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Unformatted text preview: The Economics of Effective Management Identify Goals and Constraints Recognize the Role of Profits Understand Incentives Understand Markets Recognize the Time Value of Money Use Marginal Analysis Manager A person who directs resources to achieve a stated goal. Economics The science of making decisions in the presence of scare resources. Managerial Economics The study of how to direct scarce resources in the way that most efficiently achieves a managerial goal. Accounting Profits Measured sales minus measured costs of producing goods or services Reported on the firms income statement Economic Profits Total revenue minus total opportunity cost Accounting Cost The explicit costs of the resources needed to produce produce goods or services Reported on the firms income statement Opportunity Cost The cost of the explicit and implicit resources that are foregone when a decision is made Economic Profits Total revenue minus total economics cost Normal profit Normal profits are earned when total revenues equal total costs, if total costs are calculated to reflect the opportunity costs of all services provided. Pure profit If revenues exceed these costs, we say that the firm is earning a pure, or economic, profit. Economic cost = Explicit cost + implicit cost Economic profit = Total revenue - economic cost Accounting profit = Total revenue - explicit cost 1 Finding derivatives For instance how to find marginal benefit (MB) or marginal revenue (MR), marginal cost (MC), etc. Optimization rule (For instance, how to find output level Q that maximizes total revenue, or total profit) Marginal analysis To maximize net benefits, the managerial control variable should be increased up to the point where MB = MC. MB=0 TB is maximize Pvh firmh =h 1+ih /(i-g) Pv(ex dividend firm)=Pvh firmh -=(1+g)/(i-g) Which of the following reduces the potential for sustainable long run industry profits? Selected Answer: None of the above. Correct Answer: Entry. 0 out of 1 points If marginal cost equals marginal revenue at the current production level, the firm is Selected Answer: Earning zero accounting profits. Correct Answer: Maximizing profits. If firms in the pizza industry are earning positive economic profits, which of the following will most likely occur in the future?...
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