Module 1 Wed Bsa Core 1
Module 1 Wed Bsa Core 1
BSA CORE 1
MANAGERIAL ECONOMICS
MODULE 1
(Wednesday)
Private decisions
The most general theory of the firm states that management’s primary goal is to
maximize the value of the firm.
o The firm’s value is defined as the present value of its expected future
profits.
o Thus, in making any decision, the manager must attempt to predict its
impact on future profit flows and determine whether, indeed, it will add to
the value of the firm.
2. Managers may lack the information (or fail to carry out the
analysis) necessary for value-maximizing decisions.
Samuelson, Willian F. & Marks, Stephen G. 2012. Managerial Economics, 7th Edition. John Wiley and
Sons, Inc.
2
o Second model posits that the firm attempts to maximize total sales subject
to achieving an acceptable level of profit.
Total dollar sales are a visible benchmark of managerial success.
For instance, the business press puts particular emphasis on
the firm’s market share.
In addition, a variety of studies show a close link between executive
compensation and company sales.
Thus, top management’s self-interest may lie as much in
sales maximization as in value maximization.
Samuelson, Willian F. & Marks, Stephen G. 2012. Managerial Economics, 7th Edition. John Wiley and
Sons, Inc.
3
Public decisions
How do we weight these benefits and costs to make a decision that is best for
society as a whole?
o Benefit-cost analysis
Samuelson, Willian F. & Marks, Stephen G. 2012. Managerial Economics, 7th Edition. John Wiley and
Sons, Inc.
4
Summary
1. Decision making lies at the heart of most important problems managers face.
2. Managerial economics applies the principles of economics to analyze business
and government decisions. The prescription for sound managerial decisions
involves six steps:
a. Define the problem.
b. Determine the objective.
c. Explore the alternatives.
d. Predict the consequences.
e. Make a choice.
f. Perform sensitivity analysis.
3. This framework is flexible. The degree to which a decision is analyzed is itself a
choice to be made by the manager.
4. Experience, judgment, common sense, intuition, and rules of thumb all make
potential contributions to the decision-making process. However,none of these
can take the place of a sound analysis.
Samuelson, Willian F. & Marks, Stephen G. 2012. Managerial Economics, 7th Edition. John Wiley and
Sons, Inc.