Journal Chapter One- Managerial Economics
Summary and Perspectives
Chapter one offers an introduction into managerial economics and introduces tools that managers can use when making decisions, such as using economic method versus accounting method and Porter’s Five Forces to examine profits. It also shows how goals, constraints, incentives, market rivalry, present value analysis and marginal analysis affect economic decisions managers have to make. The difference between the economic and accounting view of profits and Porter’s Five Forces were the most interesting to me.
Accounting’s view of profits is what most people think of when they hear the word “profit”. It is simply the total amount of money generated from sales minus the dollar cost that goes into producing these goods or services. Economic profits go further by not only taking into account the explicit cost, but also factoring the implicit cost of giving up the best alternative use of the resource, or opportunity cost. This is important to me because as I pursue my education, I incur opportunity cost along the way. I have turned down job offers which would have conflicted with class scheduling, I sacrifice time I could be spending with my family or just having fun to study or attend class, and I am using funds that I could put towards retirement or a big screen TV. Understanding choices involve a sacrifice of alternatives is an important skill for managers.
Porter’s Five Forces provide a framework to build strategies off of to earn and sustain profits. Understanding the ability of new competitors to enter into your market lets managers plan to build up a loyal customer base, raise cost of consumers switching to new entrants, or to aggressively fight new comers. Understanding industry concentration and rivals helps managers plan strategies involving prices, quantities, capacity, quality, and service. Understanding how power is spread through your supply chain from input suppliers down...
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