Free Research Paper On The Role Of Managerial Economics In Business Decision Making
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Managerial economics involves the integration of the basic economic theory and management practices. This field seeks to combine the logical intrigues of economic theories with the problems and policies that the practical manager encounters in business. Therefore, managerial economics is a significant tool that offers techniques for managerial decision-making and policy formation. In business decision making, the combination of economic theory and managerial skills provides an ideal strategy for solutions when confronted with business constraints. Knowledge of managerial economics enhances the analytical skills employed in analyzing the logical structures of business problems thus providing a channel towards the appropriate economic decision (Waykole, 2013). Decision-making is one of the key responsibilities of a business manager. In making the right verdicts, the manager requires focusing on the economic impact of the decision and its long and short-term effects on business.
Economic decisions involve the study of the market structure, demand supply variations, capital management, labor, profit acquisition and risk analysis. As such, the decision focuses on value maximization and risk minimization. The paper seeks illustrate the role of managerial economics in business decision-making processes. The paper also includes various business decisions and the role of managerial economics in the managers’ right judgment.BackgroundContribution of Managerial Economics
Econometrics and mathematical economics play a crucial role in constructing and estimating decision models used in determining the prime performance of a firm (Waykole, 2013). The mathematical model used expresses the theory of economics in equation forms while econometrics provides a statistical approach to the economic problem. Econometrics uses various statistical techniques such as correlation and regression for estimating the business trends and in risk analysis. Mathematical economics, on the other hand, uses techniques such as linear programming to analyze the behavior of the firm. Additionally the expression of consumer behavior models and the performance of the firm in the form of symbols and calculus logics have proven efficient (Waykole, 2013).
Managerial economics employs the economic theories and quantitative models in solving the managerial decision problems. It deals with the ‘Theory of the Firm,’ which is a major principle in the economics. The micro-economic nature of managerial economics facilitates its use in decision making in a wide range of businesses ranging from small private businesses to large public investments. Furthermore, it is an important tool in the management and decision making in non-business institutions such as educational institutions, government agencies, and hospitals. Waykole (2013) alludes that many businesses have employed management economics in enhancing their profitability to a positive return. Some of these cases are as illustrated below.Panasonic, LG, Sony, and Samsung
In their interest to increase the market share, these companies developed an interest in the Indian consumer market in 1990s. The multi-national companies invested in product differentiation to maintain the market share. They developed technological advancements in their products, a resort that promoted the market significance of the company (Waykole, 2013).
This company has focused on maintaining the consumer base by investing in product differentiation developing from IBM. The introduction of Microsoft Windows brought a new competitive environment for the company. In response to this, Apple lowered the prices of its products. The company maintained its market share despite the drop in the profit margin (Waykole, 2013). Various aspects of businesses employ distinct decision-making strategies. Therefore, business decisions fall into various categories. As such, diverse opinions among writers have emerged. Various authors have discussed the value of managerial economics in business decision-making. The broad categories are demand analysis and forecasting, cost and production examination, pricing decision, risk management, profit management and capital management.Demand Analysis and Forecasting
Demand is the attractiveness of a product in the market. A business thrives if the demand for its product is high. Demand is an important aspect of managerial economics since a firm without sufficient demand cannot survive (Bashir, Tauqeer, Ahmad, & Nasim, 2012). Many firms close when the demand for their product declines due to competition, pricing and availability of substitutes. In the present day, the business environment is growing uncertain as many companies join the competitive market with the same product but different pricing and marketing strategies. The uncertainty in the market has resulted in a complex market behavior. Policy changes and market forces have affected this behavior in the market structure (Bashir, Tauqeer, Ahmad, & Nasim, 2012). As a result, decision-making has become more challenging. It is because the firm operation is changing in proportion to the changes in the market structure.
The managers of a company would require vast market knowledge before making a decision that affects the business. As such, it is imperative to employ managerial economic techniques in analyzing the market behavior and changes in the demand that could affect the business. This assists in predicting the changes in the market orientation and forecasts the firm’s adjustment required to fit into the market. Bashir, Tauqeer, Ahmed and Nasim (2012) suggest that for a firm to thrive, decisions must focus on the demand changes of the product. Business economics offers an effective tool, which compares the demand and supply in a graphical presentation. With this result, the management can resort to proper decisionsCost and Production
Firms are profit-oriented. The chief aim of venturing into business is to acquire profit. For maximum profit, a firm requires proper cost management policies. Cost is the expenditure incurred by the firm. For instance, purchase of raw materials and factors of production occurs as costs. For optimal production and cost decisions, the firm requires the knowledge of the trends and characteristics of the short-run cost equation (McGuigan, Moyer, & Harris, 2008). The knowledge is essential in arriving at decisions such as whether to schedule over time for workers, and whether to purchase additional orders at the given price.
Production theory of economics indicates the relationship between the input and the output of a production process. It is an indication of the physical relationship between the input and outputs whereby the measures of the input variables compares to the measures of the output product (Wilkinson, 2005). The factors of production, land, labor, capital and entrepreneurship combine in various proportions to yield an output. The combination of the factors of production depends on a mathematical formula where one factor varies relative to the other, and the product is determined.
Further, the efficiency of production is considered in determining the appropriate proportional combinations of factors of production. Technical efficiency and economic efficiency require consideration in the decisions affecting the production factors. Managerial economics plays a significant role in cost and production analysis. The management needs to decide on the allowable costs and the appropriate ratio of the factors of production. As such, the mathematical equations and exploration are required in the decision making process. This makes the decision tactical and result oriented.Pricing Decision
Wilkinson (2005) considers pricing as the most important aspect of managerial economics. It is a technique that combines demand and cost (Wilkinson, 2005). A firm makes maximum profits by reducing the cost of production or by proper pricing. Pricing is one of the major decisions that managers of a firm have to make. Competition is one of the characteristics of a business environment. As such, a competitive advantage is a key focus for any business that intends to maneuver a competitive market. Wilkinson (2005) alludes that profitability of a business depends on two factors; the competitive advantage and the market structure.
Mathematical formulae express the value created by the firm compared to the customer benefit and cost of inputs (Wilkinson, 2005). This is a concept derived from the competitive advantage exploration. In determining the appropriate price, the business managers have to consider the benefit that the product yields to the consumer and the cost of production. Use of mathematical analysis, facilitates decisions to either increase, decrease or maintain the price of a commodity. Clearly, managerial economics is an important contributor to price determination of products.Policies and Risk management
According to Aleksejeva, in risk assessment, it is important to consider consumer sensitivities (Aleksejeva, 2013). It is impossible to perfectly predict the return on a business investment. As such, to make decisions assuming the uncertainty, the expected values of the returns are used. The expected value is a statistical approach to economics where the value is an expressed sum of the products of the expected returns and the probability of the returns (Wilkinson, 2005).
While assessing the impending risk of a decision, the managers need to employ the right methods to determine the risk effect. In this light, they employ mathematical analysis of the business as a tool to establish the risk. This provides sufficient grounds to decide on issues affecting the business directly or indirectly. Additionally, policies in a business enable proper running of the operation. Therefore, in making the policies, the managers need to consider the role of policies in business. The government through various bodies has a direct or indirect impact on firms. In making decisions that affect policies set by the government such as tax, the managers would require mathematical approaches to analyze the business economic structure.Profit Management and Capital Management.
Capital is one of the factors of production. It is one of the necessary requirements to start a business. Sufficient capital and appropriate management yield positive returns. It is an important stage of the business development when the managers establish management strategies to ensure value maximization on the capital. In making these decisions, the managers require calculated values of the capital returns currently in the business and the expected value of the return. Profit, on the other hand, is the focus when a firm is established. For a developing firm, the profit margin should indicate an exponential growth. Profit is the difference between the total revenue and the cost of production. As such, economic studies play a significant role in the evaluation of profit margins. Any manager whose goal is to maximize the returns of the firm requires the mathematical analysis of the profit to determine the factors affecting its profitability and hence make appropriate decisions.Conclusion
Managerial economics is the use of the economic knowledge, mathematical and statistical techniques to enhance managerial decision making in a business. The performance of every firm is determined by the market control of the firm and hence its profitability. There is a close relationship between the performance of a firm and its management. Most profitable businesses are well managed (Bloom & Reenen, 2007). Decision-making is the responsibility of the management of a firm. Therefore, the success of a business depends on the quality of decisions made by its management. Managerial economics employs the appropriate mathematical models and statistical approaches to providing the right channel towards decision-making. There are firms in the contemporary world that have employed business economics in decision-making resulting in positive results. As Waykole (2013) indicates, firms such as Apple, LG, and Samsung, among others, have established a strong customer base through the analysis of their performance and product differentiation. This has enabled the management to resort to the most appropriate strategy. Business involves a variety of activities. These activities include production and cost analysis, demand and supply analysis, risk management, profit and capital management and pricing. Each of these activities requires the right evaluation and the relevant decision. Economic knowledge and mathematical analysis of the economic scenario presents a sufficient ground for a decision. This is the application of the business economics in business decision-making processes. Some scholars have focused on the role of business economics. As such, this paper suggests further research including the role played by managerial economics in the rise and fall of companies. The research suggested aims at highlighting the failures of managerial economic in addition to giving a deeper analysis of the contribution of business economics in the rise of specific companies in the contemporary world.
Aleksejeva, I. (2013). Frame of GMO Risk Assesment in Lativia and Consumers Trust in Regulatory Bodies Involved in GMO Risk Assesment and Decision Making Process. Journal of Economics and Management Research, 4-15.
Bashir, F., Tauqeer, S., Ahmad, H., & Nasim, I. (2012). An Econometric Analysis of Demand in Pakistan: A Case Study. International Journal of Business and Behavioral Sciences, 12-17.
Bloom, N., & Reenen, J. V. (2007). Measuring and Eolaining Management Practices Across Firms and Countries. The Quarterly Journal of Economics, 1351-1408.
McGuigan, J., Moyer, C., & Harris, F. (2008). Managerial Economics,Application,Strategy, and Tactics (12th ed.). Natorp Boulevard Mason: Cengage Learning.
Waykole, M. (2013). Role of Managerial Economics in Competitive Edge Dynamic Business Decision -Making Process. Asia Pacific Journal of Marketing & Management Review, 136-139.
Wilkinson, N. (2005). Managerial Economics-A problem-solving Approach. Cambridge: Cambridge University Press.
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