Managerial economics it is the study of how to direct scarce resources in the way that most efficiently attains an administrative goal (Hirschey, 2008, p.33, para.2). A manager is an individual who directs resources to achieve a specified target (Baye & Prince, 2014, p.3, para.1). This description comprises all persons who lead the efforts of others. The manager is in charge of the following: those who delegate responsibilities within the organization such as a family, a firm, or a club; those who procure inputs to be used in the production of services and goods. And the ones who are responsible for making other decisions like checking and determining product price including quality (Baye & Prince, 2014, p.3, para.2).
A manager is responsible for his or her actions as well as the decision and activities of the people or the machinery and the other inputs which are assigned to him or her. Therefore, the decisions on the part of the manager are critical because scarcity means that by making one choice, you forgo the other (Baye & Prince, 2014, p.3, para.3).
The economic decisions encompass the allocation of the scarce resources, and the manager has to allocate resources to meet the manager's goal best. Managerial economics hence is the study on how to allocate scarce resources in the best way possible that most effectively attains an administrative purpose. Managerial economics, therefore, assist the decision makers by using appropriate tools and techniques to come up with the best decisions and take the opportunity of recently emerging trends and organizational behaviors (Baye & Prince, 2014, p.3, para.5).
Having the correct information is the key to making a sound decision, this will assist in resolving to an informed decision which pertains to data collection and processing. In the case of large firms, the legal department will assist in the provision of data concerning the legal ramifications of alternative decisions, and the accounting department will give advice pertaining tax and necessary cost data. Likewise, the marketing department can offer data on the product market characteristics, and the firm's financial analysts can give precise data for substitute means of acquiring financial capital. Eventually, the manager shall integrate the information, analyze it and arrive at a decision (Baye & Prince, 2014, p.3, para.5).
According to (Baye & Prince, 2014, p.4, para.3). there are six existing principles involving effective management that will assist the mangers to achieve well in his or her managerial duties. So as to attain set goals like maximizing profits, the following principles will guide the managers; identifying goals and constraints, recognize the nature and importance of profits, understand incentives, understand markets, recognize the time value of money, and use of marginal analysis.
Identify Goals and Constraints
First and foremost, coming up with sound decisions requires well-defined and elaborate goals since goal achievement demands good decisions (Baye & Prince, 2014, p.4, para.1). If the foods bank goal is to assist the needy, then its choices to distribute food to the people at the rural areas will differ from the ones it would apply to distribute food to the needy in the towns or urban areas. In this incident, the decision maker faces the constraints that upset the ability to attain a goal (Webster, 2003, p.27, para.2).
Constraints are an artifact of scarcity (Hirschey, 2008, p.27, para.1). Each firm unit should have unique goals; the marketing department may use their resources to capitalize on market sales or the market share, whereas those in charge of finance may emphasize on earning development or risk reduction strategies.
Regrettably, constraints make it hard for the managers to attain set goals like maximizing profit or growing a market share (Baye & Prince, 2014, p.5, para.2). Constraints are things like the available technology and the production input prices. The goal of maximizing profit needs the manager to select the optimum price to charge for the product, quantity to be produced, technology to be adopted, amount of input to be injected, how to respond to the decisions made by the competitors and many more.
Recognizing the Nature and Importance of Profits
Generally, the goal of any firm is to maximize the firm's value or the profits (Baye & Prince, 2014, pg. 5, para 3). What are the nature and importance of profits in a free market economy?
Economic versus accounting profits- accounting profits is the sum of money received from sales minus the total cost of producing goods or services (Baye & Prince, 2014, pg. 5, para 4). Accounting profits are indicated on the firm's income statement and are routinely conveyed to the manager by the firms accounting department. For effective management, the manager has to continuously find data from additional sources to identify and quantify implicit costs. For large firms, the manager can source inside the company that is from the firm's finance, marketing, and legal departments to acquire data without implicit costs and at times the manager needs to gather data on their own (Baye & Prince, 2014, pg. 5, para 6).
In a firm the incentives influence utilization of the resources and how hard the workers perform (Webster, 2003, p.24, para.2). It is important to know the role of incentives in an organization to succeed as a manager, and how to incorporate incentives to prompt maximal effort from those working under you (Baye & Prince, 2014, pg. 11, para 1).
To construct incentives a manager should be able to distinguish between the world, or the place of business the way he or she wishes to be (Baye & Prince, 2014, p.11, para.2). Difficulties arise as a result of not fully comprehending the significance of the starring role of incentives in guiding the decisions of others (Hirschey, 2008, p.24, para.2).
Therefore, the management should come up with incentives plans in the form of bonuses, which are in direct proportionality to the profits accrued by the firm (Baye & Prince, 2014, p.11, para.3). Furthermore, some persons get commission based on the income they generate for the owner of the firm. If they put in more effort, they get more pay and vice versa.
It is very crucial to be aware that there are two ways to every transaction in the market. There is a corresponding seller for every buyer. The result of a market process hence relies on the relative power of the buyers and sellers in a marketplace (Baye & Prince, 2014, p.12, para.5). Three sources of competition govern the bargaining power of the consumers and producers in the place of a market. These are: consumer versus producer rivalry, consumer versus consumer rivalry and producer versus producer rivalry (Baye & Prince, 2014, p.13, para.1).
Consumer-producer rivalry takes place due to the competing interests of consumers and producers. Consumers try to negotiate or find low prices, while producers try to sell at high rates (Baye & Prince, 2014, p.13, para.2). In brief, the consumers endeavor to "rip off' producers, and producers endeavor to "rip off' the consumers.
This lowers the negotiating power of consumers in the marketplace. It emerges due to the economic policy of scarcity. When the low amount of goods is accessible, consumers will compete with each other to acquire the present goods (Baye & Prince, 2014, p.13, para.3).
This one only exists when some sellers of a given product contest in a marketplace. Due to the scarcity of the buyers, the producers contest with each other for that opportunity so service a customer. The firms which usually provide high-quality products at the lowest prices get the right to attend to the customers (Baye & Prince, 2014, p.13, para.4).
Recognize The Time Value of Money
The timing of several decisions is a duration when the cost of a project is conceived and the time when that project benefit is earned (Baye & Prince, 2014, p.14, para.2). It is paramount to recognize that a single dollar today is worth more than a single dollar in the future reason being the opportunity cost of getting a single dollar in the future is the forgone interest that could be earned is a single dollar received today (Baye & Prince, 2014, p.14, para.2). Opportunity cost mirrors the time value of money. The manager should understand the present value to account for the timing of the receipts and expenditure correctly.
Present Value Analysis
Present value (PV) is the amount that would have to be invested now at a prevailing interest rate to make a given future value. The present value (PV) of future value (FV) received in n years in the future is (The general formula) PV=FV/(1+i) n. (Baye & Prince, 2014, p.14, para.3).
Using Marginal Analysis
Marginal analysis is one of the greatest essential managerial tools; it enables the managers to come up with an optimal decision by relating the marginal cost with marginal benefits (Baye & Prince, 2014, p.19, para.2). Optimal managerial choices encompass relating the marginal benefits of a decision with the marginal costs.
Managerial economics is a science as well as the art in which study of economic, logic and tools of economic analysis are applied in the business decision making. Managerial economics is a tool making and a tool involving discipline which entails applying economic principles and concepts to cope up with several difficulties encountered by a business firm (Hirschey, 2008, p.19, para.2). The managerial economists serve well their firms using the skills and knowledge of economic analysis and other tools and techniques which they are armed with to overcome difficulties. Therefore, economists have customarily known that the goal of a firm is to capitalize on profit.
Baye, Michael, Prince, Jeff. (2014.0). Managerial Economics & Business Strategy, 8th Edition. [VitalSource]. Retrieved from https://bookshelf.vitalsource.com/#/books/0077802616/
Hirschey, M. (2009). Fundamentals of managerial economics. Mason, OH: South-Western/Cengage Learning.
Clayton, G. E., Giesbrecht, M. G., & Guo, F. (2010). A guide to everyday economic statistics. New York: McGraw-Hill Higher Education.
Mithani, D. M. (2013). Managerial economics: Theory and applications. Mumbai: Himalaya Publishing House.
Webster, T. J. (2003). Managerial economics: theory and practice. Elsevier. Amsterdam; Boston: Academic Press.
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