RIFTY VALLEY UNIVERSITY

LAGA XAFO CAMPUS

INDIVIDUAL ASSIGNMENT OF :-MANAGERIAL

ECONOMICS
NAME ID NO
ABABA GUTEMA …………RVULTCMBAR /0004/14

SUBMITTED TO:-M/S ASNAKECH

SEPTEMBER 2022

ADDIS ABABA, ETHIOPI

1. “Managerial economics is economics theory that is applied in decision making ‘’ explain?
Managerial economics: - is concerned with the ways in which business executives and other
policy makers should make decisions.
 Draws on economic analysis for such concepts as cost, demand, profit and
competition. Attempts to bridge the gap between economic theory and the day-to-day
decision making process of managers. Provides a set of tools and approaches for
managerial Policymaking
 Is the study of how scarce resources are directed most efficiently to achieve
managerial goals.
 It is a valuable tool for analyzing business situations to take better decisions.
 Is concerned with the application of economic principles and methodologies to the
decision making process within the firm or organization under the conditions of
uncertainty.
 Is the integration of economic theory with business practices for the purpose of
facilitating decision making and forward planning by management.
 Managerial economics helps in estimating the product demand, planning of Production
schedule, deciding the input combinations, estimation of cost of production, achieving
economies of scale and increasing the returns to scale. It also includes determining price
of the product, analyzing market structure to determine the price of the product for profit
maximization, which helps them to control and plan capital in an effective manner.
2. Discuss the important phases of business decision making process and identify the role of
managerial economics in solving business decision making related problems.
 Decision making is the process of making choices by identifying a decision, gathering
information, and assessing alternative resolutions.
 The following are decision making process:-

Step 1: Identify the decision

we realize that we need to make a decision. Try to clearly dene the nature of the decision we
must make. This 1st step is very important.

Step 2: Gather relevant information

Collect some pertinent information before we make we decision: what information is needed,
the best sources of information, and how to get it. This step involves both internal and external
“work.” Some information is internal: we’ll seek it through a process of self-assessment. Other
information is external: we’ll fill it online, in books, from other people, and from other sources.

Step 3: Identify the alternatives

As we collect information, we will probably identify several possible paths of action, or

alternatives. We can also use your imagination and additional information to construct new
alternatives.

Step 4: Weigh the evidence

Draw on you information and emotions to imagine what it would be like if we carried out each of
the alternatives to the end. Evaluate whether the need identified in Step 1 would be met or
resolved through the use of each alternative. Will list all possible and desirable alternatives.

Step 5: Choose among alternatives

Once we have weighed all the evidence, we are ready to select the alternative that seems to be
the best one for us.

Step 6: Take action

We’re now ready to take some positive action by beginning to implement the alternative we
chose in Step 5.

Step 7: Review your decision & its consequences

In this final step, consider the results of your decision and evaluate whether or not it has resolved
the need we identified in Step 1. If the decision has not met the identified need, we may want to
repeat certain steps of the process to make a new decision. For example, we might want to gather
more detailed or somewhat different information or explore additional alternatives.

 Managerial Economics provides strategic planning tool that helps in analyzing the problem
and formulating rational managerial decisions. Decision making is a crucial aspect in any
business problem. It is an evolutionary science which correlates the understanding and
 application of economic knowledge with the emerging business problems in the economy.
The basic business problems that arise in any decision making or forward planning process
involves operational and environmental issues.
3. Explain the following important economics concept with real life example.

Opportunity cost: is the minimum price that would be necessary to retain a factor service in its
given use. It is also defined as the cost of sacrificed alternatives.

Examples of opportunity cost include investing in a new manufacturing plant in Los Angeles as
opposed to Mexico City, deciding not to upgrade company equipment, or opting for the most
expensive product packaging option over cheaper options.

Incremental principle: It refers to changes in cost and revenue due to a policy change.

For example adding a new business, buying new inputs, processing products, etc. Change in
output due to change in process, product or investment is considered as incremental change.
Incremental principle states that a decision is profitable if revenue increases more than costs; if
costs reduce more than revenues; if increase in some revenues is more than decrease in others;
and if decrease in some costs is greater than increase in others.

Example. Changing the product line. Changing the level of product output. Buying additional or
new materials. Hiring extra labor. Adding new machines or replacing existing ones.

Principle of time perspective: According to this principle, a manger/decision maker should give
due emphasis, both to short term and long term impact of his decisions, giving apt significance to
the different time periods before reaching any decision. Short run refers to a time period in which
some factors are fixed while others are variable. The production can be increased by increasing
the quantity of variable factors. Example: ABC is a firm engaged in continuous production of X
commodities (long run). In the production process, it is having daily an ideal time (free time) for
few hours. In that ideal time, firm can take an order for manufacturing other similar goods
instead of wasting time. By manufacturing goods in the ideal time firm does not incur any extra
fixed cost like (salaries, wages and rent and) because it is constant. So the fixed cost is absent in
the production which is done in the ideal time. Generally in production of goods, fixed and
variable cost (raw material & labour) is present. However, here the production made in the ideal
time, fixed cost is absent. This shows the cost is reduced in production that is made in the ideal
time. Investment made in the business can also be recovered very quickly and in short time.
While long run is a time period in which all factors of production can become variable.

Discounting principle: According to this principle, if a decision affects costs and

Revenues in long run, all those costs and revenues must be discounted to present values before
valid comparison of alternatives is possible. This is essential because a rupee worth of money at
a future date is not worth a rupee today. Money actually has time value. Discounting can be
defined as a process used to transform future dollars into an equivalent number of present
dollars. For instance, $1 invested today at 10% interest is equivalent to$1.10 next year. FV =
PV*(1+r)t Where, FV is the future value (time at some future time), PV is the present value
(value at t0, r is the discount (interest) rate, and t is the time between the future value and the
present value.
Example:- Discounting is the process of converting a value received in a future time period to an
equivalent value received immediately. For example, a dollar received 50 years from now may
be valued less than a dollar received today discounting measures this relative value.
Equi-marginal principle-Marginal Utility is the utility derived from the additional unit of a
commodity consumed. The laws of equi-marginal utility states that a consumer will reach the
stage of equilibrium when the marginal utilities of various commodities he consumes are equal.
Example: students allocating limited available days for existing subjects during examinations for
getting best percentage. 14 days to go for examinations and having 7 subjects. Students may not
always allot 2 days for each subject, they may allot more days for hard subject and less days for
easy subject to maintain good percentage. In general Equi-marginal principle
4. Amazon.com, the online bookseller, wants to increase its total revenue. One

strategy is to offer a 10% discount on every book it sells. Amazon.com knows that its

customers can be divided into two distinct groups according to their likely responses to

the discount. The accompanying table shows how the two groups respond to the

discount.
 Group A(sales per week)
Volume of sales before the 1.55 million 1.50 million
10% discount
Volume of sales after the 1.65 million 1.70 million
10% discount

a. Calculate the price elasticities of demand for group A and group B

Using the midpoint method, the percent change in the quantity demanded by

group A is

1.65 million − 1.55 million∕(1.55 million + 1.65 million)/2 × 100 = 0.1 million

1.6 million × 100 = 6.25%

and since the change in price is 10%, the price elasticity of demand for group A is

6.25%

10% = 0.625

Using the midpoint method, the percent change in the quantity demanded by

group B is

1.7 million − 1.5 million

(1.5 million + 1.7 million)/2 × 100 = 0.2 million

1.6 million × 100 = 12.5%

and since the change in price is 10%, the price elasticity of demand for group B is

12.5%

10% = 1.25

b. Explain how the discount will affect total revenue from each group.
For group A, since the price elasticity of demand is 0.625 (demand is inelastic),

total revenue will decrease as a result of the discount. For group B, since the price

elasticity of demand is 1.25 (demand is elastic), total revenue will increase as a

result of the discount.

c. Suppose Amazon.com knows which group each customer belongs to when he logs on and can
choose whether or not to offer the 10% discount. If Amazon.com wants to increase its total
revenue, should discounts be offered to group A or to group B, to neither group, or to both
groups?

If Amazon.com wants to increase total revenue, it should definitely not offer the discount to
group A and it should definitely offer the discount to group B.

5. Discuss the major economic problems and challenges in Ethiopia.

On the eve of the revolution of 1974 the economy 0f Ethiopia as perhaps the most backward
in the world. Life was, indeed a life expectance at birth of. Years for males and 40.6 for
female was the lowest in the world. This short life expectance was accompanied by a high
infant mortality rate and high maternal mortality rate.
- Ethiopia had the least favorable ratio of doctor’s population and the lowest rate of calorie
consumption per capital of any country on the earth.
-Ethiopia recorded its first case of covid-19 in mid –March.
-given Ethiopia’s large population and insufficient health care capacity.

Challenges facing Ethiopia

Ethiopia is confronting three principal economic challenges:
- Its debt burden
- Foreign exchange woes stemming from poor sector performance
- A decline in remittances

6. Why is the understanding of the principle of managerial economics necessary for a business
manager?
 -Economic principles assist in rational reasoning and defined thinking. They develop logical
ability and strength of a manager.
- Managerial Economics creates an economic model for managers to inspire their use in
business. In order to maximize production and maximum profit, at least cost can be paved. Thus,
Business economics only tells how to manage everything in a way that everything should be
corrected in order to maximize profits.
7. Briefly discuss on the concept of economies of scale.
Economies of scale are the cost advantages that a business obtains due to expansion. When
economists are talking about economies of scale, they are usually talking about internal
economies of scale. Economies of scale are cost advantages reaped by companies when
production becomes efficient. Companies can achieve economies of scale by increasing
production and lowering costs. This happens because costs are spread over a larger number of
goods. Costs can be both fixed and variable. Economies of scale are cost reductions that occur
when companies increase production. The fixed costs, like administration, are spread over more
units of production. Sometimes, a company that enjoys economies of scale can negotiate to lower
its variable costs, as well. Any time a company can decrease costs by increasing the volume of
goods they produce, that's an example of an economy of scale.1 there are several reasons why the
costs of production would decrease as volume increases. For example, by keeping a production
line focused on one product, companies may save on the costs associated with swapping out raw
materials and tools to produce different products. The most basic examples are managerial and
administrative costs—you don't have to hire more managers just because your workers start
producing more items per day.

Effects of Economies of Scale on Production Costs

-It reduces the per unit fixed cost.
-As a result of increased production, the fixed cost gets spread over more output than before.
-It reduces the per unit variable costs.
-Economies of scale bring down the per unit variable costs.
-This occurs as the expanded scale of production increases the efficiency of the production
process.
8. Business managers must use information on demand & costs to determine strategy regarding
price, output & other variables. Furthermore, they must also be aware of the structure of the
market in which they operate (since this has very important strategic implications). Describe
the objective and basic considerations in market structure.
Basically, when we hear the word market, we think of a place where goods are being bought
and sold. In economics, market is a place where buyers and
Sellers are exchanging goods and services with the following considerations such as:
• Types of goods and services being traded
• The number and size of buyers and sellers in the market
• The degree to which information can flow freely
Market structure refers to the characteristics of market organizations that determine the behavior
of companies in an industry. It determines the nature of competition and price and has
implications for the market share and profits that companies get. Market structure is important
since it affects market results, especially in terms of profits. The goal of economic market
structure analysis is to isolate these effects in an attempt to explain and predict market outcomes.
MSA is concerned with the effects of competition upon economic behavior. It attempts to
explain and predict market outcomes through the extent of market competition.
 The important aspects to consider while instituting actual marketing objectives

There may be a few important aspects to consider while instituting actual marketing objectives.
While setting objectives, it must be taken into consideration that your objectives are SMART or
specific, measurable, achievable, realistic and time-specific.

The four popular types of market structures include perfect competition, oligopoly market,
monopoly market, and monopolistic competition. Market structures show the relations between
sellers and other sellers1. The firm’s primary objective is the short-run maximization of profit.
This may not be, however, the case for oligopoly, where time horizons typically extend beyond
the short run. High short run
Profits may induce the entry of new competitors to cause a more competitive market for the
firms later in the planning period.
The opportunity cost of producing a particular good or service is included in the cost of doing
business – economic costs.
 The characterize optimal price, output, and advertising decisions of managers operating
in environments of market structure are:
(1) perfect competition:- cannot be found in the real
World. For such to exist the following conditions
Must be observed and required:
- A large number of sellers
- Selling a homogenous product
-No artificial restrictions placed upon price or
Quantity
- Easy entry and exit
(2) monopoly:- There is only one producer or seller of goods and
Only one provider of services in the market.
-New firms find extreme difficulty in entering the market.
-The existing monopolist is considered giant in its field or industry.
(3) monopolistic competition:- Market situation in which there are many sellers producing
highly differentiated products.
-Monopolistic competition is also perfect competition plus product differentiation.
(4) oligopoly:- small number of sellers, each aware of the action of others
-All decisions depend on how the firms behave in relation to each other