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Module 1 Assignment

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0% found this document useful (0 votes)
78 views4 pages

Module 1 Assignment

bbbbbbbbbbbbbbbbbbbbbbbbbbbvbcvbfffffffffffddddddddddddddddddddddrrrrrrrrrrrrrrrrrrrrddddddddddddddddddddddddddddddddddddgggggggggggggggggggggggggggggggggggggggggggggggghhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh
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ASSIGNMENT

1. What do you understand by the term ‘Managerial Economics?

Managerial economics is the integration of economic theory with business practice for the
purpose of facilitating decision making and forward planning by management

Managerial economics is concerned with the application of economic concepts and economics to
the problems of formulating rational decision making.

2. How is managerial economics related to macro economics?

None of the organization works in isolation. They are affected by the external environment of the
economy in which it operates such as government policies, general price level, income and
employment levels in the economy, stage of business cycle in which economy is operating,
exchange rate, balance of payment, general expenditure, saving and investment patterns of the
consumers, market conditions etc. These aspects are related to macro economics.

3. ‘Managerial Economics is dynamic in nature’. Explain the statement.

Managerial Economics deals with human-beings (i.e. human resource, consumers, producers
etc.). The nature and attitude differs from person to person. Thus to cope up with dynamism and
vitality managerial economics also changes itself over a period of time.
4. Explain the significance of managerial economics in business.

The great macroeconomist N. Gregory Mankiw has given ten principles to explain the significance
of managerial economics in business operations.

These principles are classified as follows:


 Principles of How People Make Decisions
 Principles of How People Interact
 Principles of How Economy Works As A Whole

Principles of How People Make Decisions

To understand how the decision making takes place in real life, let us go through the following
principles:

i. People Face Tradeoffs: To make decisions, people have to make choices where they have
to select among the various options available.
ii. Opportunity Cost: Every decision involves an opportunity cost which the cost of those
options which we avoid while selecting the most appropriate one.
iii. Rational People Think at the Margin: People usually think about the margin or the profit
they will earn before investing their money or resources at a particular project or person.
iv. People Respond to Incentives: Decisions making highly depends upon the incentives
associated with a product, service or activity. Negative incentives discourage people,
whereas positive incentives motivate them.

Principles of How People Interact

Communication and market affect business operations. To justify the statement, let us see the
following related principles:

i. Trade Can Make Everyone Better off: This principle says that trade is a medium of
exchange among people. Everyone gets a chance to offer those products or services
which they are good at making. And purchase those products or services too, which
others are good at manufacturing.
ii. Markets Are Usually A Good Way to Organize Economic Activity: Markets mostly act as a
medium of interaction among the consumers and the producers. The consumers express
their needs and requirement (demands) whereas the producers decide whether to
produce goods or services required or not.
iii. Governments Can Sometimes Improve Market Outcomes: The government intervenes in
business operations at the time of unfavorable market conditions or for the welfare of
society. One such example is when the government decides minimum wages for labor
welfare.

Principles of How Economy Works As A Whole


The following principle explains the role of the economy in the functioning of an organization:

i. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services: For
the growth of the economy of a country, the organizations must be efficient enough to
produce goods and services. It ultimately meets the consumer’s demand and improves
GDP to raise the country’s standard of living.
ii. Prices Rise When the Government Prints Too Much Money: If there is surplus money
available with people, their spending capacity increases, ultimately leading to a rise in
demand. When the producers are unable to meet the consumer’s demand, inflation takes
place.
Society Faces a Short-Run Tradeoff between Inflation and Unemployment: To reduce
unemployment, the government brings in various economic policies into action. These policies
aim at boosting the economy in the short run. Such practices lead to inflation.

5. Explain the theory of demand applied to operational issues.

The firm is supposed to have multiple goals. Cyert and March has referred to five different goals
viz., production goal, inventory goal, sales goal, market share goal, and profit goal.

1. Production Goal:

The production goal represents in large part the demand of those coalition members who are
connected with production. It reflects pressures towards such things as stable employment, ease
of scheduling, development of acceptable cost performance and growth. This goal is related to
output decisions.

2. Inventory Goal:

The inventory goal represents the demands of coalition members who are connected with
inventory. It is affected by pressures on the inventory from salesmen and customers. This goal is
related to decisions in output and sales areas.

3. Sales Goal:

The sales goal aims at meeting the demand of coalition members connected with sales, who
regard sales necessary for the stability of the organization.

4. Market-Share Goal:

The market-share goal is an alternative to the sales goal. It is related to the demands of sales
management of the coalition who are primarily interested in the comparative success of the
organisation and its growth. Like the sales goal, the market-share goal is related to sales
decisions.

5. Profit Goal:

The profit goal is in terms of an aspiration level with respect to the money amount of profit. It
may also be in the form of profit share or return on investment. Thus the profit goal is related to
pricing and resource allocation decisions.

While taking the decisions regarding the price, output, and sales strategy the business firms are
guided by the five goals. Cyert and March are of the opinion that although all goals must be
satisfied in any organization, there is an implicit order of priority which is reflected in the way
search activity takes place. If one of the goals is not met and the individual responsible for that is
not satisfied, a search will be made for a means to meet that goal.

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