Summary Outline Chapter 1

1 Managerial Economics Defined (slides 3 & 4)

2 Microeconomics, Macroeconomics, and How Linked to

Managerial Economics (slides 4 & 5)

3 What is an economic model and how do we evaluate them

(slide 7)?

4 “The Theory of the Firm”-- Why do firms exist? (slide 9)

Role of minimizing “transactions costs” by internalizing

versus externalizing various economic actions

Primary goal assumed to be profit maximization to

maximize the present value of the firm.

How is the present value of all expected future

profits computed? (slide 10)

Which variable in the PV formula is impacted

by:

Marketing?

Production/Operations Management?

Finance?

5 Alternate Theory of Firm: Management Utility Maximization

Explain the “Principal-Agent” Problem (slide 11)

How has senior management compensation been

structured in USA in an effort to minimize the
Principle-Agent problem? (see chapter 13 of text)

What went wrong with this compensation

approach in the U.S. financial sector?
6 Definitions of Profit (slide 12)

Define opportunity cost

Identify the “labor related” opp cost for a firm and the
“investment funds” related opp cost for a firm

Define each, and explain difference between, Business or

Accounting Profits and Economic Profit

7 Theories of Profit (slide 13)

Be able to identify each of the theories if given a brief

description of the theory

8 What social function does profit serve? (slide 14)

9 A review of the supply-demand model, Appendix to Chapter

1 (slides 20-43)

Define Law of Demand

Difference between rise or fall in quantity demanded
versus rise or fall in demand

Define Law of Supply

Difference between rise or fall in quantity supplied
versus rise or fall in supply

Define Market Equilibrium

Define market equilibrium price and market equilibrium
quantity

Define the two types of Market Disequilibrium Outcomes

If price is > equilibrium price, what is outcome and how
is it measured?
If price is < equilibrium price, what is outcome and how
is it measured?

How does market equilibrium respond to a rise in demand?

How does market equilibrium respond to a fall in demand?
What are the major factors that can shift demand?
 How does market equilibrium respond to a rise in supply?
How does market equilibrium respond to a fall in supply?
What are the major factors that can shift supply?

10 End-of-Chapter Problems Worth Solving for Exam Practice

Problems 1-8, 10, 11, 17