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    Chapter 1 Introduction To Managerial Economics

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    myra
    This document provides an introduction to managerial economics. It discusses the circular flow of income in a two-sector economy between households and firms. Households supply factors of production to firms and receive income, then purchase goods and services from firms, completing the circular flow. The rationale for firms is that they allow for specialization and economies of scale in production. The primary goal of firms is to maximize profits by bearing risks, exploiting imperfect markets, achieving monopoly status, and innovating. Firms also face various constraints like legal, moral, contractual, financial, and technological constraints in their decision making.

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    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd

    Chapter 1 Introduction To Managerial Economics

    Uploaded by

    myra
    375 views4 pages
    This document provides an introduction to managerial economics. It discusses the circular flow of income in a two-sector economy between households and firms. Households supply factors of production to firms and receive income, then purchase goods and services from firms, completing the circular flow. The rationale for firms is that they allow for specialization and economies of scale in production. The primary goal of firms is to maximize profits by bearing risks, exploiting imperfect markets, achieving monopoly status, and innovating. Firms also face various constraints like legal, moral, contractual, financial, and technological constraints in their decision making.

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    Chapter 1 - Managerial economics

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    1. Chapter 1 Introduction to Managerial Economics

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    This document provides an introduction to managerial economics. It discusses the circular flow of income in a two-sector economy between households and firms. Households supply factors of production to firms and receive income, then purchase goods and services from firms, completing the circular flow. The rationale for firms is that they allow for specialization and economies of scale in production. The primary goal of firms is to maximize profits by bearing risks, exploiting imperfect markets, achieving monopoly status, and innovating. Firms also face various constraints like legal, moral, contractual, financial, and technological constraints in their decision making.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    375 views4 pages

    Chapter 1 Introduction To Managerial Economics

    Uploaded by

    myra
    This document provides an introduction to managerial economics. It discusses the circular flow of income in a two-sector economy between households and firms. Households supply factors of production to firms and receive income, then purchase goods and services from firms, completing the circular flow. The rationale for firms is that they allow for specialization and economies of scale in production. The primary goal of firms is to maximize profits by bearing risks, exploiting imperfect markets, achieving monopoly status, and innovating. Firms also face various constraints like legal, moral, contractual, financial, and technological constraints in their decision making.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 4

    MANAGERIAL ECONOMICS ECO556

    CHAPTER ONE : INTRODUCTION TO MANAGERIAL ECONOMICS


    A. Definition of Managerial Economics: It is application of economic theory and the tools of analysis of decision science to examine how a firm can achieve its aims or objectives most efficiently. Firm in macroeconomic analysis Circular flow of income describes the way in which a countrys economy flows backward and forward between the sectors in the economy. It shows how the household and firm interact in the resource and product markets. A simple circular flow assumes that the economy is divided into only into two sectors. a) i) 2 Sector Economy - The Simple Circular Flow

    B.

    We assumed that: households receive their income from the firm by providing factors of production they own ii) firms sell their entire output(supply of goods & services) to households iii) households spend their entire income on goods and services. So all goods produced are sold. Purchase of goods and services
    supply of goods & services

    FIRMS
    supply of factors of production

    HOUSEHOLD

    wages, interest, rent, profit

    (i) The household is the owner of factors of production and they are suppliers and sellers of factors of production (resources) to the firms whilst firms are the buyers. (ii) The bottom half of the diagram shows the flow of the factors of production owned by households to the firms. (iii) The firms in return pay wages, rent, interest and profits to household as income. (iv)The top half of the flow shows the flow of goods and services produced from households to firms and the corresponding flow of money payments for goods and services from households to firms as households consumption.

    MANAGERIAL ECONOMICS ECO556

    (v) The circular flow of income illustrates the basic principle of national income accounting where the value of total outputs equals the value of total income. (vi)The above diagram shows how two sectors interact in the product market and resource market. (vii) The illustration assumed that household spends all their income to buy goods and services. (viii) But, in the real life, household does not spend all their income for consumption. They also save part of their income. (ix)So, what happens if the household does not consume all their income to buy goods and services but save part of it in the Financial Institutions?
    C. The Rationale of the firm It would be very costly for individual household to enter into each production and distribution process. Thus, a firm should exist to purchase these goods and transform them into goods and services for sale. Resource owners (households) then purchase these goods and services with the income generated form the sale of their services or resources. (The economies generated in production and distribution would lower the cost of production and provide higher returns to resource owners.

    I.

    Objectives of the firm

    The primary goal of a firm is to maximize profit (minimize cost). What is profit? Profit is a reward for: Bearing risks An entrepreneur will bear all the risk associated with production. The reward for the risk is profit. Imperfect market mechanism In imperfect market, firms can generate profit since there is less competition Monopoly status If a firm is a monopoly, it is able to curtail/prevent other firms form entering the market. Thus, it is able to enjoy profits for long period of time. Innovations Development of new products, new production techniques, and new modes of marketing will provide higher return.

    MANAGERIAL ECONOMICS ECO556

    Function of profit Profits act as a signal for reallocation of resources to reflect changing demand and taste. How to calculate profit? Profit = TR TC Accounting profit Economic profit = TR explicit costs = TR explicit costs implicit costs

    Other goals: Sales maximization Revenue Maximization Market share maximization Employment Working environment for workers Provide good product and services to customer Act as a good citizen II. Decision Problems

    Firms usually face many constraints such as: 1. Legal constraint - it includes the array of federal, state, and local laws that must be obeyed by all citizens, both individual and corporate. Areas where managers seem to have some legal difficulty include environmental law, especially those relating to pollution and the disposal of hazardous wastes, and employment law, including wrongful termination and sexual harassment matters. Moral constraint - it applies to actions that are not illegal but are sufficiently inconsistent with generally accepted standards of behavior to be considered improper. Contractual constraint - it binds the firm because of some prior agreement such as a long-term lease on a building, or a contract with a labor union that represents the firms employees. Financial constraint - it occurs when a department of a firm is assigned a budget for the next year and managers are given orders to maximize production subject to this budgeted amount. Technological constraint

    2.

    3.

    4.

    5.

    MANAGERIAL ECONOMICS ECO556

    it sets physical limits on the amount of output per unit of time that can be generated by particular machines or workers.

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