Managerial Economics Business strategy Chapter 1 The Fundamentals of Managerial Economics Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managerial Economics & Business Strategy Chapter 1 The Fundamentals of Managerial Economics
Overview I. Introduction II. The Economics of Effective management a Identify goals and Constraints a Recognize the role of profits a Understand Incentives Understand Markets Recognize the Time value of money Use Marginal analysis Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Overview I. Introduction II. The Economics of Effective Management Identify Goals and Constraints Recognize the Role of Profits Understand Incentives Understand Markets Recognize the Time Value of Money Use Marginal Analysis
Managerial economics Manager a person who directs resources to achieve a stated goal Economics The science of making decisions in the presence of scare resources Managerial Economics The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Managerial Economics • Manager A person who directs resources to achieve a stated goal. • Economics The science of making decisions in the presence of scare resources. • Managerial Economics The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal
Economic Vs Accounting Profits Accounting Profits a Total revenue(sales) minus dollar cost of producing goods or services a Reported on the firms income statement Economic profits otal revenue minus total opportunity cost Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Economic vs. Accounting Profits • Accounting Profits Total revenue (sales) minus dollar cost of producing goods or services Reported on the firm’s income statement • Economic Profits Total revenue minus total opportunity cost
Opportunity Cost ° Accounting Costs The explicit costs of the resources needed to produce produce goods or services a Reported on the firms income statement Opportunity Cost a The cost of the explicit and implicit resources that are foregone when a decision is made Economic profits Total revenue minus total opportunity cost Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Opportunity Cost • Accounting Costs The explicit costs of the resources needed to produce produce goods or services Reported on the firm’s income statement • Opportunity Cost The cost of the explicit and implicit resources that are foregone when a decision is made • Economic Profits Total revenue minus total opportunity cost
Market Interactions Consumer-Producer rival a Consumers attempt to locate low prices, while producers attempt to charge high prices Consumer-Consumer rival Scarcity of goods reduces the negotiating power of consumers as they compete for the right to those goods Producer -Producer rival Scarcity of consumers causes producers to compete with one another for the right to service customers The role of government Disciplines the market process Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Market Interactions • Consumer-Producer Rivalry Consumers attempt to locate low prices, while producers attempt to charge high prices • Consumer-Consumer Rivalry Scarcity of goods reduces the negotiating power of consumers as they compete for the right to those goods • Producer-Producer Rivalry Scarcity of consumers causes producers to compete with one another for the right to service customers • The Role of Government Disciplines the market process
The Time Value of Money Present value(Pv)of an amount(Fv)to be received at the end of n, periods when the per-period interest rate is" FV PV Examples? Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 The Time Value of Money • Present value (PV) of an amount (FV) to be received at the end of “n” periods when the per-period interest rate is “i”: ( ) PV FV i = n 1+ Examples?
Present Value of a series Present value of a stream of future amounts (FVI received at the end of each period for n periods FV FV PV 2 n +.,+ 1+i)(1+i)2(1+i) Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Present Value of a Series • Present value of a stream of future amounts (FVt ) received at the end of each period for “n” periods: ( ) ( ) ( ) PV FV i FV i FV i n = n + + + + + + 1 1 2 2 1 1 1
Net Present value Suppose a manager can purchase a stream of future receipts(FVt by spending Co dollars today. The NPV of such a decision is F*(1+ FV FV NPV=-C+ n 2 +,+ + (1+i) NPV0: Accept Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Net Present Value • Suppose a manager can purchase a stream of future receipts (FVt ) by spending “C0 ” dollars today. The NPV of such a decision is ( ) ( ) ( ) NPV C FV i FV i FV i n = − + n + + + + + + 0 1 1 2 2 1 1 1 ... NPV 0: Accept
firm valuation The value of a firm equals the present value of all its future profits PⅤ=∑π/(1+1) If profits grow at a constant rate, g<i, then ■PV=π(1+1)/(i-g),兀。= current profit level Maximizing short-Term Profits If the growth rate in profits interest rate and both remain constant, maximizing the present value of all future profits is the same as maximizing current profits Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Firm Valuation • The value of a firm equals the present value of all its future profits PV = S pt / (1 + i)t • If profits grow at a constant rate, g < i, then: PV = po ( 1+i) / ( i - g), po = current profit level. • Maximizing Short-Term Profits If the growth rate in profits < interest rate and both remain constant, maximizing the present value of all future profits is the same as maximizing current profits