DISTANCE LEARNING CENTRE

AHMADU BELLO UNIVERSITY, ZARIA

MASTER’S IN BUSINESS ADMINISTRATION

Managerial Economics (BUAD 805)

QUESTION:

(a) Distinguish between Microeconomics, Macroeconomics and Managerial

economics

(b) Briefly explain what you understand by decision making

(c) Briefly explain the Maximax criteria for decision making under
uncertainty

(d) Examine the types of risks faced by a business firm

BY

Name:

MATRIC NO.:

E-TUTOR: DR GARBA ADO

DATE: August 18, 2021

Solution a

Microeconomics deals with the economic interactions of a specific person, a single entity, or a
company of an economy. These interactions, which mainly are buying and selling goods, occur
in markets. It focuses on determining the market prices through demand and supply where the
deciding units are consumers and firms. Therefore, microeconomics is the study of markets. One
of the major goals of microeconomics is to analyze the market and determine the price for goods
and services that best allocates limited resources among the different alternative uses. This study
is especially important for producers as they decide what to manufacture and the appropriate
selling price. Microeconomics assumes businesses are rational and produce goods that
maximizes their profit. If each firm takes the most profitable path, the principles of
microeconomics state that the market’s limited resources will be allocated efficiently. In other
words, microeconomics tries to understand human choices, decisions, and the allocation of
resources by studying decisions made by people and businesses regarding the allocation of
resources, and prices at which they trade goods and services. It considers taxes, regulations, and
government legislation. Microeconomics focuses on supply and demand and other forces that
determine price levels in the economy. It takes a bottom-up approach to analyzing the economy.

Macroeconomics is the study of the performance, structure, behavior, and decision-making of an

economy. Macroeconomics focuses on the national, regional, and global scales. It studies the
behavior of a country and how its policies impact the economy. It analyzes entire industries and
economies, rather than individuals or specific companies, which is why it's a top-down approach.
It tries to answer questions such as, "What should the rate of inflation be?" or "What stimulates
economic growth?" Macroeconomics examines economy-wide phenomena such as gross
domestic product (GDP) and how it is affected by changes in unemployment, national income,
rates of growth and price levels. Macroeconomics analyzes how an increase or decrease in net
exports impacts a nation's capital account, or how gross domestic product (GDP) is impacted by
the unemployment rate. Macroeconomics focuses on aggregates and econometric correlations,
which is why governments and their agencies rely on macroeconomics to formulate economic
and fiscal policy. Its purpose is to maximize national income and provide national economic
growth.
Managerial economics is concerned with the application of business principle and methodologies
to the decision-making process, within the firm or organization under the conditions of
uncertainty. It seeks to establish rules and principles to facilitate the attainment of the desired
economic aim of management. This economic aim relates to costs, revenue and profits and are
important within both business and non –business institutions. The basic objective of managerial
economics is to analyze the economic problems faced by the business. Managerial economics
consists of applying economic principles and concepts toward adjusting with various
uncertainties faced by a business firm.

The differences

s/n Microeconomics Macroeconomics Managerial economics

1 Microeconomics focuses Macroeconomics deals Managerial economics looks
on individuals, and is with economy, combining at what has been done in large
concerned with how and all the units businesses and how changes
why people make can be made to help the
decisions business perform better.
2 Microeconomics is the Macroeconomics deals Managerial economics is a
study of an individual's with economy, combining combination of both
behavior that does not all the units. microeconomics and
have a grain of macroeconomics; for
macroeconomics. instance, it applies demand,
supply or cost through
microeconomics and takes
into account national income
or inflation under
macroeconomics
3 One of the major goals For most The goal of managerial
of microeconomics is to macroeconomists, the economics is to apply
analyze the market and purpose of this discipline economic theories and
determine the price for is to maximize national analytical tools to provide
 goods and services that income and provide choices for a firm. It deals
best allocates limited national economic growth. with different methodologies
resources among the and principles for businesses
different alternative to allocate scarce resources
uses. for decision-making.
4 The science of The most common The most common managerial
microeconomics covers macroeconomic topics of economics topics of study are
a variety of specialized study for national entities financial, organizational,
areas of study including are sustainability, full market-related, and
industrial organization, employment, price environmental issues faced by
labor economics, stability, external balance, corporations.
financial economics, equitable distribution of
public economics, income and wealth, and
political economy, increasing productivity.
health economics, urban
economics, law and
economics, and
economic history.
5 Supply and demand, fiscal policy, monetary From analyzing demands and
statistics, wage policy and exchange rate forecasting future demand to
information, profit, policy are tools used in capital management,
revenue, job loss and macroeconomics. managerial economics
retention are tools used provides help with almost
in microeconomics everything. It also helps
companies in Pricing
Decisions, Policies, and
Practices, cost and production
analysis, and manage their
profits.

Solution b
Decision making is the process of making choices by identifying a decision, gathering
information, and assessing alternative resolutions. By using a step-by-step process, decision-
making helps to make more deliberate, thoughtful decisions by organizing relevant information
and defining alternatives. This approach increases the chances of choosing the most satisfying
alternative possible. Seven brief steps for efficient decision making are:

Step 1: Identify the decision

Here, you clearly define the nature of the decision to be made.

Step 2: Gather relevant information

Relevant information (both internal and external) is gathered before decision is made.

Step 3: Identify the alternatives

All possible and desirable alternatives identified at the point of information gathering is listed in
the step.

Step 4: Weigh the evidence

Evaluate whether the need identified in Step 1 would be met or resolved using each alternative.
And finally place the alternatives in a priority order, based upon your own value system.

Step 5: Choose among alternatives

After weighing all the evidence, the best alternative is selected.

Step 6: Act
Positive action is taken to implement the alternative chosen in Step 5.

Step 7: Review your decision & its consequences

Results of decision are considered and evaluated to see if it has resolved the identified need in
Step 1.
If the decision has not met the identified need, certain steps of the process are repeated to explore
additional alternatives.
Solution c

A decision problem, where a decision-maker is aware of various possible states of nature but has
insufficient information to assign any probabilities of occurrence to them, is termed as decision-
making under uncertainty. A decision under uncertainty is when there are many unknowns and
no possibility of knowing what could occur in the future to alter the outcome of a decision. There
is uncertainty about a situation when it is difficult to predict with complete confidence what the
outcomes of any given actions will be.

Maximax criterion

This criterion, also known as the criterion of optimism, is used when the decision-maker is
optimistic about future. Maximax implies the maximization of maximum payoff. The optimistic
decision-maker locates the maximum payoff for each possible course of action. The maximum of
these payoffs is identified, and the corresponding course of action is selected.

Table 1 Maximax criterion Source: wisdomjobs.com

The optimal course of action in the above example, based on this criterion, is A3.

The Maximax rule: Deals with selecting the best possible outcome for each decision and
choosing the decision with the maximum payoff for all the best outcomes.
Solution d

Businesses face all kinds of risks, some of which can cause serious loss of profits or even
bankruptcy. Below are the main types of risk a business may face:

 Economic risk: Choice of loss due the fact that all possible outcomes and their
probability of occurrence are unknown.

 Uncertainty: When the outcomes of managerial decisions cannot be predicted with

absolute accuracy but all possibilities and their associated
probabilities of occurrence are known.
 Strategic Risk:
A successful business needs a comprehensive, well-thought-out business plan. But
sometimes, the best-laid plans can sometimes come to look very outdated, very quickly.
 Business risk: Chance of loss associated with a given managerial decision.
 Operational Risk: risk due to an unexpected failure in your company’s day-to-day
operations. It could be a technical failure, like a server outage, or it could be caused by
your people or processes.
 Market risk: Chance that a portfolio of investments can lose money due to
volatility in the financial market.
 Inflation risk: A general increase in the price level will undermine the real
economic value of any legal agreement that involves a fixed promise to pay over an
extended period.
 Interest rate risk: The changing interest rates affect the value of any agreement that
involves a fixed promise to pay over a specified period.
 Compliance Risk: Laws change all the time, and there’s always a risk that an
organization will face additional regulations in the future. As businesses expands, it is
important to comply with new rules that didn’t apply before.
 Credit risk: May arise when the other party fails to abide by the contractual
 obligations.
 Liquidity risk: Difficulty of selling corporate assets and investments.
 Derivative risk: Chance that volatile financial derivatives could create losses on
investments by increasing price volatility.
 Cultural risk: Risk may arise due to loss of markets differences due to distinctive social
customs.
 Currency risk: Is the probable loss due to changes in the domestic currency value in
terms of expected foreign currency.
 Government policy risk: Chance of loss because of domestic and foreign government
policies.

References

 Dr. Muhammad Haq (ND) Difference Between Microeconomics & Managerial

Economics
 Charles Potters (2021) Microeconomics vs. Macroeconomics: What's the Difference?
 Yogesh M., Phi L., Newdelhi D., (2005), Managerial Economics, Vrinda Publications (P)
Ltd, Delhi< India. 3rd ed.
 Tata Mcgraw-Hill, New Delhi Moyer &Harris A. J. (2012), Managerial Economics,
retrieved from: www.bookboon.com
 Jaime Golden (ND) Difference Between Managerial Economics & Microeconomics
 Andrew Blackman (2014) The Main Types of Business Risk. Retrieved from:
www.wisdomjobs.com