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The six dimensions of the economics of effective management, which are to help business managers to make managerial decisions that will help them achieve their goal of profit maximization, will be discussed.
This will help in understanding why managerial economics studies are important in removing constraints that can prevent a manager from attaining his goal of maximizing the goal of a firm. These include understanding the five forces framework and industry profitability, which are important to the survival of a firm in an industry and three kinds of rivalry that needs to be managed properly for firms to continue to maintain in the industry.
Baye and J. The responsibility of a manager is for his or her actions, as well for individuals and inputs which may include machines under his supervision, which may range from small organization like household or as large as multinational corporation. However, the essence of a manager is to coordinate, and direct the resources within his disposal monitor and coordinates the behavior of individuals within with the view of achieving the desired goals of the organization, in business to maximize the profit of the firm Prince, The study of managerial economics constitutes economics theories and analytical tools that are widely used for business decision making.
Decisions are made because resources are scarce; individuals have to choose on how best to utilize the scarce resources to maximize the profit of a firm. If resources are not scarce, decisions are not necessary, because all is well to achieve the desired aim. However, allocating scarce resources like time to attend an important meeting for reorganization that can change a firm for the best, means forgoing other activities in the firm.
Dwivedi, described managerial economics as a science that consist logic, tools, and techniques of analyzing economic phenomena as well as evaluating economic options, optimization techniques and economics theories. Jhingan and J. Stephen, define managerial economics as the application of economic theory to the problem of management. T Prince states that managerial economics is the study of how to direct scarce resources to achieve managerial goal efficiently.
It is a social science discipline, which combines the economics theory, concepts, and known business practices for managers to make decisions easy, usually for managers that are planning for the future of an organization. This is so because it assist managers to make decisions on various aspects that may become an obstacle to the organization.
Managers can break down complex problems requiring decisions into series of solutions where the theory of firm, marginal benefits, and cost analysis are key that entails providing the best mix of scarce resources to for profit maximization What is Economics, n. For managers to make key and sound decisions, the must have the needed information from various sources inform of data and process it.
Such information must come from all sectors of a firm, legal team to provide data about legal implications, accounting unit to provide data on cost, and tax advice, marketing team on the market situation about the product or service, financial analysts to provide insight on the best option of capital to make decision by the management. According to M. Prince, there are six principles that comprise effective management that will guide managers on how to perform the managerial function which depends on his or her underlying goals in this case for business, i.
In pursuit of their goals while making decisions, they face constraints that may affect their ability to achieve the goal Dwivedi, The students constraints to get an a may be due to lack of sufficient time to study, and the charity may have a budget constraint to meet the needs of the neediest, therefore, constraints of achieving goals are born out of scarcity.
Marketing unit - sales targets, accounting unit - to reduce cost, finance unit - to reduce risk, or increase earnings growth. Managers are faced with multiple constraints like available technology to use, the price of inputs to use for production to maximize profits, and other constraints, which require decisions such as the price to charge for a product, and how to react to decisions made by competitors, and so many other decisions which require economic theories to apply to arrive at the right mix to achieve the goal of the firm.
There are two types of profits that concern this course, the accounting profits and the economic profits. Opportunity cost involves two items, explicit cost of a resource added to the implicit cost of giving up its best alternative use Prince, According to Baye and Prince , explicit cost is the dollar value of cost or accounting cost, while implicit cost is very hard to measure, they are often overlooked, but effective managers continually seek data to identify and quantify it.
Therefore, the implicit cost is those inputs made that are not included in the accounting books but are part of the success of the business.
When accounting the profits of the business, the cost of the office accommodation will not show in the accounting books. This course is aim at identifying and quantifying such cost to arrive at economic profits rather than accounting profits.
In business, there certain misconceptions about the goal of maximizing the profits by a certain segment of the society of being self-centered, which they feel as selfish. When firms pursue their self-interest of maximizing profits, they ultimately meet the needs of the society by providing them with the goods and services they so desire. If a firm produces an item that the society does not appreciate, they will not patronize the product, which means the firm will incur a loss.
Thus, the profits of firms signal where society will allocate their scarce resources for their satisfaction. When companies in a particular line of business earn economic profits, other businesses outside the industry will recognize that they are giving up profit in that line of business by continuing to stay in other line of business.
The economic profits earn by the businesses in the industry will induce new firms to enter the market where profits are available, as more firms enter the industry, the price of the product will drop, and the economic profits will decline.
If a manager identifies a strategy that yield a windfall of profit to shareholders at a point in time, the sustainability of such windfall shall not be guaranteed over a long period, he or she must note with profits are signal where existing, and potential competitors will do their best to get a share of it. These are the main issues that the study of managerial economics seek to address to interrelate forces and decisions that influence a variety of business strategies design to enhance your prospects of earning and sustaining profits.
Prince provide a conceptual framework for thinking about some of the factors that impact industry profitability, which were first by Michael Porter, as five forces that impact the sustainability of industry profits as; entry, power of input suppliers, power of buyers, industry rivalry, and substitutes and complements Porter, Entry cost, speed of adjustment, sunk costs, economies of scale, network effects, reputation, switching costs, and government restraints are economic factors that may affect the ability of entrants to erode the existing industry profits.
Further studies in the course will highlight more on the difficulty of new entrants to erode the profit of an industry. The power of input suppliers is key to the framework of industry profitability. When suppliers have the power to negotiate favorable terms for their inputs to firms, profits tend to go low, but when inputs are standardized suppliers power tends to be low, in some cases, alternative markets for suppliers tend to favour industries with alternative inputs, but in many countries governments usually put price ceilings and other controls for inputs which limits suppliers to expropriate profits from firms in the industries Prince, This course will dwell more on how best to understand the power of suppliers and provide industries with economic tools to handle many of their advances to take away profits.
Like input suppliers, the buyers have negotiating powers to make it favorable to their side, which will lower the profit of the firms. Buyer power to negotiate favorably is low where the cost to customer to switch to other products is high, but government regulations such as price floors and price ceilings can also influence the ability of the buyers to obtain more favorable terms. The intensity of rivalry in an industry may affect the sustainability of industry profits Prince, If the rivalry is less intense, sustainability of profit in an industry will be higher.
Factors to be considered under rivalry includes; rivalry concentration, price, quality, quantity, service competition, the degree of differentiation between products, switching cost, the timing of decisions information, and government restraints.
To understand incentives, profits signal holders of resources when to enter, and exit an industry, because changes in profit provides incentives to resource holders to alter their use of resources, because it affects how resources are used and how hard workers work Prince, For a manager to succeed, he or she must make clear role and construct incentives to induce maximal effort from those he manage.
The manager must distinguish between the world, and a business place to construct incentives within a firm Prince, The thrust is to provide a manager with a broad array of skills that enable him to make economic decisions and structure appropriate incentives within the organization.
In both microeconomics and managerial economics, markets have two sides to every transaction, the seller of a good and the buyer of the same good, where the outcome of the process depends on the bargaining power of the buyer and seller in the marketplace that is limited to three kinds of rivalry that exist in economic transaction; consumer-producer rivalry, consumer-consumer rivalry, and producer-producer rivalry Prince, The consumer-producer rivalry takes two dimensions where the consumer engages in getting a low price for the product while the producer attempt to get a higher price for his commodity.
These two forces provide a check and balance that is natural in the market process even if the producer is enjoying a monopoly of the product Prince, Consumers compete with one another to consume the product, those that are willing to pay the higher price because of the scarcity of the goods, outbid other consumers for the right to consume the product, and is a rivalry that exist even in markets with a single commodity a good example is contracted bidding.
Producer-producer rivalry is multiple sellers of same product compete in a marketplace Prince, When consumers are scarce, producers of a commodity or services compete to gain the confidence consumers available. The producers that issue the products with the best quality at a price that is lower than other producers can earn the right to serve customers Prince, An example if restaurant selling food on the same street or located nearby has to offer best quality food, with the good sanitary condition, and at a price lower than others to earn the consumers.
Another important aspect that determine the price of goods and services is the influence of consumers to induce the government to intervene on their behalf using regulatory agencies to set prices within an affordable limit Prince, An example in Nigeria is when DSTV, a cable TV service provider decides to increase the price of their services, consumers influence government to ask the firm to maintain the existing price Stephen, This is one-way prices by firms are within affordable limits, which limit the profits firms are to rip out of consumers.
Similarly, producers may lobby for government to put them in a better position of bargaining with customers and foreign producers, which means government, play a great role in disciplining market process in modern economies Prince, The timing of many decisions for cost of doing a project and the time when to rip the benefits of the project involves a gap; managers must recognize time value of money to account properly for the timing of receipt and expenditures using the present value analysis Prince, Present value is the difference between future value FV and the opportunity cost of waiting OCW , where the higher the interest rate, the higher the opportunity cost of waiting to receive future value, and the lower the present value of the future amount Prince, Managers can determine the present value of an asset that generates indefinite cash flows by considering the yearly cash flow to be generated by the asset and the guaranteed interest rate.
So also is the issue of present value that have identical cash flow, which is a perpetual stream of identical cash flows at the end of a period. An example of such an asset is perpetual bonds or preferred stock, which pays the owner an amount, which is fixed at the end of a particular period Prince, Present value can also be used to determine the value of a firm to ascertain its profitability or otherwise.
This can be through the present value of the stream of profits generated by the firm, physically, human and intangible assets like goodwill. Managers can attempt to estimate the value of firms with tools of varying circumstances and complexities.
Assuming the firm decided to pay the profits realized as a dividend to shareholders, managers should determine the present value of the firm, and subtract the current profit paid out as a dividend. Certain factors like competitors, investment, and marketing strategies may affect the growth rate, certain tools to determine the impact of the variables to the growth rate to determine the actual value of the firm.
If the benefits of the additional one-hour production exceed the cost of the additional one-hour production, it is profitable to continue with the production for the additional one hour. However, if the additional one-hour production adds more costs than it does to the benefits, the firm should stop the additional one-hour production. Managers use the marginal analysis to determine the optimal level of a control variable discrete decisions where they cannot use fractional units.
If the managers objective is to determine the net benefits N Q , it is the difference between total benefits B Q and total cost C Q of the controllable variable which represent premium of total benefits over costs of using Q units of managerial control variable, Q. Therefore, marginal benefit MB Q is the additional benefits that arise due to the usage of an additional unit of the managerial control variable Q, while the marginal cost MC Q is the change in total cost arising from a change in the managerial control variable Q Prince, If managers continue to increase the managerial control variable Q, and the marginal benefits continue to exceed marginal cost, it is profitable for the managers to increase the managerial control variable Q.
Prince , The marginal principle is important for managers for them to determine where they should stop the increase the managerial control variable in order to maximize net benefits, this is the point where managers continue to increase the managerial control variable up to the point where the marginal benefits equal the marginal costs. This level is where the managerial control variable corresponds to the level at which the marginal net benefits are zero, where nothing more can be gained by further changes in the variable.
Managers can also use the marginal principle to make decisions, where the case is a, continues variable where the managerial control variable Q is infinitely divisible. One other important aspect of the marginal analysis is the incremental decisions where managers are faced with a proposal that require thumbs up or down decisions.
Marginal analysis can be a tool for managers to make decisions yes or no; to adopt a project if the additional revenues to be earned exceeds the additional costs to implement the project; the additional revenue from the decision is called incremental revenues, while additional cost is called incremental cost. Business organizations exist within an economy, and operations within the economy do affect individuals, and organizations in their day-to-day activities.
Such operations produces certain indices or statistical data that may likely affect their decisions. According to G. Clayton, M. Giesbrecht, and F. Guo in their book everyday Economic Statistics , they sated that firms needs to know economics statistics to understand know how the economy is doing to figure out how to get where they want to go. Managers require knowledge to make decisions and is the only logical basis of all actions Guo, Many of the statistics that are used to gauge an economic situation are either the GDP, or part of it.
There are three types of indicators of particular interest to guide business organizations in making decisions: leading, coincident, and lagging; where leading indicator turns down before an economy enters recession and turns up before the expansion begins; lagging indicator series behave opposite by turning down after the economy enters recession and up after the recovery is underway; and coincident indicator timing is such that turns down when the economy is down and up when the economy is up Guo, They are classified into such series depending on their turning points and compare to changes in the overall economy.
Economic statistics can be obtained from day to day activities through statistical organizations, and websites to determine how they will affect the economy and in turn affect businesses. Conclusion Managerial Economics is a course that help managers to make managerial decisions using economics tools and theories, and managerial tools and theories.
Understanding the Concepts of Managerial Economics
MANAGERIAL ECONOMICS BY DM DWIVEDI PDF