INTRODUCTION TO MANAGERIAL ECONOMICS
Is it appropriate to view firms primarily as economic entities?
Firms represent a combination of people, physical assets, and information
(financial, technical, marketing, and so on).
People directly involved include
stockholders, managers, workers, suppliers, and customers.
Businesses use scarce
resources that would otherwise be available for other purposes, pay income and
other taxes, provide employment opportunities, and are responsible for much of the
material well-being of our society.
Thus, all of society is indirectly involved in the
Firms exist because they are useful in the process of allocating
resources -- producing and distributing goods and services.
As such, they are
basically economic entities.
Explain how the valuation model given in Equation 1.2 could be used to describe
the integrated nature of managerial decision making across the functional areas of
As seen in the text, Equation 1.2 can be written:
where TR is total revenue, TC is total cost, i is an appropriate (risk-adjusted)
interest rate, and t indicates the relevant time period.
Thus, the value of the firm is
the discounted present value of the stream of expected future profits.
Each of the functional areas of business plays an important role in managerial
decision making since each area provides vital input into the value maximization
The marketing department of a firm has a major responsibility for sales,
the production department a major responsibility for costs, and the finance
department has a major responsibility for acquiring the capital necessary to support
the firm's investment activities.
There are many important overlaps among these
functional areas--the marketing department, for example, can help reduce the costs
associated with a given level of output by affecting the size and timing of customer
The production department can stimulate sales by improving quality and
making new products available to sales personnel.
Other departments within the
firm--for example, accounting, personnel, transportation, and engineering--provide
information or services vital to both continued sales growth and cost control.