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Chapter 1

Chapter 1 EC260.docx

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Wilfrid Laurier University
Karen Huff

EC260 Chapter 1 - Introduction Week 1 Introduction -Managerial economics uses formal models to analyze managerial actions and their effect on firm performance -These models are used to sow cost, demand, profit, competition, pricing, compensation, market entry strategy, and auction strategy – all under control of managers -In managerial economics, the focus is on managerial behaviour -Managerial economics prescribes behaviour The Theory of the Firm -Manager’s lives are complicated with operating constraints: -Most resources are scarce – within the firm, managerial decision making often involves allocating scarce inputs to support the production, distribution, and sales of goods and services that are sold at a price that exceeds their costs. -Legal or contractual – Minimum wage laws, taxes, contracts What is Profit? -Profit - When economists speak of profit, the mean profit over and above what the owner’s labor and capital employed in the business cold earn elsewhere -If the firms profit is greater than zero, she should continue to operate the firm; otherwise she should close it down and pursue other opportunities Reasons for the Existence of Profit -Profit is one indicator of decision-making skills -3 fertile profit-generating areas used by managers are innovation, risk, and market power -Managers need to make risky choices -Managers also earn profit by exploiting market inefficiencies -To create sustainable competitive advantage: build market entry barriers, sophisticate pricing strategies, diversification efforts, and output decisions Managerial Interests and the Principal – Agent Problem -The Principal-agent problem - when managers pursue their own objectives, even though this decreases the profit of the owners -To prevent this problem owners may give managers a financial stake in future firm success -Many corporations use stock option plans, whereby managers can purchase shares of common stock at less than market price -These plans give managers an incentive to increase firm profit and comply with owners’ interest Demand and Supply: A First Look -The managerial world revolves around markets -Market – a group of firms and individuals that interact with each othe
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