micro 1 Flashcards
managerial economics
refers to the application of economic theory and the tools of decision science to examine how an organization can achieve its aims or objectives most efficiently.
managerial economics includes
–Applications of economic theory
–Quantitative methods
–Statistical methods
–Computational methods
economics
–The study of choice facing scarcity and its unintended consequences.
microeconomics
–Study of the economic behavior of individual decision-making units.
macroeconomics
Study of the total or aggregate level of output, income, employment, consumption, investment, and prices for the economy viewed as a whole
mathematical economics
–Expresses and analyzes economic models using the tools of mathematics. Ex.: the demand function.
Econometrics
Applies statistical tools to real-world data to estimate the models postulated by economic theory and for forecasting.
the decision making process
- Define the problem
- Determine the objective
- Id possible solutions
- Select the best possible solution
- Implement the Decision
(managers job to make decisions and solves problems- how they should do it)
The Firm
an organization that combines and organizes resources for the purpose of producing goods and/or services for sale.
–internalizes transactions, reducing transaction costs. (firms become smaller)
according to economic theory:
–the primary goal of managers is to maximize the value of the firm (this is given by the present value of all expected future profits of the firm and money means value of the firm)
–goal is to make money. How will you measure it??
the present value of expected future profits:
PV=π1/(1+r)^1 +π2/(1+r)^2 +π3/(1+r)^3 + …
Notice that π=TR -TC (profits in year 1, 2, 3, ….) (total revenue minus total costs—– profits)
(money in the future is uncertain and discounted)
Money today can grow by investing - why money today is better than money in the future (this is why we discount it)
constraints that firms face
–Resource constraints
–Legal constraints (regulation)
–Managerial constraints
constrained optimization
–The primary goal or objective of the firm is to maximize wealth or the value of the firm subject to the constraints it faces.
alternative theories
sales maximization, management utility maximization, satisfying behavior
sales maximization
–Maximize sales after an adequate profit has been earned
management utility maximization
–Aims to resolve principal-agent problem (self benefit above the companies- owners aren’t the people running the company so the agent -CEO may have different objectives than the owners)
satisficing behavior
–Due to uncertainty and lack of data, firms strive for some measurable and attainable goal (maybe if they are a new firm)
business and accounting profit
-–Total revenue minus the explicit or accounting costs.
–explicit costs are the ones that you can see (ex: wages, rent)
economic profit
–Total revenue minus the explicit and implicit costs.
–implicit costs are the opportunity costs - what you could have if you didn’t run the business
opportunity costs
–Implicit value of a resource in its best alternative use.
explicit or accounting costs
–Actual out-of-pocket expenditures of the firm to purchase or hire the inputs.
implicit or opportunity costs
–Value of the inputs owned and used by the firm in its own production processes.
risk bearing theory of profit
–Above-normal returns are required in fields that are above-average risk.
frictional theory of profit
–Profits arise from friction or disturbances from long-run equilibrium.
monopoly theory of profit
–Firms with monopoly power can restrict output and charge higher prices and earn profits even in the long-run.
innovation theory of profit
–Profit is the reward for the introduction of a successful innovation. (difficult to compete with)
Managerial efficiency theory of profit:
–More efficient firms may earn above-normal returns and economic profits in the short-run.(ex: walmart)
profit
is a signal that guides the allocation of society’s resources. (company making profit signals that people want and like that product)
the international framework
-rapid movement toward globalization of economic
-Managerial economics should be studied in an international framework.
the firms operate in the world that has become more
risky, crisis prone, sluggish
technology change
the internet, advances in telecommunications
cyber attacks
–Arose with advent of Internet
–Requires with firms to invest in security and insurance
