Aveneu Park, Starling, Australia

There of economic theory. But it also

There are certain chief
characteristics of managerial economics, which can help to understand the
nature of the subject matter and help in a clear understanding of the following
terms:

Managerial economics is
micro-economic in character. This is because the unit of study is a firm and
its problems. Managerial economics does not deal with the entire economy as a
unit of study.

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Managerial economics largely uses
that body of economic concepts and principles, which is known as Theory of the
Firm or Economics of the Firm. Managerial economics is concrete and realistic.
It avoids difficult abstract issues of economic theory. But it also involves
complications ignored in economic theory in order to face the overall situation
in which decisions are made. Economic theory ignores the variety of backgrounds
and training found in individual firms.

      Introduction

Managerial economics belongs to
normative economics rather than positive economics. Normative economy is the
branch of economics in which judgments about the desirability of various
policies are made. Positive economics describes how the economy behaves and
predicts how it might change. In other words, managerial economics is
prescriptive rather than descriptive. It remains confined to descriptive
hypothesis.

Managerial economics also
simplifies the relations among different variables without judging what is
desirable or undesirable. For instance, the law of demand states that as price
increases, demand goes down or vice-versa but this statement does not imply if
the result is desirable or not. Managerial economics, however, is concerned
with what decisions ought to be made and hence involves value judgments. This
further has two aspects: first, it tells what aims and objectives a firm should
pursue; and secondly, how best to achieve these aims in particular situations.

Macroeconomics is also useful to
managerial economics since it provides an intelligent understanding of the
business environment. This understanding enables a business executive to adjust
with the external forces that are beyond the management’s control but which
play a crucial role in the well being of the firm.

                                                            

1.     
 ILLUSTRATION OF LAW OF DEMAND
AND LAW OF SUPPLY WITH EXAMPLE

 

(I)     
The law of demand

The law
of demand states that, if all other factors remain equal, the higher the price
of a good, the less people will demand that good. In other words, the higher
the price, the lower the quantity demanded. The amount of a good that buyers
purchase at a higher price is less because as the price of a good goes up, so
does the opportunity cost of buying that good. As a result, people will
naturally avoid buying a product that will force them to forgo the consumption
of something else they value more. The chart below shows that the curve is a
downward slope.

 

Figure 1: demand schedule illustrating the law of demand

 

A, B and
C are points on the demand curve. Each point on the curve reflects a direct
correlation between quantities demanded (Q) and price (P). So, at point A, the
quantity demanded will be Q1 and the price will be P1,
and so on. The demand relationship curve illustrates the negative relationship
between price and quantity demanded. The higher the price of a good the lower
the quantity demanded (A), and the lower the price, the more the good will be
in demand (C).

 

(II)  
The law of supply

Like the
law of demand, the law of supply demonstrates the quantities that will be sold
at a certain price. But unlike the law of demand, the supply relationship shows
an upward slope. This means that the higher the price, the higher the quantity
supplied. Producers supply more at a higher price because selling a higher
quantity at a higher price increases revenue.

 

Figure 2: supply schedule illustrating the law of supply

A, B and C are points on the supply curve. Each
point on the curve reflects a direct correlation between quantities supplied
(Q) and price (P). At point B, the quantity supplied will be Q2 and
the price will be P2, and so on.

 

As examples to show how supply and demand affect price, let’s consider the
following illustration. Imagine that a special edition CD of your favourite
band is released for $20. Because the record company’s previous analysis showed
that consumers will not demand CDs at a price higher than $20, only ten CDs
were released because the opportunity cost is too high for suppliers to produce
more. If, however, the ten CDs are demanded by 20 people, the price will
subsequently rise because, according to the demand relationship, as demand
increases, so does the price. Consequently, the rise in price should prompt
more CDs to be supplied as the supply relationship shows that the higher the
price, the higher the quantity supplied. Hence, the higher the quantity
demanded of the CDs as a result of higher price, the higher the production and
supply of that CDs, also, the lower the quantity demanded of the CDs as a result
of lower price, the lower the production and hence the quantities supplied of
that CDs. This clearly illustrates the law of demand.

 

 

2.       LAW OF DEMAND IS IN VIEW OF THE BUYERS WHEREAS
LAW OF SUPPLY IS ABOUT THE SELLERS

 

Demand
is an economic principle that describes a consumer’s desire and willingness to
pay a price for a specific good or service. Holding all other factors constant,
an increase in the price of a good or service will decrease demand, and vice
versa. Think
of demand as your willingness to go out and buy a certain product. For example,
market demand is the total of what everybody in the market wants. Businesses often spend a considerable amount of money
to determine the amount of demand the public has for their products and
services. Incorrect estimations either result in money left on the table if
demand is underestimated or losses if demand is overestimated. It is evident
from the illustrations above that the demand of a commodity is centred on the
buyers. Hence this justify that the law of demand is in view of the buyers.

 

Whereas,
the law of supply summarizes the effect price changes have on producer behavior.
For example, a business will make more video game systems if the price of those
systems increases. The opposite is true if the price of video game systems
decreases. The company might supply 1,000,000 systems if the price is $200
each, but if the price increases to $300, they might supply 1,500,000 systems. If a price
ceiling is set, suppliers are forced
to provide a good or service, no matter the cost of production. Generally,
suppliers are willing to supply more of a good when its price increases and
less of a good when its price decreases. It also evident that the company supplying
video games will tend to supply more at higher prices. Everything about the law
of supply is somewhat connected with the distribution of the commodity by the
seller. Hence, the law of supply is about the seller.

 

 

 

 

3.     
OUTLINE OF THE DIFFERENT
TYPES OF MARKET STRUCTURE

 

An outline of
the different types of Market Structure include:

(i)    
Pure monopoly.

(ii)  
perfect competition;

(iii)  imperfect competition;
and

(iv)  Oligopoly.

 

4.     
FACTORS OF
MACROECONOMICS INCORPORATED INTO AND CONSTITUTING PART OF MANAGERIAL ECONOMICS

 

The
macroeconomics factors are highlighted as follows:

(i)     FDI (Foreign Direct Investment)

The factors of macroeconomics that
influence FDI are:

(a)    transport and
infrastructure,

(b)   size of
economy/potential for growth,

(c)    political
stability/property rights,

(d)   wage rates,

(e)    labor skills,

(f)    tax rates,

(g)   transport and
infrastructure,

(h)   commodities,

(i)     exchange rate,

(j)     clustering
effects, and

(k)   Access to free
trade areas.

 

(ii)   Reserves:

The factors that affect reserve such
as the world’s oil reserve include the following:

(a)    the demand of the
commodity,

(b)   market price,

(c)    mining costs,

(d)   transportation
costs,

(e)    new technologies
that can extract the material at a lower price,

(f)    taxes,
environmental laws, and

(g)   Government price
controls.

 

(iii)
GDP (Gross Domestic Product)

The factors that
affect a country’s GDP include the following:

(a)   
human resources,

(b)  
natural resources,

(c)   
capital formation,

(d)  
 technological development,

(e)   
social factors; and

(f)   
Political factors.

 

(iv) Employment

The macroeconomic factors that
influence or affect the employment rate include the following:

(a)    economic factors,

(b)   technological
advances,

(c)    corporate values
and

(d)   Seasonal
fluctuations.

 

(v)   Inflation

The macroeconomic factors that affect
the employment rates include:

(a)    the money supply,

(b)   the national
debt,

(c)    demand-pull
effect,

(d)   cost-push
effect,  and

(e)    Exchange rates.

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