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Social Function of Profit

The document discusses ten principles of economics for managers: 1) Managers make decisions within the constraints of limited resources for the firm. 2) Decisions involve choosing between alternatives that each have associated costs and benefits. 3) The objective of management is to increase the firm's value, which is measured by expected profits over time. 4) A firm's sales revenue and profits depend on demand for its products and its ability to minimize costs for a given level of output.

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Abhishek Singh
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168 views18 pages

Social Function of Profit

The document discusses ten principles of economics for managers: 1) Managers make decisions within the constraints of limited resources for the firm. 2) Decisions involve choosing between alternatives that each have associated costs and benefits. 3) The objective of management is to increase the firm's value, which is measured by expected profits over time. 4) A firm's sales revenue and profits depend on demand for its products and its ability to minimize costs for a given level of output.

Uploaded by

Abhishek Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Social Function of Profit

• Profit is a signal that guides the allocation of


society’s resources.
• High profits in an industry are a signal that
buyers want more of what the industry
produces.
• Low (or negative) profits in an industry are a
signal that buyers want less of what the
industry produces.

1
Ten Economic Principles for managers
1. Making decisions
2. Decisions are always among alternatives
3. Decision alternatives always have costs and benefit
4. Increase the firm’s value
5. Firm’s value is measured by its expected profit
6. Firm’s sales revenue depends demand for its product
7. The firm must minimize cost for each level of output
8. The firm must develop a strategy consistent with its market
9. Growth depends on rational investment decisions
10. Firms deal rationally and ethically with laws and regulations

2
1. Making decisions
• The role of the managers is to make decisions
– Business firms come in all sizes
– No firm has unlimited resources
– Short-run and long-run decisions
• Managerial Economics: How to make
decisions that make sense for the operation of
the firm

3
2. Decisions are among alternatives
• Choices are always among alternatives
• Example-buying a new computer
• A job can be done by many, but some may be
better at it than others-cost differs

4
3. Decision alternatives have costs and benefits

• Studying OR watching TV
• What we consider when making our decision?
• Benefit: benefit gained from studying –own
knowledge and capabilities
• Cost-cost of giving up watching television
• Choosing to study-additional benefit gained from
study exceeds the additional cost to next best
alternative
• Opportunity cost

5
4. Objective of management is to
increase the firm’s value
• Profit is the difference between TR and TC
• Different types of organizations/ firms
• Problem- Managers attempt to maximize own
interest while shareholders increase own
benefit
• Principle –agent problem Politician and voters

6
5. The firm’s value is measured by its
expected profit
• Example: two companies
• Profits earned in two different periods
• Two different production process
• Which one would be better company
• It can be evaluated based on the excepted
profit
• Present value of the expected future profit
stream
7
6. Firm’s sales revenue depends on
demand for its product
• Price sensitive goods price
uniue and few substitute-less
sensitive
• Less price sensitive goods
price elasticity
• Demand varies of demand

• New goods introduced in the market

8
7. Firm must minimize cost for each
level of output
• TR-TC
• Two factors affect
• Technology of production
• Input prices
• Factors of production
• Different levels of technologies

9
8. Firm must develop a strategy
consistent with it market
• If a company has any sellers- focus on sellers
• Selling identical products –little rivalry
• Differentiated products –strong competition
• Price changes
• Example-airline industry

10
Value of the Firm

The present value of all expected future profits

1 2 n n
t
PV     
(1  r )
1
(1  r ) 2
(1  r ) n
t 1 (1  r )t

n
tTRt  TCt
n
Value of Firm   
t 1 (1  r ) t
t 1 (1  r ) t

11
9. Firm’s growth depends on rational
investment
• Decision to invest in new plant or equipment
or develop a new product
• The process of evaluating new investments of
the firm-capital project analysis
• Capital project-calculating the expected stream
of benefits it will produce for the firm

12
10. Successful firm deal rationally and
ethically with laws and regulations
• Various business laws
• Case of Satyam

13
Frozen Foods and
Opportunity Costs

The growth of the frozen dinner


entrée market in the last 50 years is a
good example of the role of
opportunity costs in our lives.

14
ECONOMICS IN PRACTICE

To Understand Global Affairs

An understanding of economics is essential to an understanding


of global affairs.

iPod and the World


An iPod Has Global Value. Ask the
(Many) Countries That Make It.
The New York Times

15
Theories and Models

Expressing Models in Words, Graphs, and Equations

The most common method of expressing the quantitative


relationship between two variables is graphing that
relationship on a two-dimensional plane.

Sunk Cost

16
Theories and Models

Cautions and Pitfalls

The Post Hoc Fallacy


post hoc, ergo propter hoc Literally, “after this (in time), therefore
because of this.” A common error made in thinking about causation:
If Event A happens before Event B, it is not necessarily true that A
caused B.

The Fallacy of Composition


fallacy of composition The erroneous belief that what is true for a
part is necessarily true for the whole.

17
Economic Policy

Criteria for judging economic outcomes:


1. Efficiency
2. Equity
3. Growth
4. Stability

18

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