CHAPTER 1
The Fundamentals of
Managerial Economics

McGraw-Hill/Irwin

Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter One

Chapter Overview

• Introduction
– The manager
– Economics
– Managerial economics defined

• Economics of Effective Management
– Identifying goals and constraints
– Recognize the nature and importance of profits
– Understand incentives
– Understand markets
– Recognize the time value of money
– Use marginal analysis

• Learning managerial economics
1-2

Introduction

Economics
• The science of making decisions in the presence of scarce resources.
– Resources are anything used to produce a good or service, or achieve a goal.
– Decisions are important because scarcity implies
• Use marginal analysis
– Marginal benefit:
• The change in total benefits arising from a change in the managerial control variable, .

– Marginal cost:
• The change in the total costs arising from a change in the managerial control variable, .

– Marginal net benefits:

1-21

Economics of Effective Management

Marginal Analysis Principle I
• Marginal principle
– To maximize net benefits, the manager should increase the managerial control variable up to the point where marginal benefits equal marginal costs. This level of the managerial control variable corresponds to the level at which marginal net benefits are zero; nothing more can be gained by further changes in that variable.

1-22

Economics of Effective Management

Marginal Principle II
• Marginal principle (calculus alternative)
– Slope of a continuous function is the derivative
/marginal value of that function:

1-23

Economics of Effective Management

Marginal Analysis In Action
• It is estimated that the benefit and cost structure of a firm is:

• Find the and functions.

• What value of makes zero?

1-24

Economics of Effective Management

Determining the Optimal Level of a Control Variable
Total benefits
Total costs

Maximum total benefits

pe
Slo

=

Maximum net benefits 0

pe o l
S

=

Quantity

(Control Variable)
1-25

Economics of Effective Management

Determining the Optimal Level of a Control