ECON Managerial Accounting

8/11/2019 ECON Managerial Accounting

1/33

McGraw-Hill/Irwin Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.

CHAPTER 1

The Fundamentals of

Managerial Economics


2/33

Introduction The manager

Economics

Managerial economics defined

Economics of Effective Management Identifying goals and constraints

Recognize the nature and importance of profits

Understand incentives

Understand markets

Recognize the time value of money

Use marginal analysis

Learning managerial economics

1-2

Chapter Overview

Chapter One


3/33

Introduction

Chapter 1 focuses on defining managerialeconomics, and illustrating how it is a valuabletool for analyzing many business situations.

This chapter provides an overview of managerial

economics. How do accounting profits and economic profits

differ?

Why is the difference important?

How do managers account for time gaps betweencosts and revenues?

What guiding principle can managers use to maximizeprofits?

1-3

Chapter Overview


4/33


5/33

Economics

The science of making decisions in thepresence of scarce resources.

Resources are anything used to produce

a good or service, or achieve a goal.Decisions are important because scarcity

implies trade-offs.

1-5

Introduction


6/33

The study of how to direct scarce resources in theway that most efficiently achieves a managerial

goal.

Should a firm purchase componentslike disk

drives and chipsfrom other manufacturers orproduce them within the firm?

Should the firm specialize in making one type of

computer or produce several different types? How many computers should the firm produce,

and at what price should you sell them?

1-6

Introduction

Managerial Economics Defined


7/33

Basic principles comprising effectivemanagement:

Identify goals and constraints.

Recognize the nature and importance ofprofits.

Understand incentives.

Understand markets.

Recognize the time value of money.

Use marginal analysis.

1-7

Economics of Effective Management



8/33


9/33

The Role of Profits

Profit Principle:

Profits are a signal to resource holders

where resources are most highlyvalued by society.

1-9



10/331-10

Power of

Input SuppliersSupplier Concentration

Price/Productivity ofAlternative Inputs

Relationship-Specific

Investments

Supplier Switching Costs

Government Restraints

Power of

Buyers

Buyer ConcentrationPrice/Value of Substitute

Products or Services

Relationship-Specific

Investments

Customer Switching Costs


Entry

Substitutes & ComplementsIndustry Rivalry

Concentration

Price, Quantity, Quality,

or Service Competition

Degree of Differentiation

Level, Growth,and Sustainability

of Industry Profits

Entry Costs

Speed of Adjustment

Sunk Costs

Economies of Scale

Network Effects

Reputation

Switching Costs


Price/Value of Surrogate Products

or Services

Price/Value of Complementary

Products or Services

Network Effects

Government

Restraints

Switching Costs

Timing of Decisions

Information

Government

Restraints


Five Forces and Industry Profitability


11/33


12/33

Two sides to every market transaction:

Buyer.

Seller.

Bargaining position of consumers and producers

is limited by three rivalries in economic

transactions:

Consumer-producer rivalry.

Consumer-consumer rivalry.

Producer-producer rivalry.

Government and the market. 1-12


Understand Markets


13/33

The Time Value of Money

Often a gap exists between the timewhen costs are borne and benefits

received.

Managers can usepresent valueanalysisto properly account for the

timing of receipts and expenditures.

1-13



14/33

Present Value Analysis 1

Present value of a singlefuture value The amount that would have to be invested

today at the prevailing interest rate to

generate the given future value:

1 + Present value reflects the difference between

thefuture value and the opportunity cost of

waiting:

1-14



15/33

Present Value Analysis II

Present value of a stream of future values

1 + +

1 + + +

1 +

or,

1 +

=

1-15



16/33

Consider a project that returns the following

income stream:

Year 1, $10,000; Year 2, $50,000; and Year 3,

$100,000.

At an annual interest rate of 3 percent, what

is the present value of this income stream?

$10,0001+0.03+ $50,0001+0.03+ $100,0001+0.03 $148,352.70

1-16


The Time Value of Money in Action


17/33

Net Present Value

The present value of the income streamgenerated by a project minus the

current cost of the project:

1 + +

1 + + +

1 +

1-17



18/33


19/33

Profit maximization principle

Maximizing profits means maximizing

the value of the firm, which is thepresent value of current and future

profits.

1-19


Present Value and Profit Maximization


20/33


21/33

When dividends are immediately paid out ofcurrent profits, the present value of the firm is

(at ex-dividend date):

1 +

1-21


Present Value and Estimating Values of Firms II


22/33

Short-term and long-term profits principle

If the growth rate in profits is less than

the interest rate and both are constant,maximizing current (short-term) profits

is the same as maximizing long-term

profits.

1-22


Short-Term versus Long-term Profits

f ff


23/33

Given a control variable, , of amanagerial objective, denote thetotal benefit as .total cost as .

Managers objective is to maximize net

benefits:

1-23


Marginal Analysis


24/33

E i f Eff i M


25/33

Marginal principle

To maximize net benefits, the manager

should increase the managerial control

variable up to the point where marginal

benefits equal marginal costs. This level of

the managerial control variable corresponds

to the level at which marginal net benefits

are zero; nothing more can be gained byfurther changes in that variable.

1-25


Marginal Analysis Principle I

E i f Eff ti M t


26/33

Marginal Principle II

Marginal principle (calculus alternative)

Slope of a continuous function is the

derivative /marginal value of that function:

1-26


E i f Eff ti M t


27/33

Marginal Analysis In Action

It is estimated that the benefit and cost

structure of a firm is: 250 4

Find the and functions. 250 8

2 What value of makes zero?250 8 2 25

1-27


E i f Eff ti M t


28/33

1-28

Quantity(Control Variable)

Total benefits

Total costs

0

Maximum total benefits

Maximum net

benefits


Determining the Optimal Level of a Control Variable



29/33

1-29


Net benefits

0

Maximum

net benefits

Slope =()

0


Determining the Optimal Level of a Control Variable II



30/33

1-30


Marginal

benefits, costsand net benefits

0

Maximum net

benefits


Determining the Optimal Level of a Control Variable III



31/33

Incremental revenues

The additional revenues that stem from a yes-or-

no decision.

Incremental costs

The additional costs that stem from a yes-or-no

decision.

Thumbs up decision

> . Thumbs down decision

< .

1-31


Incremental Decisions

Learning Managerial Economics


32/33


Practice, practice, practice Learn terminology

Break down complex issues into

manageable components.

Helps economics practitioners

communicate efficiently.

1-32


Conclusion


33/33

Conclusion

Make sure you include all costs andbenefits when making decisions

(opportunity costs).

When decisions span time, make sure youare comparing apples to apples (present

value analysis).

Optimal economic decisions are made atthe margin (marginal analysis).

Conclusion

Documents

ECON Managerial Accounting