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Managerial Economics & Business Strategy
Managerial Economics & Business Strategy
Managerial Economics & Business Strategy
Business Strategy
Chapter 1
The Fundamentals of Managerial
Economics
Overview
I. Introduction
II. The Economics of Effective Management
Managerial Economics
Manager
Economics
Managerial Economics
Economic Profits
Opportunity Cost
Accounting Costs
Opportunity Cost
Economic Profits
Market Interactions
Consumer-Producer Rivalry
Consumer-Consumer Rivalry
Producer-Producer Rivalry
FV
PV
n
1 i
Examples?
Michael R. Baye, Managerial Economics and Business
FV1
FV2
FVn
PV
1
2 . . .
n
1 i 1 i
1 i
Michael R. Baye, Managerial Economics and Business
FV1
FV2
FVn
N PV C 0
1
2 . . .
n
1 i 1 i
1 i
NPV < 0: Reject
NPV > 0: Accept
Firm Valuation
The value of a firm equals the present value
of all its future profits
PV = t / (1 + i)t
PV = i) / ( i - g),
Marginal (Incremental)
Analysis
Control Variables
Output
Price
Product Quality
Advertising
R&D
Net Benefits
Net Benefits = Total Benefits - Total Costs
Profits = Revenue - Costs
Marginal Principle
To maximize net benefits, the managerial
control variable should be increased up to
the point where MB = MC
MB > MC means the last unit of the control
variable increased benefits more than it
increased costs
MB < MC means the last unit of the control
variable increased costs more than it
increased benefits
Michael R. Baye, Managerial Economics and Business
Benefits
B
C
Slope = MC
Q
Q*
Michael R. Baye, Managerial Economics and Business
Summary
Make 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)