Assessment: Essay

1. The Importance of Managerial Economics in Business

2. Criticisms of Assumption on Economics
3. Choose one economist whose economic ideas are acceptable to you. Cite your
reasons why you choose this economist.

The Importance of Managerial Economics in Business

The Managerial economics is defined as the combination of economic

theory with the practice of business so that the forward planning and decision
making could be facilitate by the management of the organization. It has the huge
capacity to serve various purposes that can be useful for managers for decision
making by exhibiting some kind of relation with the internal environment. It mainly
focuses on the economic theory development of the firm or an organization by
enabling the process of decision making in terms of sales and profits. It also
allows taking decisions about appropriate productions and inventory policies that
could be served for the future purposes. It helps in making successful forecast by
defining various objectives that could be help in reducing the risk of the business
organization. It basically deals on the amount of available cash and its investment
process in relation with the choice of both projects and processes that could make
economic feasibility possible with various lines of production.

The Managerial economics bridges the gap between economics in theory and
economics in practice. It assists the managers in logically solving business problems
and rational decision making. The key function of managerial economics is efficient
decision making and chooses the most suitable action out of two or more alternatives. It
monitors and ensures that all scarce resources like labor, capital, land, etc. are properly
utilized to derive better results. Managerial economics properly analyze the external
environment within which the business operates. These factors influence the working of
the business and therefore should be considered while taking any decisions and
framing policies. Managerial economic studies all factors like economic scenario,
government policies, price trends, national income growth, etc. Managerial economics
brings coordination and flexibility in all operations of the business. It supports effective
decision making by providing all relevant data using economic theories and tools. The
objective of any business organization is to earn revenue and for this as a manager, he
or she should understand all these concepts clearly so that they can apply them in the
practical field and get positive results.

Criticisms of Assumption on Economics

It is important to remember that neo-classical economics employs three basic

assumptions: people have rational preferences among outcomes that can be identified
and associated with a value, individuals maximize utility and firms maximize profit, and
people act independently on the basis of full and relevant information. This can’t be
denying that the stated assumptions have their own criticism. But we have to
understand first that an assumption allows an economist to break down a complex
process in order to develop a theory and realm of understanding. Later, the theory can
be applied to more complex scenarios for additional study.

As a field, economics deals with complex processes and studies substantial

amounts of information. Economists use assumptions in order to simplify economic
processes so that it is easier to understand. Simplifying assumptions are used to gain a
better understanding about economic issues with regards to the world and human
behavior. Critics have stated that assumptions cause economists to rely on unrealistic,
unverifiable, and highly simplified information that in some cases simplifies the proofs of
desired conclusions. Examples of such assumptions include perfect information, profit
maximization, and rational choices. Economists use the simplified assumptions to
understand complex events, but criticism increases when they base theories off the
assumptions because assumptions do not always hold true. Although simplifying can
lead to a better understanding of complex phenomena, critics explain that the simplified,
unrealistic assumptions cannot be applied to complex, real world situations. In classical
economics, there's no need for government involvement. So, for example, there
wouldn't have been any money allocated to bank bailouts during the 2008 financial
crisis and any simulative measures in the Great Recession that followed. Many
economists would argue that the market wasn't acting efficiently, and if the government
hadn't intervened, more banks and businesses would have failed, leading to higher
unemployment. The assumption in neoclassical economics that all participants behave
rationally is criticized by some economists. Critics argue that there are myriad of factors
that impact a consumer and business that might make their choices or decisions
irrational. Market corrections and bubbles, as well as income inequality, are all the result
of choices made by participants that some economists would argue are irrational.
Indeed, We need to rethink many of our assumptions and ask harder questions about
what promotes human flourishing. It’s more than a well-functioning economy.

Adam Smith

Adam Smith was an 18th-century Scottish economist, philosopher, and author,

and is considered the father of modern economics. The ideas of Smith that makes me
feel interested are the importance of free markets, assembly-line production methods,
and gross domestic product (GDP)–formed the basis for theories of classical
economics.

The philosophy of free markets emphasizes minimizing the role of government

intervention and taxation in the free markets. The free market is an economic system
based on supply and demand with little or no government control. It is a summary
description of all voluntary exchanges that take place in a given economic environment.
Free markets are characterized by a spontaneous and decentralized order of
arrangements through which individuals make economic decisions. The term “free
market” is sometimes used as a synonym for laissez-faire capitalism. When most
people discuss the “free market,” they mean an economy with unobstructed competition
and only private transactions between buyers and sellers. No modern country operates
with completely uninhibited free markets. That said, the freest markets tend to coincide
with countries that value private property, capitalism, and individual rights. This makes
sense since political systems that shy away from regulations or subsidies for individual
behavior necessarily interfere less with voluntary economic transactions. Additionally,
free markets are more likely to grow and thrive in a system where property rights are
well protected and capitalists have an incentive to pursue profits.

An assembly line is a production process that divides labor by breaking up the

manufacture of a product into steps that are completed in a pre-defined sequence.
Assembly lines are able to reduce labor costs because unskilled workers could be
easily trained to perform specific tasks. Rather than hire a skilled craftsman to put
together an entire piece of furniture or vehicle engine, companies are able to hire a
worker to only add a leg to a stool or bolt to a machine. The assembly line drastically
changed the way goods were manufactured. Prior to its introduction, workers would
assemble a product or a large part of it in place, often with one worker completing all
tasks associated with product creation. Assembly lines, on the other hand, have
workers (or machines) complete a specific task on the product as it continues along the
production line rather than complete a series of tasks. This increases efficiency by
maximizing the amount a worker could produce relative to the cost of labor. The
assembly line had a great impact on society on many different levels. It increased
production output, which saved companies time and money. This impacted their bottom
lines, leading to higher profits. And since earlier versions of the assembly line allowed
workers to remain in place, they were no longer required to move or haul heavy items
from one place to the next to complete production. But the assembly line has cut out the
need for skilled labor since modern versions typically require individuals with fewer skills
or no labor at all.

Gross domestic product (GDP) is the total monetary or market value of all the
finished goods and services produced within a country’s borders in a specific time
period. As a broad measure of overall domestic production, it functions as a
comprehensive scorecard of a given country’s economic health. The calculation of a
country’s GDP encompasses all private and public consumption, government outlays,
investments, additions to private inventories, paid-in construction costs, and the
foreign balance of trade. The GDP of a country tends to increase when the total value of
goods and services that domestic producers sell to foreign countries exceeds the total
value of foreign goods and services that domestic consumers buy. When this situation
occurs, a country is said to have a trade surplus. If the opposite situation occurs if the
amount that domestic consumers spend on foreign products is greater than the total
sum of what domestic producers are able to sell to foreign consumers it is called a trade
deficit. In this situation, the GDP of a country tends to decrease. Gross domestic
product (GDP) is one of the most common indicators used to track the health of a
nation's economy. The calculation of a country's GDP takes into consideration a number
of different factors about that country's economy, including its consumption and
investment. GDP is perhaps the most closely watched and important economic indicator
for both economists and investors alike because it is a representation of the total dollar
value of all goods and services produced by an economy over a specific time period. As
a measurement, it is often described as being a calculation of the total size of an
economy.

Those are the reasons why I love the economic ideas of Adam Smith.