13-02-2013, 09:27 AM
Managers, Profits, and Markets
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Managerial Economics & Theory
Managerial economics applies microeconomic theory to business problems
How to use economic analysis to make decisions to achieve firm’s goal of profit maximization
Microeconomics
Study of behavior of individual economic agents
Economic Cost of Resources
Opportunity cost of using any resource is:
What firm owners must give up to use the resource
Market-supplied resources
Owned by others & hired, rented, or leased
Owner-supplied resources
Owned & used by the firm
Total Economic Cost
Total Economic Cost
Sum of opportunity costs of both market-supplied resources & owner-supplied resources
Explicit Costs
Monetary payments to owners of market-supplied resources
Implicit Costs
Nonmonetary opportunity costs of using owner-supplied resources
Types of Implicit Costs
Opportunity cost of cash provided by owners
Equity capital
Opportunity cost of using land or capital owned by the firm
Opportunity cost of owner’s time spent managing or working for the firm
Maximizing the Value of a Firm
Value of a firm
Price for which it can be sold
Equal to net present value of expected future profit
Risk premium
Accounts for risk of not knowing future profits
The larger the rise, the higher the risk premium, & the lower the firm’s value
Separation of Ownership & Control
Principal-agent problem
Conflict that arises when goals of management (agent) do not match goals of owner (principal)
Moral Hazard
When either party to an agreement has incentive not to abide by all its provisions & one party cannot cost effectively monitor the agreement
Corporate Control Mechanisms
Require managers to hold stipulated amount of firm’s equity
Increase percentage of outsiders serving on board of directors
Finance corporate investments with debt instead of equity