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managerial economics

managerial economics. SUB-DISCIPLINES WITHIN ECONOMICS. Managerial economics the application of economic theory and methods to business decision-making. Relationship with economic theory 1 theory of the firm 2 theory of consumer behaviour (demand) 3 production and cost theory (supply)

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managerial economics

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  1. managerial economics

  2. SUB-DISCIPLINES WITHIN ECONOMICS

  3. Managerial economics • the application of economic theory and methods to business decision-making Relationship with economic theory 1 theory of the firm 2 theory of consumer behaviour (demand) 3 production and cost theory (supply) 4 price theory 5 market structure and competition theory

  4. Relationship with decision sciences * numerical and algebraic analysis * optimization * statistical estimation and forecasting * analysis of risk and uncertainty * discounting and time-value-of-money techniques Relationship with business functions • 1 production and operations • 2 marketing • 3 finance and accounting • 4 human resources

  5. PROFIT Business profit • Residual of sales revenue minus the explicit accounting costs of doing business • Economic profit • Business profit minus the implicit costs of capital and any other owner-provided inputs

  6. Variability of Business Profits Profit margin • Accounting net income divided by sales Return on stockholders’ equity (ROE) Accounting net income divided by the book value of total assets minus total liabilities

  7. WHY DO PROFITS VARY AMONG FIRMS? Frictional profit theory Abnormal profits observed following unanticipated changes in demand or cost conditions Monopoly profit theory Above-normal profits caused by barriers to entry that limit competition

  8. WHY DO PROFITS VARY AMONG FIRMS? Compensatory profit theory Above-normal rates of return that reward efficiency Innovation profit theory Above-normal profits that follow successful invention or modernization

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