UNIVERSITY OF SAN CARLOS

MANAGERIAL
ECONOMICS
Topics
KEY CONCEPTS COVERED

Seven examples of managerial decisions

Theory of the Firm
Role of Profits
Accounting Profits
Opportunity Cost
Economic profit
 7 EXAMPLES OF MANAGERIAL DECISIONS

THE BEST WAY TO BECOME

ACQUAINTED WITH MANAGERIAL
ECONOMICS IS TO COME FACE TO
FACE WITH REAL-WORLD
DECISION MAKING PROBLEM
Samueleon & Marks
7 examples of
managerial
decisions
Determining price and Public sector decisions
outputs to maximize Criterion of benefit-cost analysis
profits rather than by profit consideration
Require careful analysis of
revenues and costs a) FUNDING A PUBLIC PROJECT
B) REGULATORY DECISION

Competition between
firms
7 examples of
managerial
decisions
Decision Making under
uncertainty
a) identifying and Managing
exploration risks

b) Choosing between Risky

Research and Development
Programs

c) Competitive risks In the context

of negotiation and competitive
bidding
7 examples of
managerial
decisions
Decision Making under
uncertainty
a) identifying and Managing
exploration risks

b) Choosing between Risky

Research and Development
Programs

c) Competitive risks In the context

of negotiation and competitive
bidding
MODELS OF
MANAGERIAL BEHAVIOR
IN DECISION MAKING
Value maximization
model
Management’s primary
responsibility is the firm’s
shareholders
Satisficing model
The typical Firm strives for
satisfactory level of
performance rather than
attempting to maximize its
objective.
Sales maximization
Firm attempts to maximize
total Sales at an acepptable
level of profit. Total Sales per
peso is the visible benchmark
for managerial success.
Social responsibility
of the business
The firm have other
stakeholders as well:
customers, employees and
local community for which IT
pays its taxes.
 MAIN TENET OF THE MODEL
Understanding - maximize the Firm’s profit

Theory of the
- management’s primary goal is to maximize
the value of the Firm

Firm Approach to managerial economics is based

ON the Theory of the Firm :How Firms behave
and what objective they pursue
 DEFINITION

Present value of all its future profit

Understanding Hence, when managers decide, he must

Firm’s value
attempt to predict Its impact on future profit
flows and determine whether indeed it will
add to the value of the Firm.

Value maximization is a compelling

prescription concerning how managerial
decisions should be made.
Reasons why actual decision
making vs. company’s ultimate
goal differs
1) Managers may have individual incentives ( such sa job security, power, salary increase, bonuses, career advancement ,
increasing a division’s budget, resources,etc) that are at odd with value maximization of the Firm.

2) Managers may lack the information necessary for value maximization decision.

3)Managers may formulate but fail to implement optimal decisions.

Private firms vs. Government
MANAGERIAL BEHAVIOR MODEL

- Value Maximization model is often used as the private firms' ultimate objectives and basis of actions.

-In government decisions, the purpose is to include all the people whose interests are affected when a particular decision is
made. In other words, to promote the social welfare of the society.

- The Benefit-cost-analysis is the principal framework used in guiding public decisions.

-- Benefit-cost analysis is similar to the profit calculation of the private firm with one key difference: Whereas the firm
considers only the revenue it accrues and the cost it incurs, public decisions account for all benefits, whether or not
recipients pay for them (regardless of whether the revenue is generated) and all costs (direct and indirect).
Understanding Benefit-cost
analysis
DEFINITION

- the systematic enumeration of all the potential benefits and costs of a particular public decision.

-measure or estimate the peso magnitudes of these benefits and costs.

- Decision rule: Undertake the project or program if and only if its total benefits exceed its total costs.
Role of Profits
PROFITS SERVES AS THE "SCORE" IN THE GAME OF
BUSINESS

-amount by which revenues exceed costs

When costs > revenues = (profit): signals owners in clear terms that they are
reducing their wealth by owning and running unprofitable businesses.

The success of managers' decisions is judged according to a single overriding

concern: Are managers' decisions creating higher or lower profits?
Role of Profits
PROFITS SERVES AS THE "SCORE" IN THE GAME OF
BUSINESS

- largest profits not only enrich the owners of firms

--create for the managers a reputation for profitable decision making that can
be worth millions of pesos/dollars in executive compensation
 ACCOUNTING PROFIT

Revenue - cost
= profit
follow the principles of GAAP and rules of IFRS
Opportunity
cost
What the firms' owners give up to use
resources to produce goods or services.
2 kinds of
inputs or
resources
1) Market-supplied resources - owned by
others and hired, rented or leased by the firm.

2) owner-supplied resources - money provided

to the business by owners, time and labor
services provided by the firms' owners, and
any land, buildings or capital equipments
owned and used by the firm.
Total
economic
costs
-sum of opportunity costs of market-supplied
resources + opportunity costs of owner-
supplied resources
Explicit costs
--monetary opportunity costs using market
supplied resources.

- amount of money sacrificed by firm owners to

get market-supplied resources.
Implicit costs
--Nonmonetary opportunity costs-of using
owner-supplied resources.

- the firm makes no monetary payment to use

its own resources

The opportunity cost of using an owner-

supplied resource is the best return the owners
of the firm could have received had they taken
their own resource to market instead of using it
themselves.
Equity capital
--Money provided to businesses by the owners.
Opportunity
cost
Can either be explicit costs or implicit costs
 EXPLICIT COSTS of
Market Supplied

01 Resources
The monetary payments to
resource owners

ECONOMIC
IMPLICIT COSTS of
COST OF Owner Supplied
02 Resources
USING The returns forgone by not taking
the owners' resources to market

RESOURCES
TOTAL ECONOMIC

03
COST
The total opportunity costs of both
kinds of resources
 TOTAL REVENUE
01

ECONOMIC TOTAL ECONOMIC

02 COST

PROFIT Explicit costs + Implicit costs

ECONOMIC PROFIT
03 belongs to the owner and will
increase the wealth of the owners
 ACCOUNTING PROFIT

Revenue -
explicit cost =
profit
follow the principles of GAAP and rules of IFRS