial Economics Flashcards
Basic Principles of Effective Management
- Identify goals and constraints
- Recognize the nature and importance of profits
- Understand Incentives
- Understand Markets
- Recognize the time value of money
- Use of marginal analysis
Manager
-a person responsible for controlling and administering to achieve a stated goal.
Economics
- a science of making decision in the presence of scarce resources.
Resources
- anything used to produce goods or services
Managerial Economics
- study of how to direct scarce resources in the way the most efficiently achieves a managerial goal.
Goals
- something that a management hoped to achieve.
Constraints
Limitation
Profit
= Company’s Revenue - Expenses
Accounting Profit
- total money taken in from sales minus the cost of producing the goods or services
AP= Total Revenue - Total Expenses
Economic Profit
- difference between the total revenue and the total opportunity cost of producing goods or services
EP= Total Income - Total Expenses - Opportunity Lost Cost
Opportunity Cost
- cost of the explicit and implicit resources that are foregone when decision is made.
Explicit Cost
- out-of-pocket- costs of a firm.
Implicit Cost
- opportunity cost of resources already owned by the firm and used in business.
Incentive
- anything that motivates a person to do something.
Economic Incentives
- financial motivations for people to take certain actions.
Intrinsic Incentives
- do something for its own sake
- feeling of personal fulfillment and satisfaction that people get from doing certain things.
Extrinsic Incentives
- involve providing material reward for accomplishing task.
Two sides of every transaction in a market
- For every buyer of a good, there is a seller.
Consumer - Producer Rivalry
- competing interest of consumers and producers.
- consumers attempt to negotiate low prices while producers attempt to negotiate high prices.
Consumer - Consumer Rivalry
- scarcity of goods reduces consumers’ negotiating
power as they compete for the right to those goods.
Producer - Producer Rivalry
- given that customers are scarce, producers compete with one another for the right to service the customers available.
Present Value
- amount that would have invest today at the prevailing interest rate to generate given future value.
Net Present Value
- present value of the income stream generated by a project minus the current cost of the project.
Marginal Analysis
- optimal managerial decision involve comparing marginal benefits with the marginal costs.
Marginal Benefits
- the change in total benefits arising from a change in the managerial control variable.
Marginal Costs
- the change in total costs arising from a change in the managerial control variable Q.
MB = MC
- maximize net benefits, the managerial
control variable should be increased up to
the point
MB > MC
- last unit of the control
variable increased benefits more than it increased costs.
MB < MC
- last unit of the control variable increased costs more than it increased benefits.
Five Forces Framework
- Entry
- Power of input suppliers
- Power of buyers
- Industry Rivalry
- Substitute and complements
Entry
- new entrants to its market
Power of Input Suppliers
- supplier’s gain power if they can increase their prices easily, or reduce the quality of their product.
Power of Buyers
- buyers have the power to influence price and the quantity of the products sold.
Industry Rivalry
- number of competitors and their ability to undercut a company.
Substitute and Complements
- level and sustainability of industry’s profits also depend on the price and value of interrelated products and services.
