Project

Real Life Managerial Problem and Its Solution

Managerial Economics
Sir Dr. Mohammad Afzal
March 30, 2022

Submitted By
Shamail Raza

Master of Business Administration (MBA)

1st Semester
Topic:

Real Life Managerial Problem and Its Solution

Managerial economics plays a momentous role in managerial decision making by

providing optimal solution to management decision problem. Managerial economics uses
economics concepts and quantitative analysis to solve managerial problem. There are many
problems in our daily life which are strongly linked up with economics. Our lives are also
influenced by macro-economic trends such as inflation, interest rates and economic growths. By
having knowledge of managerial economics provides substantial aid to find the solution of a
particular problem.

Managerial
Managerial Problem Economic Concepts
Managerial Optimal Solution of
Solution
Problem arises Economics
Quantitative Analysis the Problem

Inflation

A sustain and persistent rise in general level of prices over a period of time in an
economy is known as inflation. Inflation erodes or gradually decreases the purchasing power and
value of currency or how much of something can be purchased with currency. Inflation usually
enhances investing because it affects the consumer behavior in such a s way that they tend to buy
more assets which are likely to alleviate the negative impact on their personal wealth but it also
has a negative impact as increased spending by consumers means more money enters the money
supply which can drive inflation even higher. To measure purchasing power in economic sense,
the price of a good or service are compared against a price index such as the Consumer Price
Index (CPI).

Following are the goods which are most likely affected by Inflation. Meats, poultry, fish
and eggs are affected at a rate of 13% increases, Fruits and vegetables are affected at a rate of
7.6%, Electricity and Petrol at a rate of 9% increase, Furniture and bedding at 17.1% increase,
Women's dresses at 13.5% increase, Jewelry and watches at 4.2% increase, and rent of primary

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residences at 4.2% increase. Most of the household products which are in high demand are
mostly affected by inflation. Inflation also has a negative effect on individual’s savings.

Managerial Problem

A sustain and persistent rise in general level of prices has affected the purchasing power
of every individual. Inflation and purchasing power have a reciprocal relation or indirect relation.

Inflation Rate
12.3 13 12.2
14 11.5
12 9.2
10
8
6
4
2
0
October, 2021 November, 2021 December, 2021 January, 2022 February, 2022

Inflation Rate

For example:

In December, 2021 the inflation rate increases to 12.3% so on a monthly basis, consumer
prices edged down 0.02 percent and the expense for grocery of December was around Rs.25,000-
30,000.

In January, 2022 the rate rises to 13% and Main upward pressure came from prices of
transport (24.1%); housing & utilities (16.6%), of which electricity costs (56.2%) and cooking
oils (50.3%); furnishings (13%); restaurants & hotels (13%) and food & non-alcoholic beverages
(12.8%). On a monthly basis, consumer prices were up 0.4%, after decreasing 0.02% in the
previous month.

Inflation rate eased to 12.2% in February of 2022 from 13% in the previous month,
pointing to the lowest level since November 2021. Main upward pressure came from prices of
transport (25%); housing & utilities (9%); furnishings (13.4%); restaurants & hotels (14.4% vs
13%) and food & non-alcoholic beverages (14.7%). On a monthly basis, consumer prices were
up 1.2%, following a 0.4% rise in January. Whereas in February there is an increase in grocery
expense of about Rs. 7,000 and rate of savings also has a decline.

The managerial problems arise are:

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  Decreased Purchasing Power
 Increase in expenses
 Fixed Income or Salary (Income/Salary which not rises with the increase in
inflation rate).
 Decline in Savings

Now the question arises that how a housewife or an individual purchases product to get
maximum satisfaction and how can she alleviate the effect of inflation on her savings or reduce
the effect or if it is possible or not.

Economic Concepts

A concept of economics is that society has unlimited wants but depends on scarce
resources. Therefore, decisions are made to maximize satisfaction. So, an individual should buy
in such a way which maximizes the satisfaction and total utility of a given amount of money.

According to cardinal approach in economics utility is measurable and the law of Equi
Marginal utility states that if other things do not change total utility of a given amount of money
is maximum when it is spent on various goods in such a way that marginal utilities are equal.

For instance:

A consumer wants to purchase three commodities sugar, rice & flour

Price Rs.120, 100, 80 per kg

Income to spend on these commodities is Rs.6000/-

Equation:

MU A MU B MU C MU N
= = =... TU = Maximum
PA PB PC PN

Units of Money MUA MUB MUC

1000 24 20 16
2000 20 16 12
3000 16 12 8
4000 12 8 4

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 5000 8 4 2
6000 4 2 0
According to the data mentioned in the table a consumer has Rs.6000 to spend. There are
three commodities and he will spend his money in such a way that marginal utility of all
commodities is equal. So, he/she will spend Rs.3000 on commodity A which was sugar, Rs.2000
on commodity B (rice) and Rs. 1000 on commodity C (flour).

Consumer should use their money in such a way to get maximum utility from that
amount of money. For this purpose, consumer must have knowledge and one should do research
in order to understand and get highest satisfaction. Savings can be in a form of gold, real estates,
returns to reduce the effect of inflation in near future. Being a follower of Islam, interest is
prohibited, so every individual must remember not to invest aur save money in banks which
gives interest in return.

An individual must have a fair amount of knowledge about economy, economics and
other related concepts to be a significant part to enhance the economy and to handle issues like
inflation on individual basis.

Drawback

Many consumers are not aware of such measures or can be said as they don’t search for
maximum satisfaction and to invest their money in assets to reduce the effect of inflation on their
wealth rather, they stagnant their money in lockers which ultimately leads to reduce the
purchasing power of that value of money. Many consumers are not even aware of the term
inflation aur how it could be handled or how to get maximum satisfaction.

Conclusion

At last, we conclude that having knowledge to mitigate the effects of inflation can surely
help an individual in present and in near future and will reduce the effect of inflation on his
personal wealth if he/she takes necessary measures in this regard.

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