Sharda University

School of Business Studies

Assignment 1
Economic Analysis for Business Decision (MBA 133)

Singye Wangchuk
MBA 1st year,Section –C
STD Id -2020811362

1
 1. Definition of managerial economic
Managerial economics is a stream of management studies which emphasizes
solving business problems and decision-making by applying the theories and principles of
microeconomics and macroeconomics. It is a specialized stream dealing with the organization’s
internal issues by using various economic theories.

2. Define economic unit

In an economy, production, consumption and exchange are carried out by three basic economic
units: the firm, the household, and the government. The diagram below shows the clear
economic unit

2
 1. Firms
Firms make production decisions. These include what goods to produce, how these goods
are to be produced and what prices to charge. They employ the various factors of
production and they sell the finished goods to the households for consumption and to the
government.
2. Households
The households make consumption decisions and own factors of production. They
provide firms with factor services in production, and buy finished goods from firms for
consumption.
3. Government
The government buys finish products from firms and distribute those goods and services
to household individually or collectively. It also redistributes purchasing power between
the household. The government collects taxes from households.

3. Define economic system

An economic system is a means by which societies or governments organize and distribute

available resources, goods and services across a geographic region or country. Economic systems
regulate the factors of production, including land, capital, labor, and physical resources. An
economic system encompasses many institutions, agencies, entities, decision-making processes,
and patterns of consumption that comprise the economic structure of a given community.

3
Explanation on how firm makes production decision
A product can be defined as a collection of physical, service and symbolic attributes which yield
satisfaction or benefits to user or buyer. A product is a combination of physical attributes like
size and shape and subjective attributes say image or quality. A customer purchase on both
dimension. The product involves several decision for its formation as well as distribution to end
consumer. In the product decision the firms makes four types of decision in order to produce
goods. The each types of decision are described/ explained as follows;

•Product manufacturing process

•Technology to use
•Product quality

•Local Market
•International market
•Multinatinal market
•Global Market

•Width of prodcut
•Depth of product
•Consistency of product

1. Product design Decision

During the initial design of the product, a firm should think of more unique design so that there
are less competitors in the market which will enable profitability. The uniqueness of the product
should be based on the existing technology trend.

2. Production Decision

Before the production, the firm need to ask key question like can we ensure continuity of
production of supply? For this the firm need to make following decision:

a) Product manufacturing process

b) Batch flow line
c) Technology to use
d) Product quality
4
 3. When and where to launch decisions: In this stage the firm should decide on what types
of product to be launch in which market. The firm need to survey and find out which
market to be targeted for the product to be launched;
a) Local products- Seen as only suitable in one single market
b) International products- seen as having extension potential into other markets
c) Multinational products- products adapted to the perceived unique characteristics of
national market
d) Global products – Products designed to meet global segment

4. Product Mix Decision

Product-mix is the total sum of products in the different product lines of a company. It is a group
of similar and consistent products marketed by a company. It also includes dimension of the
product mxi as given below;

a) Width of Product Mix- How many product lines company has

b) Depth of Product – How many products are there in each product line? It is
measured by the sizes, color and models offered within each product line
c) Consistency of Product mix – how closely related the product lines are in end use
d) Inconsistency of Product mix- It means heterogeneity of product lines of a company.
A marketing company producing textiles, cement, chemicals and tires can be termed
a company as inconsistency in product mix

Production decision by using theory of firm

The theory of the firm explain that the firm's primary objective is to maximize profits. During the
maximizing profits, firms consider two constraints: the consumers' demand for their product and
the costs of production.

Let us assume that a firm produces a single good. To produce this goods, the firm must employ
or purchase a number of different factors of production. Its production decision is determined by
how much of each factors of production to employ

Some of the factors of production that the firm needs are available only in fixed quantities. For
example, the size of the firm's factory, its machinery, and other capital equipment cannot be
varied on a day‐to‐day basis. In the long‐run, the firm can adjust the size of its factory and its use
of machinery and equipment, but in the short‐run, the quantities of these factors of production
are considered fixed.

Other factors of production, however, are variable in the short‐run. For example, the number of
workers the firm employs or the quantities of raw materials the firm uses can be varied on a day‐
to‐day basis. A factor of production that can be varied in the short‐run is called a variable factor
of production. A factor of production that cannot be varied in the short‐run is called a fixed
5
factor of production. In the short‐run, a firm can increase its production of goods and services
only by increasing its use of variable factors of production.

Total and marginal product. A firm combines its factors of production in order to produce goods
or output. The total amount of output the firm produces, the firm's total product, depends on the
quantities of factors that the firm purchases or employs. The marginal product of a factor of
production is the change in the firm's total product that results from an increase in that factor by
one unit, holding all other factors constant.

To better understand the concepts of total and marginal product, consider a firm that produces a
certain good using only labor and capital as inputs. Assume that the amount of capital the firm
uses is fixed at 1 unit. When the firm combines its fixed unit of capital with different quantities
of labor, it is able to vary its output or total product. The change in the firm's total product, due to
a 1‐unit increase in labor input, is referred to as the marginal product of labor.

Table provides a simple numerical example. When the firm combines its fixed unit of capital
with one worker, its total product increases from 0 units to 5 units of the good. The marginal
product of the first worker is therefore 5 (5 ‐ 0 = 5). If the firm adds a second worker, its total
product increases to 15; the marginal product of the second worker is therefore 10 (15 ‐ 5 = 10).
Continuing in this manner, it is possible to determine the marginal product of every worker that
the firm hires.

Marginal product of labur and diminishing return

Labour input Capital input Total Product Marginal product

( worker) (No. Product) of labour
0 1 0 0
1 1 5 5
2 1 15 10
3 1 23 8
4 1 27 4
5 1 29 2
6 1 30 1

The law of diminishing returns says that as successive units of a variable factor of production are
combined with fixed factors of production, the marginal product of the variable factor of
production will eventually decline. The law of diminishing returns is illustrated in Table. As
more and more workers are combined with the firm's fixed amount of capital, the marginal
product of labor eventually starts to decline; in Table , diminishing returns “set in” beginning
with the third worker. Intuitively, if the firm's capital is fixed at 1 unit, the production
possibilities of the firm are limited. Adding more and more workers cannot alleviate this
situation and will eventually cause the marginal product of additional workers to fall. Note that
diminishing returns is a short‐run phenomenon that will persist only as long as there are fixed
factors of production; in the long‐run, it will be possible to vary the amount of the fixed factor
capital so as to eliminate the problem of diminishing returns.

6
Graphical representation of the above table

TOTAL PRODUCT CURVE

Q1 TPL

Output

O L Labour

This is total curve for labour. When all other input are held constant, it shows the different levels
obtainable from different unit of labour. The shape of the total product curve is a function of
specialization, teamwork and utilizing the variable input with the fixed inputs. The TP (total
product) curve represents the total amount of output (end result) that an enterprise can
manufacture within a provided amount of labour. As and when the amount of labour changes,
total output changes.

7
References:

1. Nick Wilkinson, Managerial Economic, A problem solving approach, Cambridge

2. Google images
https://www.google.com/search?q=diagram+role+of+managerial+economics&tbm=isch
&ved=2ahUKEwjMg76m-7XtAhU0ELcAHSElDOgQ2-
cCegQIABAA&oq=diagram+of+managerial+econo&gs_lcp=CgNpbWcQARgAMgYIA
BAIEB4yBggAEAgQHjIGCAAQCBAeMgYIABAIEB4yBAgAEBg6BwgjEOoCECc6B
AgjECc6BQgAELEDOgIIADoECAAQQ1D05BVYpMAWYMjLFmgGcAB4BYAB-
QSIAa45kgEKMC41MC4xLjUtMZgBAKABAaoBC2d3cy13aXotaW1nsAEKwAEB&s
client=img&ei=FAfLX8ypOrSg3LUPocqwwA4#imgrc=3pYXNZ47HO1KdM
3. Product decision
https://cruel.org/econthought/essays/product/decision.html
4. Economic decision
http://www.pearsoned.ca/highered/divisions/virtual_tours/jones-
fa/jones_finac_ce_ch02.pdf