Transcript Managerial Economics - Universitas Trunojoyo Madura

Introduction and
Goals of the Firm
Chapter 1
Slides developed by:
William Rentz
& Al Kahl
University of Ottawa
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Topics
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What is Managerial Economics
Decision-Making Process
Objectives of the Firm
Role of Profits
Agency Problems & Solutions
Vision, Mission, and Strategy
Porter’s Five Forces
Not-for-Profit Organizations
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Managerial Economics
• Integrates and applies microeconomic
theory and methods to decision making
problems faced by private, public, and notfor-profit organizations.
• Managerial economics deals with
microeconomic reasoning on real world
problems such as pricing decisions
selecting the best strategy in different
competitive environments.
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Major Topics
• Demand and Supply Analysis
and how to estimate price elasticities with
regressions
• Production and Cost Analysis
and how managers can estimate these relationships
• Monopoly, Competition, and Oligopolies
and how to make good pricing decisions in the real
world
• Organization Architecture
and the economic problem of motivating agents
• Risk in Economic Decisions
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and ways to modify or compare risks
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Objectives of the Firm
• Profit maximization
• Market Value Added = market value of all
shares minus the book value of all shares.
This is the present value of expected future
profits or cash flows, discounted at the
shareholders required rate of return, ke,
ignoring taxes.

Market Value Added =  t /(1+ke) t
t=1
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Firm Value
Market Value Added
= the present value of expected economic profits
discounted at shareholders’ required rate of return
n
(t ) / (1+ke)t =
t=1
n
(PtQt – VtQt – Ft) / (1+ke)t
t =1
• Whatever lowers the perceived risk of the firm (ke) will
also raise firm value.
• Whatever raises the price of the product (Pt) or the
quantity sold (Qt) will raise firm value.
• Whatever raises variable cost (Vt) or fixed cost (Ft)
will reduce firm value.
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• To make good economic decisions,
managers need to be able to forecast &
estimate relationships
• Forecasting demand (both Pt & Qt)
» applies to for-profit corporations
» non-profit organizations
• Hospital Administrators -- # patients
• University Administrator -- enrolment
• Regression analysis, time series methods,
and qualitative forecasting methods used
for forecasting
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The Role of Profits
• Economic Cost (or opportunity cost) is
the highest valued benefit that must be
sacrificed as a result of choosing an
alternative.
• Economic Profit is the difference
between revenues and total economic
cost (including the economic or
opportunity cost of owner supplied
resources such as time and capital).
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Factors Affecting Stock Prices
Economic Environment Factors
1.
2.
3.
4.
5.
6.
Economic Activity
Tax Rates & Regulations
Competition
Laws and Governmental Regulation
Unionization
International Conditions & Exchange Rates
Major Policy Decisions Under Management Control
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Products or Services Offered
Production Technology
Marketing and Distribution Network Used
Investment Strategies
Employment & Compensation Policies
Ownership Form
Capital Structure Used
Working Capital Management Policies
Dividend Policies
Alliances, mergers, spin-offs
Amount, Timing, and Risk of Expected Profits
Conditions in
Financial Markets
1.
Interest
Rates
2.
Investor
Sentiment
3.
Expected
Inflation
Shareholder Wealth (The Market Price of the Share)
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Agency Problems
• Modern corporations allow managers to
have no, or limited, ownership participation
in the profitability of the firm.
• Shareholders may want profits, but
managers may wish to relax.
• The shareholders are principals, whereas
the managers are agents.
» Conflicting motivations between these
groups are called agency problems.
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Principal-Agent Problem
• Shareholders (principals) want profit
• Managers (agents) want leisure &
security
»Examples
• KKR’s takeover of RJR Nabisco to refocus
on wealth-maximization
• The LBO by O.M. Scott (a lawn fertilizer
company) from ITT improved Scott’s
performance
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Solutions to Agency Problems
• Compensation as incentive
• Extending to all workers stock options,
bonuses, and grants of shares of stock
• It helps to make workers act more like
owners of firm
• Incentives to help the company,
because that improves the value of
stock options and bonuses.
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Vision, Mission, and Strategy
• Vision statement indicates what the firm
strives to achieve in the long term – what it
wants to become.
• Mission statement indicates what business
the firm is in now – what it is.
• Strategy is the firm’s plan for getting from
where it is now to where it wants to be in
the future – how it will compete.
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Michael Porter’s Five Forces of
Competitive Advantage
•
The 5 forces that determine competitive
advantage are:
1. Substitutes
2. Potential Entrants
3. Buyer Power
4. Supplier Power
5. Intensity of Rivalry
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Five Forces Framework
Potential entrants
Substitutes
Value-price gap
Branded vs. generic
Sustainable
industry
profitability
High capital requirements
Economies of scale
Absolute cost advantages
High switching costs
Lack of access to distribution
channels
Product differentiation
Public policy constraints
Intensity of rivalry
Buyer power
Industrial concentration
Pricing tactics
Switching costs
Exit barriers
Cost fixity
Industrial growth rates
Buyer concentration
Overcapacity
Homogeneity of buyers
Potential of integration
Outside alternatives
Supplier power
Unique suppliers
Number of suppliers
Supply shortages or surplus
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Degree of vertical integration
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Goals in the Public Sector and the
Not-For-Profit (NFP) Enterprise
 Public Goods are goods that can be consumed or
used by more than one person at the same time with no
extra cost.
 Instead of profit, NFP organizations may have as their
goals:
1. Maximization of output, subject to a budget
constraint.
2. Maximization of the utility of NFP administrators.
3. Maximization of cash flows.
4. Maximization of the utility of contributors to the NFP
organization.
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• Which goal a NFP manager selects affects
decisions made.
» A food bank manager may maximize the utility of
clients by selecting only "healthy foods"
• Public sector managers are performance
monitored.
» Hospital administrators are rewarded for reducing the
cost per bed over a year. Hence, they become
efficient with respect to costs.
» The "friendliness" of the hospital staff is harder to
measure, so friendliness will tend not be a high priority
of the public sector manager.
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