managerial economics
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Transcript of managerial economics
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managerial economics
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SUB-DISCIPLINES WITHIN ECONOMICS
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Managerial economics • the application of economic theory and methods
to business decision-making
Relationship with economic theory1 theory of the firm2 theory of consumer behaviour (demand)3 production and cost theory (supply)4 price theory5 market structure and competition theory
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Relationship with business functions
• 1 production and operations• 2 marketing• 3 finance and accounting• 4 human resources
Relationship with decision sciences* numerical and algebraic analysis* optimization* statistical estimation and forecasting* analysis of risk and uncertainty* discounting and time-value-of-money techniques
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PROFIT
Business profit
• Residual of sales revenue minus the explicit accounting costs of doing business
Economic profit Business profit minus the implicit costs of capital
and any other owner-provided inputs
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Variability of Business Profits
Profit margin• Accounting net income divided by sales
Return on stockholders’ equity (ROE)Accounting net income divided by the book value
of total assets minus total liabilities
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WHY DO PROFITS VARY AMONG FIRMS?
Frictional profit theoryAbnormal profits observed following unanticipated changes in demand or cost conditions
Monopoly profit theoryAbove-normal profits caused by barriers to entry that limit competition
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WHY DO PROFITS VARY AMONG FIRMS?
Compensatory profit theory
Above-normal rates of return that reward efficiency
Innovation profit theoryAbove-normal profits that follow successful invention or modernization