Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

II. The Economics of Effective ManagementIdentify Goals and ConstraintsRecognize the Role of ProfitsUnderstand IncentivesUnderstand MarketsRecognize the Time Value of MoneyUse Marginal Analysis

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999Managerial EconomicsManagerA person who directs resources to achieve a stated goal.EconomicsThe science of making decisions in the presence of scare resources.Managerial EconomicsThe study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999Market InteractionsConsumer-Producer RivalryConsumers attempt to locate low prices, while producers attempt to charge high pricesConsumer-Consumer RivalryScarcity of goods reduces the negotiating power of consumers as they compete for the right to those goodsProducer-Producer RivalryScarcity of consumers causes producers to compete with one another for the right to service customersThe Role of GovernmentDisciplines the market process

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999Firm ValuationThe value of a firm equals the present value of all its future profitsPV = S pt / (1 + i)t If profits grow at a constant rate, g < i, then:PV = po ( 1+i) / ( i - g), po = current profit level.Maximizing Short-Term ProfitsIf the growth rate in profits < interest rate and both remain constant, maximizing the present value of all future profits is the same as maximizing current profits.

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999Control VariablesOutputPriceProduct QualityAdvertisingR&DBasic Managerial Question: How much of the control variable should be used to maximize net benefits?Marginal (Incremental) Analysis

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999Marginal PrincipleTo maximize net benefits, the managerial control variable should be increased up to the point where MB = MCMB > MC means the last unit of the control variable increased benefits more than it increased costsMB < MC means the last unit of the control variable increased costs more than it increased benefits

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999The Geometry of Optimization

Benefits & CostsBenefitsCostsQ*BCSlope = MCSlope =MB

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999SummaryMake sure you include all costs and benefits when making decisions (opportunity cost)When decisions span time, make sure you are comparing apples to apples (PV analysis)Optimal economic decisions are made at the margin (marginal analysis)

Michael R. Baye, Managerial Economics and Business Strategy, 3e. The McGraw-Hill Companies, Inc. , 1999