Bài giảng Managerial Economics - Chapter 01: Managers, Profits, and Markets

Chapter 1: Managers, Profits, and MarketsMcGraw-Hill/IrwinCopyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.Managerial Economics & TheoryManagerial economics applies microeconomic theory to business problemsHow to use economic analysis to make decisions to achieve firm’s goal of profit maximizationEconomic theory helps managers understand real-world business problemsUses simplifying assumptions to turn complexity into relative simplicityMicroeconomicsMicroeconomicsStudy of behavior of individual economic agentsBusiness practices or tacticsUsing marginal analysis, microeconomics provides the foundation for understanding everyday business decisionsIndustrial organizationSpecialized branch of microeconomics focusing on behavior & structure of firms & industriesProvides foundation for understanding strategic decisions through application of game theoryAssume Profit MaximizationWhat about?SteakholdersSocial concernsEnvironmental concernsDo these concerns influence profits?Short or long run profit maximization?This is a false choiceMaximize the value of the firmThe value of the firm is equal to the present value of the future stream of profitsEmphasis on short or long term will depend on: Time value of money (cost of funds)Market structureUncertainty Economic Forces that Promote Long-Run Profitability (Figure 1.1)Maximizing the Value of a FirmValue of a firmPrice for which it can be soldEqual to net present value of expected future profitRisk premiumAccounts for risk of not knowing future profitsThe larger the risk, the higher the risk premium, & the lower the firm’s valueMaximizing the Value of a FirmMaximize firm’s value by maximizing profit in each time periodCost & revenue conditions must be independent across time periodsValue of a firm = Possible Profit StreamsTimeProfitsLimit PricingShort-run profit max0Strategic DecisionsStrategic decisions seek to shape or alter the conditions under which a firm competes with its rivalsIncrease/protect firm’s long-run profitWhile routine business practices are necessary for the goal of profit-maximization, strategic decisions are generally optimal actions managers can take as circumstances permitEconomic ProfitsEconomic profits are not accounting profitsEconomic profits are equal to revenues minus economic costsAll economic costs are measured in terms of opportunity costsChoices represent foregone opportunitiesEconomic Cost of ResourcesOpportunity cost of using any resource is:What firm owners must give up to use the resourceMarket-supplied resourcesOwned by others & hired, rented, or leasedOwner-supplied resourcesOwned & used by the firmTotal Economic CostTotal Economic CostSum of opportunity costs of both market-supplied resources & owner-supplied resourcesExplicit CostsMonetary payments to owners of market-supplied resourcesImplicit CostsNonmonetary opportunity costs of using owner-supplied resourcesTypes of Implicit CostsOpportunity cost of cash provided by ownersEquity capitalOpportunity cost of using land or capital owned by the firmOpportunity cost of owner’s time spent managing or working for the firmEconomic Cost of Using Resources (Figure 1.2)+=Economic Profit vs. Accounting Profit Economic profit = Total revenue – Total economic cost = Total revenue – Explicit costs – Implicit costs Accounting profit ? = Total revenue – Explicit costsAccounting profit does not subtract implicit costs from total revenueFirm owners must cover all costs of all resources used by the firmObjective is to maximize economic profitBrady’s Explicit CostsOpportunity Cost of Brady’s CapitalImplicit Cost of Brady’s Owner Supplied ResourcesTotal Opportunity Cost of All ResourcesBrady’s Total Accounting ProfitBrady’s Economic ProfitBased on his profit in 2007, did Terry Brady increase his wealth by quitting his job at Mattoon High and opening Brady Advantage?Infinite AnnuityR = constant dollar annual returnI = risk adjusted expected rate of returnV = present value of future returns Economic ProfitDiscount rate0%16%10%Year1$700,000 $ 603,448 $ 636,364 2$800,000 $ 594,530 $ 661,157 3$500,000 $ 320,329 $ 375,657 Total$2,000,000 $1,518,307 $1,673,178 Present Value and the Discount RatePresent value is negatively related to the discount rate. Some Common Mistakes Managers MakeNever increase output simply to reduce average costsPursuit of market share usually reduces profitFocusing on profit margin won’t maximize total profitMaximizing total revenue reduces profitCost-plus pricing formulas don’t produce profit-maximizing pricesSeparation of Ownership & ControlPrincipal-agent problemConflict that arises when goals of management (agent) do not match goals of owner (principal) Ex. Mortgage brokersMoral HazardWhen either party to an agreement has incentive not to abide by all its provisions & one party cannot cost effectively monitor the agreementEx. Preexisting conditionsCorporate Control MechanismsRequire managers to hold stipulated amount of firm’s equityIncrease percentage of outsiders serving on board of directorsFinance corporate investments with debt instead of equityPrice-Takers vs. Price-SettersPrice-taking firmCannot set price of its product Price is determined strictly by market forces of demand & supplyPrice-setting firmCan set price of its productHas a degree of market power, which is ability to raise price without losing all salesWhat is a Market?A market is any arrangement through which buyers & sellers exchange goods & servicesMarkets reduce transaction costsCosts of making a transaction other than the price of the good or serviceMarket StructuresMarket characteristics that determine the economic environment in which a firm operatesNumber & size of firms in marketDegree of product differentiationLikelihood of new firms entering marketPerfect CompetitionLarge number of relatively small firmsUndifferentiated productNo barriers to entryMonopolySingle firmProduces product with no close substitutesProtected by a barrier to entryMonopolistic CompetitionLarge number of relatively small firmsDifferentiated productsNo barriers to entryOligopolyFew firms produce all or most of market outputProfits are interdependentActions by any one firm will affect sales & profits of the other firmsGlobalization of MarketsEconomic integration of markets located in nations around the worldProvides opportunity to sell more goods & services to foreign buyersPresents threat of increased competition from foreign producers