Kinh tế học - Chapter 1: Managers, profits, and markets

Chapter 1Managers, Profits, and MarketsManagerial Economics & TheoryManagerial economics applies microeconomic theory to business problemsHow to use economic analysis to make decisions to achieve firm’s goal of profit maximizationMicroeconomicsStudy of behavior of individual economic agents2Economic 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 firm3Total 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 resources4Economic Cost of Using Resources (Figure 1.1)+=5Types 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 firm6Economic Profit versus Accounting ProfitEconomic profit = Total revenue – Total economic cost = Total revenue – Explicit costs – Implicit costsAccounting profit = Total revenue – Explicit costs Accounting profit does not subtract implicit costs from total revenue Firm owners must cover all costs of all resources used by the firmObjective is to maximize economic profit7Maximizing 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 rise, the higher the risk premium, & the lower the firm’s value8Maximizing 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 = 9Separation of Ownership & ControlPrincipal-agent problemConflict that arises when goals of management (agent) do not match goals of owner (principal)Moral HazardWhen either party to an agreement has incentive not to abide by all its provisions & one party cannot cost effectively monitor the agreement10Corporate 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 equity11Price-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 sales12What 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 service13Market StructuresMarket characteristics that determine the economic environment in which a firm operatesNumber & size of firms in marketDegree of product differentiationLikelihood of new firms entering market14Perfect CompetitionLarge number of relatively small firmsUndifferentiated productNo barriers to entry15MonopolySingle firmProduces product with no close substitutesProtected by a barrier to entry16Monopolistic CompetitionLarge number of relatively small firmsDifferentiated productsNo barriers to entry17OligopolyFew firms produce all or most of market outputProfits are interdependentActions by any one firm will affect sales & profits of the other firms18Globalization 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 producers19