Economics for Managers, 11th Edition

by McGuigan, Moyer, & Harris

PowerPoint Lecture Slides

prepared by Richard D. Marcus
University of Wisconsin - Milwaukee

2008 Thomson * South-Western

Slide 1

What is Managerial Economics?

Integrates and applies microeconomic theory and methods to decision making problems faced by private, public, and not-for-profit organizations.

Managerial economics deals with microeconomic reasoning on real world problems such as pricing decisions, selecting the best strategy in different competitive environments, and making efficient choices.
Slide 2

To Expand Capacity or Not?

Should Toyota expand its capacity? In part, it must consider current and future demand and what other firms are likely to do. Capacity for making cars is a long term project, so Toyota should think in terms of the present value (PV) of future profits. Objective Function:
Max PV of profits {S1, S2} S1 expand capacity and S2 not to expand.

Decision Rule:
Choose S1 if PV {Profits of S1 } > PV { Profits of S2 } Choose S2 if PV { Profits of S1 } < PV { Profits of S2 } What if profits are equal?
Slide 3

The Role of Profits

Economic Profit is the difference between
revenues and total economic cost (including the economic or opportunity cost of owner supplied resources such as time and capital). Wed expect high profit areas to attract investment Wed expect low profit areas to lose investment

Slide 4

Objectives of the Firm

Profit maximization Shareholder wealth = value of each share (V0) times the number of shares outstanding, or V0 (# shares outstanding). This is the present value of expected future profits , discounted at the shareholders required rate of return, ke, ignoring taxes. V0 (shares outstanding) = t /(1+ke) t
t=1
Slide 5

Determinants of Firm Value

(Figure 1.3)

t = REVENUE COST = TRt TCt = PtQt VtQt - Ft

Value of the Firm = the present value of future cash flows
N

(t ) / (1+ke)t =
t=1

(PtQt VtQt Ft) / (1+ke)t

t =1

Whatever lowers the perceived risk of the firm (ke) will also raise firm value. Whatever raises the price of the product (Pt) or the quantity sold (Qt ) will raise firm value. Whatever raises variable cost (Vt )or fixed cost ( Ft ) will reduce firm value.
Slide 6

 To make good economic decisions,

managers need to be able to forecast & estimate relationships

Will be forecasting demand (both Pt & Qt)

applies to for-profit corporations non-profit organizations
Hospital Administrators forecast patients University Administrator forecast enrollment

Regression analysis, time series methods, and qualitative forecasting methods used for forecasting
Slide 7