MANAGERIAL ECONOMICS

Mintarti Rahayu

Introduction to Managerial Economics

Managerial EconomicsThe application of economic theory and the tools of analysis of decision science in the managerial decisions so that an organization can achieve its aims or objectives most efficiently

Management decision problemsOPTIMAL SOLUTION TO MANAGERIAL DECISION PROBLEMSMANAGERIAL ECONOMICSApplication of Economic theory and decision science tools to solve managerial decision problemsEconomic Theory:Microeconomics & Macroeconomics Decision Science toolsMathematics, statistics, lenear programming

Decision Making Process PACEDP roblemA lternativesC riteriaE valuationD ecision

The objective of Managerial Economics is.To seek laws and principles that support achievement of the economic objectives of an organization.

Profit Revenue Cost

The scope of decision making that is the concern of Managerial Economics: generating revenue & controlling costDecision making methodsUnderstanding consumer behavior: consumer reaction against change in price, promotion, product quality, etc. ; demand estimation & forecastingUnderstanding cost component & behavior, relevant cost, cost estimation & forecastingPricing decision, product attributes, strategic decision

Positive and Normative Economic

Managerial Economics is normative (about laws & principles how to achieve objectives / how ought to ), but based on positive perspective (based on what occur in management practices / what actually happened )

certainty & uncertainty Economic theory: in certainty and perfect information Managerial Economics: in uncertainty and imperfect information.

Managerial Economics use symbolic models: verbal, graphic, mathematicModel: the simplification of a complicated system or situation; an abstraction of reality that is done by ignoring details that are not essentially related to the objective of building a model.

The objectives of building a model :Teaching: to show how a complicated system worksExplanating: to explain the logic relationships among phenomenaPredicting: to predict future behavior based on former system

Theory of Firm :Definition of Firm ;The Objective of a Firm & The Constraints in achieving itProfit

1. Firm: an organization that organize various resources to produce and sell goods and services

Theory of the FirmCombines and organizes resources for the purpose of producing goods and/or services for sale.Internalizes transactions, reducing transactions costs.Primary goal is to maximize the wealth or value of the firm.

Next2. The objective of a Firm : to maximize value of the firmValue = PV of all expected future profits TR depend on Sales or Demand of Product and Pricing decision --- (Marketing Department)TC depend on Production Technology and Input Price --- (Production Department and Human Resource Dept)r depend on Firm Risk and Cost of Capital --- (Financial Department)

Alternative TheoriesSales maximizationAdequate rate of profitManagement utility maximizationPrinciple-agent problemSatisficing behavior

Constraints in achieving the firms objectives:Resources constraints ( e,g,: materials, HR, production capacity, fund, etc. )legal constraints ( e.g.: minimum wages, working safety, pollution handling, etc. )

Business EthicsIdentifies types of behavior that businesses and their employees should not engage in.Source of guidance that goes beyond enforceable laws.

Function of ProfitProfit is a signal that guides the allocation of societys resources.High profits in an industry are a signal that buyers want more of what the industry produces.Low (or negative) profits in an industry are a signal that buyers want less of what the industry produces.

Definitions of ProfitBusiness Profit: Total revenue minus the explicit or accounting costs of production.Economic Profit: Total revenue minus the explicit and implicit costs of production.Opportunity Cost: Implicit value of a resource in its best alternative use.

Next3. PROFIT Accounting/Business Profit = TR explicit costs ( useful for Taxition Accounting purposes )Economic Profit = TR explicit costs implicit costs ( useful for investment decision )Normal Profit : Economic Profit = 0

Profit theory: Excess Profit may take place because of:Risk Different from the long run profit ( that tend to be normal )MonopolyReturn for innovationMore efficient than the other firms in general

Theory of the FirmCombines and organizes resources for the purpose of producing goods and/or services for sale.Internalizes transactions, reducing transactions costs.Primary goal is to maximize the wealth or value of the firm.

Why do firms exist?The role of transaction costsTypes of transaction costssearch and information costsbargaining and decision costspolicing and enforcement costsOptimal economic organization minimizes transaction costs

Firms can reduce transaction costsAdvantages of firms over marketsFewer transactionsInformation specializationReputational concernsBut firms can become large and unwieldy, foregoing advantages

The Changing Environment of Managerial EconomicsGlobalization of Economic ActivityGoods and ServicesCapitalTechnologySkilled LaborTechnological ChangeTelecommunications AdvancesThe Internet and the World Wide Web