IFRA AFZAL (62075)

MANAGERIAL ECONOMIC ASSIGNMENT 1

MBA WEDNESDAY 6:30 CLASS

Ma’am FARRUKH WAZIR

Question No # 01
A) Study of economics versus managerial economics

Economics Managerial economic

Economics is the study of social sciences in which
we study how individuals, firms, govt and foreign
entities allocate efficiently and equitably scare
resources in order to meet unlimited needs and
wants.
Managerial economics is the study of how
managers can apply economic principles in
making an effective business and managerial
decisions to allocate the best use of the
organizations scarce resources to achieve their
objectives or goals.

B) ‘Profit maximization’ versus ‘Optimal’ decision of a firm

Profit Maximization Optimal Decision

Is a strategy of maximizing profits with low
expenditure where by a firm tries to equalize the
MC with the MR derived from the producing
goods and services.
MR=MC=Profit Maximization
All the decision that brings the firm closets to
its goals or objectives. To maximize its profit
or minimize its loss, a firm should price its
product at a level where the MR earned on the
last unit of a product sold to the additional
cost MC of making this last unit.
 The right decision taking when MB>MC

C) Opportunity Cost versus Opportunistic behavior

Opportunity Cost Opportunistic Behavior

When the resources are limited and wants are Opportunistic behavior is a partnership act or
unlimited. For this reason, individuals, business behavior where one of the parties seeks to take
and societies make choices and choice implies advantage of the other.
cost.

Opportunity cost= What you give up

What you get

D) The three questions of ‘economic problem’, faced by a country versus by a company

Economic Problem Faced by A Country Economic Problem Faced by A Company

what to produce (country with limited resources what to produce (the product decision).
produces bread or national defense).
How (the hiring, staffing, procurement, and
How to produce (amount of land, labor, capital, budgeting decision).
entrepreneurial effort).
For whom (the market segmentation decision).
For whom (how much bread and how much
national defense goods).

E) Economic objectives versus non-economic objectives

Economic Objectives Non-Economic Objective

Economic objectives are concerned with the Non-economic objective related to the services
production and consumption of goods and you provide for social and psychological reasons
services for the economic profit. For instance, to other people without expecting anything in
return, such as love or affection. For instance,
 Market Share
 Profit Margins  Provide a good place for our employees to
 ROI work.
 Shareholder Value  Provide a good products & services to our
 Customer Satisfaction. customer.
 Act as a good citizen in our society.
 F) Economic profit versus normal profit
Economic profit
Economic profits equal revenue minus economic
cost.
G) ‘Satisfice’ versus ‘principal-agent problem’
Satisfice
A economic concept based on the economic
principles that owners of a firm (especially
stockholder in a large corporation) maybe content
with adequate return and growth since they really
cannot judge when profits are maximized.
H) Explicit cost versus implicit cost
Explicit Cost
The cost that the company actually incurs during
production is known as explicit cost.
I) Elasticity when demand is price ‘inelastic’ versus Revenues when demand is ‘inelastic’
Elasticity When Demand is Price ‘Inelastic’
Elasticity is the rate of response between two
variables. Elasticity when demand is price
inelastic means if the price of product increases
the demand for that product will decrease. The
percentage change in price is greater than the
corresponding change in quantity.
0 < Ep < 1 (in absolute terms)
J) Change in quantity demanded versus change in demand
normal profit
Normal profit is equal to the profit that could be
earned by the company in their next best
alternative activity. It is the minimum profit
necessary to keep resources engaged in a
particular activity.
Principal-Agent Problem
A conflict of priorities between the owner of an
asset and the person who has been given control
of the asset is known as the principal-agent
problem or agency problem.
Implicit Cost
Implicit Costs are the exact opposite of explicit
costs because the organization does not directly
incur them; rather, they are implied in nature and
do not require a cash payment.
Revenues When Demand is ‘Inelastic’
Revenues when demand is inelastic means if the
price increases the total revenue also increases.
 Change in Quantity Change in Demand

Change in quantity demanded refers to the change
in the price of a good or service, graphically
represented by a movement along a particular
demand curve.
Change in demand refers to the shift in demand
curve that caused by a change in one determinant
other than the price like change in taste,
preferences etc. when demand increases, the
demand curve shifts rightward and when demand
decreases, the demand curve shifts leftward.

K) ‘Rationing’ versus ‘Guiding/Allocating’ function of price. Use D/S Model to demonstrate

graphically.

Rationing Function of Price. Allocating Function of Price

Short run changes show the rationing function of
price. The rationing function of price is the
change in market price to eliminate the imbalance
between quantities supplied and demanded.
Long run changes show the allocating function of
price. The guiding or allocating function of price
is the movement of resources into or out of
markets in response to a change in the equilibrium
price

Question No # 02
A) What are the five fundamental questions that managers essentially deal with?
1. What are the economic conditions in a particular market in which we are or could be competing? In
particular:
 Market structure?
 Supply and demand conditions?
 Technology?
 Government regulations?
 International dimensions?
 Future conditions?
 Macroeconomic factors?
2. Should our firm be in this business?
3. If so, what price and output levels should we set in order to maximize our economic profit or
minimize our losses in the short run?
4. How can we organize and invest in our resources (land, labor, capital, managerial skills) in such a
way that we maintain a competitive advantage over other firms in this market?
 Cost leader?
 Product differentiation?
 Focus on market niche?
 Outsourcing, alliances, mergers, acquisitions?
 International dimension
5. What are the risks involved?

B) What are the types of risks or uncertainty that managers face?

The types of risks or uncertainty that manager’s face is cost minimizing production technique, optimal
location to reduce cost and forecast demand for goods and services. Here are the types of risk that
businesses face include:

 Changes in demand and supply conditions

 Technological changes and the effect of competition
 Changes in interest rates and inflation rates
 Exchange rate changes for companies engaged in international trade
 Political risk for companies with foreign operations

Question No # 03
Economics of business refers to the key factors that affect the ability of firm to earn acceptable rate of
returns to its owner’s investment. The most common of these factors are competition, technology and
customers.

The key factors of change that manager should consider for effective decision making is competition,
technology, customers, change in demand and supply, change in interest rate and inflation rate and
exchange rate for companies emerged in international trade. Managers should consider these factors for
effective decision making to earn an acceptable rate of return on owner’s investment.

The four-stage model of change observed in a business is:

 Stage 1, the good old days, in which company enjoy the high profit margins and cost plus.
 Stage 2, cost management, in which company manage the extra cost by cost cutting, downsizing,
restructuring.
 Stage 3, limits to the growth in profit, reverse management, top line growth.
 Stage 4, revenue plus.

Question No # 04