Managers, Profits, and Markets

Managerial Economics

focuses on how managers make economic decisions by allocating the scarce resources at their disposal

Managers must understand the behavior of other decision makers such as:

Consumers, Workers, Other managers, Governments 

Production manager

minimize the cost of producing a particular good or service 

Market research manager

determines how many units of any particular product can be sold at a given price. Total revenue function

Research and development manager

supervise the development of new products that will be attractive to consumers

CEO

coordinating the firms managerial functions and setting its overall strategy. Making sure everything functions the way it should be 

Macroeconomics

study of individual behavior of consumers, business firms, and markets, and it contributes to our understanding of business practices and tactics 

Industrial organization

branch of macroeconomics focusing on the behavior and structure of firms and industries

Business practices or tactics

routine business decisions managers must make to earn the greatest profit under the prevailing market conditions facing the firm 

Strategic decisions

business action taken to alter market conditions and behavior of rivals in ways that increase and/or protect the strategic firms profit 

Private sector

consists of firms that are owned by individuals or other nongovernmental entities and whose owners may earn a profit. Apple, Nike 

Public sector

firms and other orgs. That are owned by governments or government agencies. AMTRACK 

Nonprofit sector

consists of organizations that are neither government0owned nor intended to earn a profit, but typically pursue social or public interest objectives  

3 main types of private sector organizations 

sole proprietorship, partnership, corporations

Sole proprietorship

firms owned and controlled by a single individual. Generally seek to maximize profit 

Partnership

business jointly owned and controlled by 2 or more people operating under a partnership agreement 

Corporations

firms owned by stakeholders 

Government and nonprofit firms

pursue actions that benefit specific groups of people 

Private sector firms

pursue actions that maximize their profit

Public sector

Firms and other orgs. That are owned by governments or government agencies. AMTRACK 

Nonprofit sector

consists of organizations that are neither government0owned nor intended to earn a profit, but typically pursue social or public interest objectives  

private sector organizations 

• Sole proprietorship: firms owned and controlled by a single individual. Generally seek to maximize profit 

• Partnership: business jointly owned and controlled by 2 or more people operating under a partnership agreement 

• Corporations: firms owned by stakeholders 

Sole proprietorship, Partnership, Corporations

Sole proprietorship

firms owned and controlled by a single individual. Generally seek to maximize profit 

Partnership

business jointly owned and controlled by 2 or more people operating under a partnership agreement 

Corporations

firms owned by stakeholders 

Private sector firms

pursue actions that maximize their profit 

Government and nonprofit firms

pursue actions that benefit specific groups of people 

Economic profit

the difference between total revenue and total economic cost 

Opportunity cost

what a firms owners give up to use resources to produce goods or services 

Market supply resources

total quantity of goods and services that producers are willing to supply at a particular price point or range for a certain period of time. Resources owned by others and hired, rented, or leased in resources markets 

Owner supply resources

the resources you personally are dedicated to the firm. Your time for example, money from your savings. resources owned and used by a firm 

Explicit costs

monetary opportunity costs of using market-supplied resources

Implicit costs

nonmonetary opportunity costs of using owner-supplied resources. 

Equity capital

money provided to businesses by the owners. Cash that you out pay (taking money out of savings) 

Value of a firm

the price for which the firm can be sold, which equals the present value of future profits 

Risk premium

an increase in the discount rate to compensate investors for uncertainty about future profits  

Common mistakes managers make

Increasing output to reduce average costs, Pursuit of market share usually reduces profits, Focusing on profit margin wont maximize total profit, Maximizing total revenue reduces profit, Cost-plus pricing formulas don’t produce profit-maximizing prices 

Principal-agent problem

a manager takes an action or males a decision that advances the interests of the manager but reduces the value of the firm 

Two conditions must be met for principal agent problem

• The managers objectives must be different from those of the owner  

• The owner must find it too costly or even impossible to monitor the managers decision 

Complete contract

an employment contract that protects owners from every possible deviation by managers from value-maximizing decisions 

Hidden actions 

actions or decisions taken by managers that cannot be observed by owners for any feasible amount of monitoring effort  

Equity ownership 

Equity ownership: Give the manager some kind of ownership in the company, they now have the incentive to value maximize  

Price taker

a firm that cannot set the price of the product it sells, since price is determined strictly by the market forces demand and supply 

Price-setting firm

a firm that can raise its prices without losing all of its sales 

Market power

a firms ability to raise price without losing all sales  

Market

any arrangement through which buyers and sellers exchange anything of value 

Transaction costs

costs of making a transaction happen, other than the price of the good or service itself  

Market Structure

market characteristics that determine the economic environment in which a firm operates 

Four types of market structures

perfect condition, monopoly, monopolistic competition, and oligopoly

Perfect Competition

Large number of firms, each one smaller relative to the market. No barriers to entry so new firms enter and push down the market prices bringing profits to 0. agricultural goods and currency  

Monolopy

One firm. Barriers to entry. USPS

Monopolistic Competition 

Large number of firms, each one small relative to the market. Attracts you to one firm as opposed to another. No barriers to entry so new firms enter and push down the market price bringing profits to zero. tooth paste and pizza

Oligopoly

What one firm does affects other firms. Few firms, each one large relative to the market. Some barriers to entry. airlines.

Globalization of Markets 

economic integration of markets located in nations around the world