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Managerial
EconomicsPrinciples and WorldwideApplications, 7th Edition
Dominick Salvatore
&
Ravikesh Srivastava
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Chapter 1:
The Nature and Scope ofManagerial Economics
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Managerial Economics
Defined
The application of economic theory and the tools of
decision science to examine how an organization can
achieve its aims or objectives most efficiently.
applications of economic theory
quantitative methods
statistical methods
computational methods
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Economic Theory
Macroeconomics
Study of the total or aggregate level of output,
income, employment, consumption,investment, and prices for the economy
viewed as a whole.
Microeconomics
Study of the economic behavior of individualdecision-making units.
Relevance to Managerial Economics.
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Decision Sciences
Mathematical Economics
Expresses and analyzes economic models
using the tools of mathematics.
Econometrics
Employs statistical methods to estimate and
test economic models using empirical data.
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Economic Methodology
Economic Models
Abstract from details
Focus on most important determinants of
economic behaviorcause and effect
Evaluating Economic Models
A model is accepted if it predicts
accurately and if the predictions followlogically from the assumptions.
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The Theory of the Firm
Combines and organizes resources for thepurpose of producing goods and/or
services for sale.
Internalizes transactions, reducingtransactions costs.
Economic theory assumes that the
primary goal of managers is to maximizethe value of the firm.
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Value of the FirmThe present value of all expected future profits
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Alternative Theories
Sales maximization
Adequate rate of profit
Management utility maximization
Principle-agent problem
Satisficing behavior
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Definitions of Profit
Business or Accounting Profit: Totalrevenue minus the explicit or accounting
costs of production.
Economic Profit: Total revenue minus theexplicit and implicit costs of production.
Opportunity Cost: Implicit value of a
resource in its best alternative use.
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Theories of Profit
Risk-Bearing Theories of Profit
Frictional Theory of Profit
Monopoly Theory of Profit
Innovation Theory of Profit
Managerial Efficiency Theory of Profit
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Social Function of Profit
Profit is a signal that guides the allocationof societys resources.
High profits in an industry are a signal thatbuyers want more of what the industryproduces.
Low (or negative) profits in an industry are
a signal that buyers want less of what theindustry produces.
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Business Ethics
Identifies types of behavior that businessesand their employees should not engage
in.
Source of guidance that goes beyondenforceable laws.
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The Changing Environment of
Managerial Economics
Globalization of Economic Activity
Goods and Services
Capital
Technology
Skilled Labor
Technological Change
Telecommunications Advances
The Internet and the World Wide Web
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Appendix: Solving Managerial
Problems Using Spreadsheets Using the test scores in column B
to the right, we can calculate the
mean, median, mode, sample
variance, sample standard deviation,and coefficient of variation of the
data.
The next table shows the formulas
used. You can either write out theentire formula or use Excel function
commands.
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Appendix: Solving Managerial
Problems Using Spreadsheets A histogram of the data can also be created. Choose Tools-
Data Analysis. In the resulting dialog box, select Histogram
and click OK.
For the input range, select the data from B1 to B10. Also
check the Chart Output and Cumulative Percentage boxes,
as seen in the following figure.
The last figure shows the results.
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