Part I (Chapters 1 and 2) examines the nature, scope and methods of managerial economics and the theory of the firm. Chapter 1 is therefore concerned with explaining why managerial economics is important and useful as an area of study, how it relates to other disciplines, what its core areas are, and the methods of analysis which it uses. Chapter 2 examines the basic profit-maximizing model of behaviour, and its underlying assumptions, and then proceeds to relax these assumptions to develop a more complex but realistic model of firms' behaviour. The focus is on the individual and the nature of transactions, with an emphasis on agency theory. These two chapters introduce the framework of parameters and analysis that are developed throughout the remainder of the text.