ECW2731

Managerial Economics

Semester 2 , 2020
Assignment : Final Exam

1
1. Introduction

Managerial economics involves the management of a company through theories, instruments,

and principles of economics. For successful problem solving and decision making, it is

essentially the assortment of management concepts and economic theory. It is an economic

division that uses economic theories to analyse, conclude, and forecast market situations

(Commerce Mates, 2020).

It is a common understanding that in the field of economic thought and action, there is a

difference amongst theory and practice. In reality, a hypothesis that is technically valid might

not be explicitly true by definition. For example, if there are economies of scale, it seems

theoretically valid that production will be more or less doubled if resources are doubled, and

production will be more or less tripled when resources are tripled. In fact, this hypothetical

inference could not hold (Experts Mind, 2005).

On the other hand, managerial economics lets managers consider whether companies are

influenced by economic factors and defines the economic impact of managerial actions. In

order to build critical methods for managerial decision making, it connects orthodox

economics with decision making. Figure 1 demonstrates this mechanism (SW Learning,

2000).

Managerial economics explores ways to successfully accomplish targets. F or instance, a

small company that is pursuing accelerated expansion to achieve a scale that enables

mainstream media ads to be used efficiently. To help achieve this short-run target efficiently,

strategic economics can be utilised to define pricing and production strategies (SW Learning,

2000).

2
WisdomJobs.com

3
2. Government and Business Approaches to Achieve Objectives Efficiently

A systematic formulation of economic theory and methods to managerial decision making is

provided by managerial economics. The managing of non-business, non-profit organisations,

such as government departments, cooperatives, colleges, hospitals, libraries, and the like is as

important as the management of profit-oriented corporations.

2.1 Business Approaches

In terms of limitations enforced by technology, resource shortages, obligations, rules, and

legislation, management decisions are often rendered. Managers consider whether external

limitations influence their capacity to accomplish corporate objectives in order to make

choices that optimize efficiency (The Nature and Scope of Managerial Economics, 2000).

The supply of critical resources like skilled labour, raw materials, advanced technology, and

warehouse capacity is often restricted to corporations. Managers frequently encounter

restrictions on the volume of accessible investment capital for a specific operation.

Highlighted below are objectives that a firm successfully achieve with the aid of managerial

economics.

• Business Strategy and Simulation

Through predicting potential demands and uncertainty, managerial economics plays an

important role in constructing business policies. By presenting all data using economic

resources and strategies, it aids in the successful decision making of an organisation.

• Evaluate Costs and Manufacturing

Managerial economics aims to decrease organization costs. It calculates the

expenses involved with various business operations and figures out the amount of production

that minimizes costs. Managerial economics encourages corporate owners to guarantee that

there is no waste of money, reducing the marginal cost.

4
 • Implement Pricing Policy

This aims to analyse the best corporate price strategy. The system of pricing influences the

viability and income of the company enterprise and it is therefore important to set the correct

price. The business pricing system and methods for determining company prices are studied

by managerial economics.

• Company Assessment

Managerial economics allows managers to forecast different potential challenges through the

use of different economic instruments and hypotheses. Accurate diagnosis of risks tends to

prevent them by implementing all necessary measures.

• Profit Strategy And Control

Managerial economics helps the organization to schedule and handle its profit. It allows a

reliable calculation of both expenses and profits that helps to generate the profit anticipated.

• Inventory Management

To ensure the consistency of company operations, inventory control is a requirement.

Managerial economics helps in identifying demand, and manufacturing operations are carried

out appropriately. Managers should plan to maintain inventory within the company and make

sure that the right volume of stock is readily accessible.

• Regulates Capital

Managerial economics aids to take all decisions about the capital of the business. It

adequately analyses investment opportunities to guarantee the feasibility of a venture prior to

infusing capital.

5
2.2 Government Approaches

Managerial economics adequately examines the macro climate in which governments help

run the country. It analyses numerous external variables that influence the economy, such as

the state of the economy, government policy and economic conditions (Commerce Mates,

2020).

• Decision-Making

Managerial economics lets policymakers decide successfully. It illustrates how governments

can use different quantitative methods and economic models to devise policies and different

strategic choices.

• Output and Cost Analysis

It helps to predict manufacturing costs and identifies variables that cause cost forecasts to

change. Managerial economics adequately analyses and determines the processes of

production and their costs. It assures that all resources are allocated efficiently to avoid the

basic economic problem, which in turn decreases the operating cost for a country.

• Research and Predicting Demand

Managerial economics helps the state departments to assess demand and predict potential

fluctuations. A detailed demand forecast would assist in planning the necessary

production strategies and policies.

• Capital Management

Capital allocation assessments are one of the government's most demanding and dynamic

activities. Managerial economics serves as the foundation and administration of all

government capital expenditures that entail excessive spending. It thoroughly analyses

investment opportunities to ascertain the feasibility of a project, such as infrastructure, prior

investing in it.

6
3. Relevance of Managerial Economics in Solving Business Problems and

Rational Decision Making

In both profit and non-profit industries, Managerial Economics has implications. For

instance, with insufficient medical personnel, supplies and related services, a manager of a

non-profit hospital aims to offer the finest medical service possible. The manager will set the

optimum distribution of these scarce capital by utilising the methods and principles of

Managerial Economics. Managerial Economics allows managers to materialize at a set of

operational principles that aid in the use of limited human and financial resources efficiently

(EconomicsDefinition.com, 2020). Companies, non-profit organizations and

government institutions are able to fulfil targets effectively by following these principles.

In order to evaluate challenges experienced by the managers of an enterprise, Managerial

Economics follows the theory and strategies of economics and aims to recognize approaches

that support the interests of those entities.

Economic models do not include an already existing solution to market issues

rather economic theories essentially suggest a basis whereby economic choices are shaped by

real economic evidence. The goal of economic analysis in the field of Keynes is not to

provide a system for binding exploitation that provides an unfailing solution, but to provide

an ordered and organized mindset about a specific issue (Experts Mind, 2005).

The purpose of economic analysis is to show a map of fact instead of a perfect image of it. It

is also possible to compare managerial economics with medical science where medical

science expertise seeks to analyse the illness and recommend an effective treatment,

managerial economics helps to evaluate market issues and to make an accurate decision.

7
Judicial constraints, which influence both manufacturing and marketing processes, may also

play a significant role in managerial decisions. Laws specifying minimum pay, health and

safety regulations, emissions standards for waste, specifications for fuel quality, and

reasonable pricing and marketing policies all restrict administrative independence.

Moreover, managers have to consider the economic context in which they function in order to

create effective decision principles. For instance, a supermarket store can sell a highly price-

sensitive commodity such as milk to buyers at an incredibly low mark-up over cost of "1% or

2%", whereas selling less price-sensitive items like non-prescription medications at mark-ups

of "up to 40% over cost".

Furthermore, with regards to the purpose of profit maximization, managerial economics

explains the rationale of this pricing practice. Comparably, managerial economics shows that

import tariffs on vehicles limit the supply of domestically manufactured car equivalents,

which in turn would increase the price of an automobile and create a monopoly for local

automakers' profits. It does not clarify why it is an appropriate macroeconomic policy to

enforce quotas which explains that only the foreseeable economic ramifications of such

behaviour are defined in managerial economics.

8
4. Case Study: The Microsoft Saga

“Managerial economics applies economic theory and methods to business and administrative

decision making” (The Nature and Scope of Managerial Economics, 2000). Like other

philosophies, managerial economics has seen a world of transition. The role of globalization

has been seen in all economic practices, including goods and services, skilled labour, assets

and innovation (Paul, Justin & Kaushal, Leena & V.J, Sebastian., 2015).

In telecommunications, the internet and the World Wide Web has undergone a sudden

transition in technology. The Internet has dramatically altered the market and its spread. The

territorial borders have been abolished and the goods and services are conveniently delivered

to everyone. The elasticity of demand is thereby increased.

Telecommunications and the Internet have had an effect on the capacity for trade, and

businesses utilize it dynamically to improve their development by great strides. It also adds to

the strategic edge of the company (Paul, J., Kaushal, L., & Sebastian, V. J., 2012).

Bill Gates had outperformed in accumulating a fortune in 1992 and was classified by Forbes

magazine as America's wealthiest individual. Bill Gates dropped out of college and wanted to

develop an operating system himself after he understood what he could regarding personal

computers and their use at Harvard. The development of its operating system, MS-DOS or

Microsoft Disk Operating System, was such that IBM decided to use it in its PC line-up. It

was later replaced by Windows and Vista was established ever since.

9
In the corporate world, the company made its presence known with its world class

technology. A profit of over "$200 crores" was registered by the company in 1997. After

IBM and Hewlett - Packard, it ranked "third". ⠀

Gates has shown how much capacity an economy has to reward, with extreme "diligence,

innovation and the ability" to take prompt and measured risks. Thus he has demonstrated the

real nature of the economic system through the use of managerial economics, where an

individual is rewarded for productivity and creativity when producing what the consumer

wants and demands (Paul, Justin & Kaushal, Leena & V.J, Sebastian., 2015).

10
5. Conclusion

Economic theories are inherently simplified since they are advocated on the framework of

economic models, which are built on the simplification of hypotheses. Economists construct

a condensed environment with its limited economic models via which their findings

originate. Since an abstraction from the real world is said to be an economic model, the

proximity of this extraction depends on how practical the model's conclusions are.

It is a common conviction that economic model predictions are in several scenarios,

impractical. The general misconception of economic models is the "ceteris paribus"

presumptions which means "all other things remain constant".

However, this does not imply that it does not have valuable uses for economic modelling and

hypotheses. For instance, microeconomic view emphasizes the interpretation of what a

dynamic ambiguity of dozens of evidence might be by creating simplistic behavioural

simulations that are reasonably close to the real phenomena to better explain it (National

Open University of Nigeria, 2020). The possibility that there is a difference amongst

economic theory and practice should not be deplored. The disparity results from the presence

of a distance between the abstract world of economic theories and the real world.

In conclusion as analysed in the research it can be stated that the divide among economic

theory and real world market strategies can be bridged through managerial economics by

allowing a corporation in studying the business environment, planning its production process,

cost control, setting prices for its product portfolio, providing flexibility in decision making

and managerial economics allows a business to allocate its resourced in the most profitable

and efficient investment (Commerce Mates, 2020) which bridges the gap between economics

in theory and practice as these models and theories allows managers to apply into business

decision making.

Word Count: 1860

11
6. Reference

Abir, O. (2015, December 11). MANAGERIAL ECONOMICS BRIDGE THE GAP

BETWEEN ECONOMIC THEORY ANBUSINESS I D : 2 0 1 5 - 3 - 9 5 - 0 7 0. Slide

Share. Retrieved From: https://www.slideshare.net/hgt2011/managerial-economics-

bridge-the-gap-between-economic-theory-anbusiness-i-d-2-0-1-5-3-9-5-0-7-0

Economicsdefinition.com - Managerial Economics. (2020). Economics Definition. Retrieved

From: https://sites.google.com/site/economicsbasics/managerial-economics

Gap between theory and practice in managerial economics, Managerial Economics. (2005).

Experts Mind. Retrieved From: http://www.expertsmind.com/questions/gap-

between-theory-and-practice-in-managerial-economics-3019166.aspx

Managerial Economics: Importance, Significance, Nature, Scope, and Role. (2020,

September 21). CommerceMates. Retrieved From: https://commercemates.com/role-

and-importance-of-managerial-economics/

Paul, Justin & Kaushal, Leena & V.J, Sebastian. (2015). Chap-1 MANAGERIAL

ECONOMICS Paul, J., Kaushal, L., & Sebastian, V. J. (2012).

Retrieved From: https://www.researchgate.net/publication/282219878_Chap-

1_MANAGERIAL_ECONOMICS_Paul_J_Kaushal_L_Sebastian_V_J_2012

Wisdom Jobs. (2019, December 4). HOW IS MANAGERIAL ECONOMICS USEFUL? -

Managerial Economics. Retrieved From: https://www.wisdomjobs.com/e-

university/managerial-economics-tutorial-307/how-is-managerial-economics-

useful-9984.html

12