Chapter 1: Fundamentals of Managerial Economics

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Chapter 1 Fundamentals of Managerial Economics

• Goals and Constraints
• Goal maximize profits
• Market Rivalry
• Time Value of Money
• Maximizing Profits

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How are managers like economists?

• Hiring?
• Purchase?
• Advertising?

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How are managers like central planners?

• assign tasks
• motivate effort
• reward performance

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How are managers like entrepreneurs?

• product characteristics
• pricing policy
• performance
• planning

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Goals and Constraints

• What is the managers goal?
• over time
• under uncertainty
• risk considerations
• What constrains managers?
• financial constraints
• market constraints
• management constraints

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What is the Invisible Hand

• How does greed serve consumers?
• What are opportunity costs?
• How does self interest contribute to the general
  welfare?

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Rivalry and Benefits of Trade

• What determines the price?
• Who benefits from trade, buyer or seller?
• Is all trade voluntary?
• How do sellers get customers to buy?
• How do consumers get sellers to offer goods and
  services?

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Time Value of Money

• Why do you care if you have to wait for revenues?
• What is the opportunity cost of waiting?
• If you invest 100 today at 10 interest, how
  much money do you have in one year.
• Receiving this in one year is equivalent to
  receiving 100 today.

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Present Value (PV) and Future Values (FV)

• If PV is received now, then in one year,
• FV PV iPV (1i)PV
• or PV FV/(1i)
• Higher interest rates reduce PV.
• In 5 years
• FV PV(1i)5 or PV FV/(1i)5

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A sequence of incomes

• Three payments over three years has a present
  value of
• PV FV1/(1i) FV2/(1i)2 FV3/(1i)3
• In general,
• PV ?t FVt/(1i)t

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Uses of Net Present Value

• Net present value of a project with initial costs
  C0
• NPV PV ? C0.
• The value of a firm is the present value of
  future profits ?t
• PVfirm ?t ?t/(1i)t
• How do we measure these future profits?

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A NAÏVE way to estimate the value of the firm.

• Assume that the growth of profits is constant,
  then
• ?t1 (1g)?t for t 0,,?, and
• PVfirm ?t ?t/(1i)t ?t ?0(1g)t/(1i)t
• ?0 (1i)/(i?g).
• Maximizing the value of the firm is the same as
  maximizing current profits.

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Simple Profit Maximization

• What is the simplest way to define profits?
• What do profits depend on?
• What is profit generated from the quantity (Q)
  produced and sold?
• ?(Q) TR(Q) ? TC(Q).

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Marginal This and That

• What do you get if you sell one more unit?
• MR(Q1) TR(Q1) ? TR(Q) ?TR
• What does it cost to produce one more unit?
• MC(Q1) TC(Q1) ? TC(Q) ?TC

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Marginal Profit

• ??(Q1) ?(Q1) ?(Q) ?TR ? ?TC MR(Q1) ?
  MC(Q1).
• Should you produce more or less?
• If MR(Q1) gt MC(Q1) then ??(Q1) gt 0.
• If MR(Q1) lt MC(Q1) then ??(Q1) lt 0.

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Calculus

• gt 0 if MR(Q) gt MC(Q)
• lt 0 if MR(Q) lt MC(Q)
• 0 if MR(Q) MC(Q)
• How do we know if profits are maximized?

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What is a derivative?
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How do you take a derivative?

• f(x) m?xn
• df(x)/dx m?n?xn-1
• f(x) 5x 10x2
• df(x)/dx 5 ? 20x

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Next

• What are demand and supply?
• What is the difference between demand and
  quantity demanded?
• What is the difference between supply and
  quantity supplied?
• What makes demand or supply change?
• Whar makes the quantity demanded or supplied
  change? Chapter
  2.ppt