Introductions and Goals of the Firm Overview

Work #1:

Article Link:

https://www.911.gov/pdf/OEC_Fact_Sheet_Cyber_Risks_NG911.pdf

Write at least 500 words analyzing a subject you find in the above article related to a threat to confidentiality, integrity, or availability of data. Use an example from the news.

Use at least three sources. Include at least 3 quotes from your sources enclosed in quotation marks and cited in-line by reference to your reference list.  Example: “words you copied” (citation) These quotes should be one full sentence not altered or paraphrased. Cite your sources using APA format. Use the quotes in your paragaphs.

Write in essay format not in bulleted, numbered or other list format.

It is important that you use your own words, that you cite your sources, that you comply with the instructions regarding length of your post. Do not use spinbot or other word replacement software. Proof read your work or have it edited. Find something interesting and/or relevant to your work to write about.

Work #2:

Discussion Board – 4G Model

After watching the required video “Profit’s not always the point” by Harish Manwani and reading the article “Samsung delays launch of Galaxy Fold After Screen Failures” by Sam Kim and Mark Gurman, discuss the 4G Model and the purpose firms must have beyond the products they sale or the service they provide. Pretend you are the executive officer at Samsung responsible for not releasing the Galaxy Fold, what would be your response to shareholders and customers regarding the failed product. Use the economic theory and concepts in chapter one to support your response. Remember the idea is to maximize the wealth of shareholders but also be socially responsible to the community that must sustain your product.

Video Link:

Article Link:

https://www.bloomberg.com/news/articles/2019-04-22/samsung-delays-launch-of-galaxy-fold-phone-after-screen-failures

Managerial Economics Applications, Strategies and Tactics, 14e

James R. McGuigan

R. Charles Moyer

Frederick H. deB. Harris

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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PART I – INTRODUCTION

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Chapter 1 – Introductions and Goals of the Firm Overview

WHAT IS MANAGERIAL ECONOMICS?

THE DECISION-MAKING MODEL

THE ROLE OF PROFITS

OBJECTIVE OF THE FIRM

SEPARATION OF OWNERSHIP AND CONTROL: THE PRINCIPAL-AGENT PROBLEM

IMPLICATIONS OF SHAREHOLDER WEALTH MAXIMIZATION

 

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Figure 1.1 – Nitrous Oxide from Coal-Fired Power Plants, pre Clean Air Act

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Chapter 1 – Introductions and Goals of the Firm What is Managerial Economics? (1 of 1)

Managerial economics enables managers to select strategic direction, allocate efficiently, and respond effectively to tactical issues

Managerial economic decision-making seeks to:

Identify the alternatives,

Select the choice that accomplishes the objective(s) in the most efficient manner,

Taking into account the constraints,

And the likely actions and reactions of rival decision-makers.

 

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Chapter 1 – Introductions and Goals of the Firm The Decision-Making Model (1 of 3)

Making good decisions is key to successful managerial performance, and includes several elements:

Establish the objectives

Identify the problem

Examine potential solutions

Analyze the relative costs and benefits

Analyze the best available alternative under a variety of assumptions (sensitivity analysis)

Implement the decision

 

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Chapter 1 – Introductions and Goals of the Firm The Decision-Making Model (2 of 3)

The Responsibilities of Management

Managers are responsible for many goals

They must proactively solve problems before they become crises

Moral Hazard in Teams

The single most critical trait of effective managers is the ability to motivate teams to perform to their best

To encourage team members to avoid the moral hazards of free riding and shirking of duties;

Without penalties and sanctions, only moral duty induces full effort teamwork

 

 

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Chapter 1 – Introductions and Goals of the Firm The Decision-Making Model (3 of 3)

Managers in a capitalist economy are motivated to monitor teamwork because of their overarching goal to maximize returns to owners of the business:

Economic profits: the difference between total revenue and total economic cost

Includes a “normal” rate of return on the capital contributions of the firm’s partners

 

 

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Figure 1.2 – Payoffs from Team Production with and without a Supervisor

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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What Went Right? ● What Went Wrong?

Saturn Corporation

Different kind of car company in 1991, but permanently closed in 2009

It used no-haggle pricing and designed cars to compete with Asian imports

Sales were above expectations at first because of tiny margin of only $400 per car to GM, so that GM earned only 3% on capital

Saturn customers wanted bigger Saturn cars rather than trade up to Buick, as GM hoped

Sales later slumped in the late 1990s through 2009

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© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Chapter 1 – Introductions and Goals of the Firm The Role of Profits (1 of 1)

Risk-Bearing Theory of Profit

Risk-bearing should lead to higher profits

Temporary Disequilibrium Theory of Profit

Firms may earn a return above or below the long-run normal return level

Monopoly Theory of Profit

A firm which dominates the market can persistently earn above-normal returns

Innovation Theory of Profit

These are the reward for successful innovations

Managerial Efficiency Theory of Profit

Exceptional managerial skills may lead to higher profits

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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What Went Right? ● What Went Wrong?

Eli Lilly, a Pharmaceutical Company

It takes12.3 years on average to get a new drug approved.

Patents on Lilly’s Prozac created monopoly power and profits for a widely used medication for depression

As the patent began to expire, Lilly requested a patent “extension” because of some alterations in Prozac’s formula

But when the patent extension was overturned, generic drug manufactures took 70% of the share of the market for anti-depressants

Lilly missed the chance of finding a replacement in time for its blockbuster Prozac

This is an example of having and losing monopoly power

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© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

Chapter 1 – Introductions and Goals of the Firm Objective of the Firm (1 of 1)

The Shareholder Wealth-Maximization Model

Shareholder wealth is measured by the market value of a firm’s common stock, which is equal to the present value of all expected future cash flows to equity owners discounted at the shareholders’ required rate of return, plus a value for the firm’s embedded real options:

 

 

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Chapter 1 – Introductions and Goals of the Firm Separation of Ownership & Control: Principal-Agent… (1 of 2)

Divergent Objectives and Agency Conflict

Growth results in owners (principals) delegating decision-making authority to professional managers (agents)

Because manager-agents have much less to lose, agents may seek acceptable (not maximum) profit levels, pursuing their own self-interests; Agency Conflict

Agency Problem

Problems arise from inherent unobservability of managerial effort and random disturbances in team production

Separation of ownership (shareholders) and control (management) in large corporations permits managers to pursue goals that are not always in the long-term interests of shareholders

 

 

 

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Comparison slide; see Figure 1.3, next slide

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Figure 1.3 – CEO Pay Trends Reflect Corporate Performance

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Chapter 1 – Introductions and Goals of the Firm Separation of Ownership & Control: Principal-Agent… (2 of 2)

Agency Problem (cont’d)

In attempt to mitigate agency problems, firms incur agency costs:

1. Grants of stock options or restricted stock from Treasury stock so executive compensation aligns the incentives for management with shareholder interests; also, many monitor financial ratios and investment decisions of large debtor companies; strengthens firm’s corporate governance

2. Internal audits and accounting oversight boards to monitor actions of management

3. Bonding expenditures and fraud liability insurance to protect shareholders

4. Complex internal approval processes to limit discretion, but which prevent timely responses to business opportunities

 

 

 

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Chapter 1 – Introductions and Goals of the Firm Implications of Shareholder Wealth Maximization (1 of 4)

Critics of those who seek to align interests of managers with equity owners allege that maximizing shareholder wealth focuses on short-term payoffs, sometimes to detriment of long-term profits

But evidence suggests just the opposite:

Short-term cash flows reflect only a small fraction of the firm’s share price

In general, only about 85% of shareholder value can be explained by even 30 years of cash flows

Managers’ value-maximizing behavior distinguishable from satisficing behavior (hitting their targets)

 

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Chapter 1 – Introductions and Goals of the Firm Implications of Shareholder Wealth Maximization (2 of 4)

Caveats to Maximizing Shareholder Value

Complete Markets – to directly influence a company’s cash flows, forward or futures markets, and spot markets must be available for firm’s inputs, outputs and by-products

No Asymmetric Information – Problems often arise because of asymmetric information; Line managers and employees can misunderstand what senior executives want when they challenge employees to find a thousand different ways to save 1 percent

Known Recontracting Costs – Focusing exclusively on discounted present value of future cash flows requires managers to forecast future recontracting costs for pivotal inputs

 

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Chapter 1 – Introductions and Goals of the Firm Implications of Shareholder Wealth Maximization (3 of 4)

Residual Claimants

Shareholders have only a residual claim on the firm’s net cash flows after all expected contractual returns have been paid

Goals in the Public Sector and Not-for-Profit Enterprises

Profit maximization not appropriate for public sector of NFP firms

Public goods are consumed by more than one person at a time with little or no extra cost; expensive or impossible to exclude those who do not pay

Not-for-Profit Objectives

Maximize: 1) quantity and equality of output subject to break-even budget constraint; 2) outcomes preferred by NFP’s contributors; 3) longevity of NFP’s contributors

 

 

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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Chapter 1 – Introductions and Goals of the Firm Implications of Shareholder Wealth Maximization (4 of 4)

The Efficiency Objective in Not-for-Profit Organizations

Cost-benefit analysis is a resource-allocation model that can be used by public sector and NFP firms to evaluate programs or investments on the basis of the magnitude of the discounted costs and benefits

Because such spending is constrained by a budget ceiling, goals can be any one of these:

1. Maximize benefits for given costs

2. Minimize the costs while achieving a fixed level of benefits

3. Maximize the net benefits (benefits minus costs)

But cost-benefit analysis is only one factor in the final decision

It does not incorporate subjective considerations or less quantifiable attributes such as fairness

 

 

© 2017 Cengage Learning® May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning management system for classroom use.

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