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Objectives of Managerial Economics

Managerial economics is a method to analyze goods or services and make


business decisions.

Managerial economics is a method to analyze goods or services and make


business decisions from the analysis. This form of studying can help identify
themes and trends that could be the cause and effect of good and bad business
decisions. Managerial economics is usually applied to assist in making decisions
on risk management, manufacturing, pricing and investment. It has been used in
profit and not-for-profit organizations.

Implement Analytical Tools


1. An objective of managerial economics is to implement devices that will measure
and analyze a broad scale of a company’s financial goals. These devices can be as
simple as manually recording production processes to making cost-effective
suggestions to developing a top-scale database program that will help identify
obstacles and potential growth areas.

Analyze Business Goals


2. Managerial economics helps to assess business goals and stratagem on a
continuous basis--weekly, monthly and quarterly, for example. Using managerial
economics helps to scrutinize the hazards of business choices and evaluate
marketing techniques and procedures.

Make New Business or Product Decisions


3. The process of managerial economics also allows for deciding if an investment in
a new business or product venture is financially sound. After assembling the
necessary data, decision makers are able to develop a strategy and plan for
production, quantity, pricing, marketing and handling. Understanding the risks
and cost beforehand will allow the company a better opportunity to reach its
objectives and make a profit.

Types of Managerial Economics


By Walter J. Johnson, eHow Contributor
updated: March 31, 2010

1. Economics often deals with abstract forces. Managerial economics deals with
people and the decisions they make. Managerial economics primarily deals with
the firm and its products in the marketplace as a function of executive decision
making. It stresses decisions and the context in which decisions are made in the
market. However, in no respect can managerial economics ever be separated from
the discipline of economics as a whole. Furthermore, it can never be separated
from the market and the broader economy either. It is in this setting that the
different "types" of managerialism can be found.

Normative Managerialism
2. Ethics rarely plays a part in economics. Demand and supply are two abstract
forces that do not, as a rule, worry about what it is precisely that is being
demanded and why. Major aspects of managerial economics, especially demand
analysis and cost cutting at the firm level, are loaded with ethical questions. The
nature of the product and its possible uses, the ethical nature of layoffs and hiring
policies are all important issues in the normative sort of managerialism. Most of
the literature on managerial economics stresses the ethical and conceptual side of
this discipline as one of the issues that make it different from other branches of
the discipline. Managers do not make decisions in a vacuum, but are always
confronted with real people with real lives. Therefore, automatically, their
decisions are based -- at least in part -- on ethical concerns.

Liberal Managerialism
3. This is the classic "libertarian" approach to managerial economics. In this model,
the market is a sort of democracy: A firm will win if it fits its structure and
products to the demand of the market, which is considered just an aggregation of
individuals and their preferences. The decision of the market is justified on the
same basis that any democratic election is justified. This type of managerialism
holds that decisions of managers must be tightly attuned to the market, or these
decisions will be the basis of the fall of the firm. It holds that managers are free in
their work, but that they must act as servants of the market.

Radical Managerialism
4. The radical/conflict sort of managerialism tends to reduce the focus of the
discipline on the manager as a person or free agent, and stresses the constraints on
the manager as a function of the broader economy. People are fired and products
are marketed because the demands of owners and shareholders and the reputation
of the managers themselves force them into it. The manager here is not a free
agent, but the system of advanced capitalism controls the nature of decision
making. This type of managerialism holds that the only way a manager can truly
be a free agent is to reject the capitalist system and its profit motive, and market
product based on need, not on profit.
Uses for Managerial Economics
Business managers can optimize business decisions using managerial economics.

Learning the concepts of managerial economics is a valuable tool for making


economic decisions. Managerial economics applies quantitative techniques to
business decisions using economic concepts such as supply and demand, price
elasticity and marginal analysis. Managerial economics can answer the following
questions: When is the best time to make capital investments? What is a good way
to determine whether a company's stock is a good investment? Should my
company enter a new market with a new invention?

Making Capital Investments Using the Laws of


Supply and Demand
1. The law of supply states that there is a direct relationship between price and the
quantity a seller is willing to offer. That is, the higher the product's price, the
more sellers will want to sell. The law of demand states that there is an inverse
relationship between the price and quantity demanded. That is, buyers buy more
at lower prices. Business managers can take advantage of supply and demand by
determining when the price will be at its lowest. When demand for a product
decreases due to outside forces, like high levels of unemployment, suppliers tend
to lower prices on large-ticket, luxury items, such as Learjets and specialty
machinery. Sellers that sustain profitability at these lower prices will exit the
market. The best time to make large purchases is prior to this happening, when
there is a surplus of products with decreasing demand.

Assessing a Company's Investment Potential Using


Price Elasticity
2. By analyzing the price elasticity of demand for a company's products, investors
can gauge the sustainability of the company. When consumers are sensitive to
price changes for a product, we call this a product with elastic demand. Elastic
items are large-purchase, luxury items that can be easily substituted. For example,
a home with lots of features, such as a pool and a barbeque pit, would be an item
with elastic demand. Necessity products with few substitutes have inelastic
demand. An example of a product with inelastic demand is gasoline. When
determining whether to invest in a company, consider the price elasticity of
demand of its products by asking the following: Are the products large-ticket
items? Are the products luxuries or necessities? Are there close substitutes for the
product? Inelastic demand products have a sustainable profit outlook and offer the
best opportunity for a consistent return.
Determine Whether to Enter a New Market Using
Marginal Analysis
3. Companies that invent new products do not always choose to market and sell the
product, as it might require entering new market. Another option is to sell the
rights to another company. Comparing the two options requires projections of
profitability for the next five years. Marginal analysis provides the tools to
determine the profit-maximizing price that takes into account marginal costs such
as labor, inventory, advertising and production. Using this information, analysts
develop a five-year projection of profitability and compare it with the proceeds
from potential earnings from the sale of the rights to the invention.

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