chapter 1

• Manager


  A person who directs resources to achieve a stated goal
• Economics


  The science of making decisions in the presence of scarce resources
• Managerial Economics

  The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal
• Sound decision making


  • Involves having well-defined goals
  • Leads to making the "right" decisions
• Constraints


  An artifact of scarcity
• Accounting Profits


  Total revenue (sales) minus dollar cost of producing goods or services
• Economic Profits


  Total revenue minus total opportunity cost
• Accounting Costs


  The explicit costs of the resources needed to produce goods or services
• Opportunity Cost


  The cost of the explicit and implicit resources that are foregone when a decision is made the explicit cost of a resource plus the implicit cost of giving up its best alternative use.
• Profits signal to resource holders where resources are most highly valued by society
• The Five Forces Framework

  • Supplier Concentration
  • Price/Productivity of Alternative Inputs
  • Relationship-Specific Investments
  • Supplier Switching Costs
  • Government Restraints
  • Buyer Concentration
  • Price/Value of Substitute Products or Services
  • Relationship-Specific Investments
  • Customer Switching Costs
  • Government Restraints
  • Entry Costs
  • Speed of Adjustment
  • Sunk Costs
  • Economies of Scale
  • Network Effects
  • Reputation
  • Switching Costs
  • Government Restraints
  • Price/Value of Surrogate Products or Services
  • Price/Value of Complementary Products or Services
  • Network Effects
  • Government Restraints
  • Switching Costs
  • Timing of Decisions
  • Information
  • Government Restraints
  • Concentration
  • Price, Quantity, Quality, or Service Competition
  • Degree of Differentiation
• Incentives- affect how resources are used and how hard workers work. 


  • Play an important role within the firm
  • Determine how resources are utilized
  • Determine how hard individuals work
• Constructing proper incentives will enhance productivity and profitability
• Market Interactions

  • Consumer-Producer Rivalry
  • Consumer-Consumer Rivalry
  • Producer-Producer Rivalry
• The Role of Government


  Disciplines the market process
• Present Value (PV)


  The difference between the future value and the opportunity cost of waiting
• As the interest rate (i) increases, the higher is the opportunity cost of waiting and the lower the present value (PV)
• Net Present Value (NPV)


  The present value of a stream of future receipts (FVt) minus the cost (C0) of purchasing that stream today
• The value of a firm equals the present value of current and future profits (cash flows)
• Profit maximization means maximizing the present value of current and future profits
• Control Variables

  Examples: Output, Price, Product Quality, Advertising, R&D
• Marginal Benefit (MB)


  Change in total benefits arising from a change in the control variable
• Marginal Cost (MC)


  Change in total costs arising from a change in the control variable
• To maximize net benefits, the managerial control variable should be increased up to the point where MB = MC
• MB > MC means the last unit of the control variable increased benefits more than it increased costs
• MB < MC means the last unit of the control variable increased costs more than it increased benefits
• Resources - are simply anything used to produce a good or service or, more generally, to achieve a goal.
• Decisions are important because scarcity implies that by making one choice, you give up another.
• Accounting profits - the total amount of money taken in from sales (total revenue, or price times quantity sold) minus the dollar cost of producing goods or services.
• Economic profits - the difference between total revenue and total opportunity cost. (total revenue minus total opportunity cost)
• Opportunity Cost - the explicit cost of an resource plus the implicit cost of giving up its best alternative use.
• Identify goals and constraints - the first step in making sound decisions is to have well-defined goals because achieving different goals entails making different decisions.
• Five Forces Framework and Industry Profitability 1. Entry - heightens the competition and reduces the margins of existing firms in a wide variety of industry settings.
• Five Forces Framework and Industry Profitability

  2. Power of Input Suppliers - industry profits tend to be lower when suppliers have the power to negotiate favorable terms for their inputs. Supplier power tends to be low when inputs are relatively standardized and relationship-specific investments are minimal, input markets are not highly concentrated, or alternative inputs are available with similar marginal productivities per dollar spent.
• Five Forces Framework and Industry Profitability 3. Power of Buyers - industry profits tend to be lower when customers or buyers have the power to negotiate favorable terms for their inputs. In most consumer markets, buyers are fragmented, and thus buyer concentration is low.
• Power of Buyer


  • Buyer concentration and hence customer power tend to be higher in industries that serve relatively few "high volume" customers
  • Buyer power tends to be lower in industries where the cost to customers of switching to other products is high - as is often the case when there are relationship-specific investments and hold-up problems, imperfect information that leads to costly consumer search, or few close substitutes for the product
• Industry Rivalry


  The sustainability of industry profits also depends on the nature and intensity of rivalry among firms competing in the industry
• Industry Rivalry


  • Rivalry tends to be less intense (and hence the likelihood of sustaining profits is higher) in concentrated industries - that is, those with relatively few firms
• Substitutes and Complements


  The level and sustainability of industry profits also depend on the price and value of interrelated products and services
• Market


  A place where buyers and sellers come together to exchange goods and services