Chapter2 - MANAGERIAL ECONOMICS An Analysis of Business...

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1 MANAGERIAL ECONOMICS An Analysis of Business Issues Howard Davies and Pun-Lee Lam Published by FT Prentice Hall
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2 Chapter 2: Business Objectives and Basic Models of the Firm Objectives: After studying the chapter, you should understand: 1. the assumptions of the neo-classical (or profit- maximising) model of the firm and the limitations of the model 2. the differences between the profit-maximising model and the managerial models of the firm 3. the differences between the profit-maximising model and the behavioural model of the firm
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3 The Assumptions of the Neo- classical Model of the Firm 1. The firm is a profit-maximiser - it optimises 2. The firm can be treated in a holistic way 3. There is perfect certainty
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4 Assumption 1: The firm is a profit-maximiser: it is assumed to make as much profit as possible. This means that the model is an ‘optimising’ model: the firm attempts to achieve the best possible performance, rather than simply seeking “feasible” performance which meets some set of minimum criteria.
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5 The profit-maxing assumption can be interpreted in two ways: 1. Maximisation of profit in the short-run i.e. the firm has a given set of plant and equipment and makes as much profit as it can with that 2. Long-run profit maximisation i.e. maximise the wealth of the shareholders In most situations these are consistent with each other. Shareholder wealth is maximised by selecting the most profitable set of plant and equipment and then operating it in the most profitable way. BUT THERE MAY BE EXCEPTIONS - making maximum short term profit might trigger entry or government intervention
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6 Assumption 2: It is a holistic model: the firm is a single entity which has objectives of its own and which can be said to take decisions.
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7 Assumption 3: It assumes perfect certainty. Cost and demand conditions are perfectly known. .
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8 The Basic Model of the Firm The neo-classical model The firm aims to maximise profit by choosing the level of output which gives the biggest difference between revenue and costs. STEP BY STEP TO THE MODEL Demand: Average Revenue $ Quantity Produced P1 P2 Q1 Q2
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The Basic Model of the Firm The neo-classical model The firm aims to maximise profit by choosing the level of output which gives the biggest difference between revenue and costs. STEP BY STEP TO THE MODEL
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This note was uploaded on 08/07/2011 for the course PMBA 2963.2 taught by Professor Stephenchiu during the Spring '03 term at HKU.

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Chapter2 - MANAGERIAL ECONOMICS An Analysis of Business...

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