Managerial Economics Importance for Running a Strong Company

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Abstract

The success or failure of any company depends on the decisions it managers make under any circumstance. In the market place, the interaction of forces of demand and supply remain the default means of fixing prices of commodities. However, to account for excesses and surplus that often causes losses or abnormal profits managers need to adopt best microeconomics practices in order to find results consistent to their plans. As companies outline their objectives and goals including missions, the amount of resources available to realize those intentions cannot remain to the methods of trial and error.

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Thus, Game theory and a number of other techniques provided by managerial economics emerged as the prime concept of handling the decision making for managers who wish to run successful firms. This research paper provides critical analysis of business’ decisions as facilitated by managerial economics techniques and methods of interpretations. The critical role of managerial economics in keeping a company with its long term and short-term goals is maintained through the paper because the techniques of managerial economics used by managers in running a successful firm capture every interval (peak or no peak).

Research Topic: Importance of Managerial Economics for running a successful company.

Introduction

Managerial economics refers is the sub discipline of economics that uses concepts of microeconomics techniques in the decision-making modules used by business managers. Since its inception, this branch of economics has broadened in its scope and methods of microeconomic analysis application to cover the all production management units in business environments. The conceptual framework of managerial economics entails interlink between theories developed in economics and their actual application in practice. Managerial economics uses wide range quantitative techniques in the analysis of variables considered in the process of decision-making.

Since companies would wish to achieve optimal output in their activities and, managerial economics plays the critical role of providing the most suitable decision for cost minimization and profit maximization through optimal functions derived from multi-variate regression analysis, correlation studies and Lagrange calculus. Subject to the constraints of scarce resources and companies specific and general objectives within some definite period, the daunting task of decision making as the role of company managers and stakeholders still demand that such investors act prudently in optimal resource allocation with target output that yields maximum returns.

Thus, business researchers hypothesize, the application of principles of managerial economics in any given business entity significantly affects its success. This research paper therefore investigates the role of company mangers in applying various aspects of managerial economics in making the decisions of any company with the view of driving it successfully.

Background Information

This research undertaking derives from the original aims of managerial economics as a subject in the wide field of economics. Given the laws of scarce resource and marginal productivity and returns on capital, managers using concepts of managerial economics set out to ease the process of decision making by consistently allocating resources optimally to achieve the desired ends. The quantitative nature of managerial economics implied that managers could systematically asses the various risks posed by the market function under the dynamic forces of demand and supply. Therefore, regression analysis and Lagrange multi-linear calculus and programming established the most suitable paths of action given the overall objectives of a company. The objectives range from maximizing the wealth of stakeholders, profit maximization, cost minimization and ideal pricing of a commodity in a highly competitive market environment.

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The simulation of expected outcomes in such a complex scenario required projections of quantities used in the theories of economics modules. Most importantly, managerial economics emerged as the apt subject for understanding the risks involved in the analysis of variables obtained from within and without the business environment. All the factors influencing the company’s decisions generated from its external market or non-market environment constitutes the variables outside the business environment in the various optimization functions. Similarly, constraints within the business operational area such as size of capital outlay and production competency and capability comprise its internal environment variables.

Objectives

The research aims at examining the application of managerial economics in the running of a successful company. Using the various concepts of managerial economics, the research investigates the efficiency of employing managerial economics techniques in managing a company’s resources and allocating them to factors of production at the company’s disposal for optimal yields. The research also aims at establish the correlation between a successful business and effective Managerial Economics. In this respect, a look in the real market for a few examples helps in assessing the causes of failure in the use or no use of managerial economics tools by past successful companies helps in establish the association precisely.

Methods and Technique

The research borrows heavily from managerial economics tools and techniques such as linear programming, regression analysis and other correlation functions as used in the managers decision making and establishing of correlation of events and their associated analysis. Drawing from books, manuals and journals of microeconomics and successful companies that have used this techniques in the recent past, the research obtains first hand and secondary information from valid academic sources that realistically justifies the claims of a successfully company, depending on contemporary methods of managerial economics. The research also draws data from conventional quantitative techniques adopted by managerial economics for optimal decision-making and strategic planning for successful organization. This simplifies the correlation analysis, as the interpretation of figures is faster than reading through many materials in the archives.

Research findings

Managerial economics techniques are widely applied in business decision-making and planning functions. Given the periodic review of results by manages to observe the progress of a company; managers have found certain common applications of managerial economics examined in this study. Thus, the following applications of managerial economics constitute the findings of this paper.

Production estimations

Essentially companies produce commodities for the market. This production also targets certain demands without which a deficit or surplus would result leading to unintended consequences. With rapid innovation in the market place, managers require accurate techniques for making decisions regarding production units at the least cost possible. In the production decision, the managers in the concerned units also need to factor for inputs available to meet its market demand (Mansfield, 1987, p. 119).

Pricing Techniques

Companies operate in different market structures. Some firms operate in a perfect competition, other operate in oligopolistic structure while a few reserve monopoly in their market structure. Depending on the structure of a firm’s market, the success of a company would largely depend on the pricing decisions of its leaders and the marketing strategies used. With the aspect of globalization creeping in the local markets, companies must be wary of pricing techniques as this affects the projected sales of a given time period. Therefore, pricing of commodities to sell in the increasingly competitive local and international markets, demands that managers seriously consider the ratings of their rival and complementary products in the market place.

Budgeting strategies

Managers are generally professionals entrusted with the investments of other capital owners as risk takers to conduct business and share out the accruing benefits to the stakeholders. The managers therefore need high confidence in making the investments decisions and capital evaluations. In the core of management economics is the practice of allocating the scarce resources at the company’s disposal, to a wide range of competing opportunities. In the process, managers need precise acknowledgement the value of each opportunity (product or service provision) taking into consideration future adaptability of the preferred option in terms of money.

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Similarly, the area of capital investment as applicable to management economics demands optimal investment to yield future returns even in volatile markets such as airline and data handling companies. Concerning the success of a company depending on the best practices of management economics, budgeting strategies considers cash flow management as the principal agent of investment that should coincide with predicted opportunities (Hirschey & Pappa, 1996, p. 52).

Risk assessment

In management economics, risk assessment entails the managers’ role to take care of unexpected circumstances in the course of the firms operations. The two kinds of risks inherent to any business are classified as systematic and unsystematic risks. The former is predictable and can easily be predicted by the firm but the latter is generally unpredictable. In either case, a successful company such as Federal Express (FedEx) or a collapsed firm like Pan American is no exception. Managers still need to quantify uncertainties accurate or just find some rough estimation. Ideally, all forms of investments in the long-term involve assuming some risks. Managerial economics provides the techniques of estimating such risks through various simulations such as the Monte Carlo Simulations that provides the estimates of future values of working capital investment based its Net Present Value (NPV) and Discounted Cash Flow (DCF). The success of a firm thus depends on how well it manages both risks in the present and in the future (Hammersley & Handscomb, 1975, p. 26).

Discussion and Analysis

Even after the business has laid down a well thought out plan, it requires managerial economics techniques to analyze the production targets of the company relative to capital budgeting and pricing of the products and services involve. Therefore, managerial economics performs the unusual function of quantifying factors across the entire business spectrum and using modules from economics theory to determine the best decision for a company. The suitability of managerial economics in running a successful company examined in this paper relies heavily on the quantitative vigor of its analysis that allows managers to obtained values of their objectives in numeric approximately (Anderson, Sweeney & Thomas, 1997, p. 119).

Since the accuracy of the resulting values from the analysis used is subject to further unsystematic occurrences in the company’s operating environment, the techniques used normally provides a range of values within which the managers expected objectives would fall. Thus, the curvilinear paths of a business marking its peaks and lows provided by managerial economics estimations means the business has ample time to project its output accordingly in order to exploit its peaks and relatively adjust to its lows (McCann & Froeb, 2008, p. 133).

Production estimations

Actuary studies in the case of FedEx in indicated that proper estimation of the company’s mail services demand almost matched its delivery. The mock design used in the study used the methods of multiple linear regression analysis depicting uniform demand in its projections into the millennium. With minimal unaccounted for services in the consumers’ part, FedEx continued to gather more clients in the 90s as Pan Am declined due to its exaggerated clientele base in Florida, Miami, Havana and New York. Inaccurate estimation of its delivery and market share mislead the managers to inflating their inventories before its collapse in December 4, 1991. On the other hand, FedEx, which began as a small corporation in 1971, attributes its efficiency in production, processing and mail delivery to reasonable estimations of market share with corresponding production within the advisers range. Harnessing growing opportunity in the developing countries tailored through network of Multinational Corporations, provides comprehensive observation into such markets while using all factors influencing product decisions given the market mix in this environment (Hirschey, 2009, p. 433).

Pricing Techniques

Relative to its rivals and competitors such as DHL, Royal Mail and TNT, FedEx success hinges on simulations of its best rates decision relying on linear programming to determine its best optimal price against its competitor’s rates. The mangers decision to adopt this trend follows uptight completion motivated by rapid technology innovations associated with globalization. As theory of economics practice is to management economics, so is computer technology innovation to globalization of the market place in terms of mail delivery and tracking. Thus, FedEx managers maintained that distance travelled to reach a client and currency value (monetary value) of dispatch must compete well with local and other Multinational Corporation in this oligopolistic market structure (Waschik & Fisher, 1992, p. 4).

Budgeting strategies

Since management economics evolved as the primary way optimal capital allocation in the over-night mail delivery segment, the managers of successful micro and medium enterprises accept that quantified simulation of figure invested in inventory yield significant results as opposed to theoretical estimations. Regression analysis and linear programming models used in game theory leads to more accurate cash investments in all sectors. The case of FedEx most probably explains the level of success attainable by accurate timing of opportunities in a competitive market environment. As Pan Am collapses and Trans World Airline shows likelihood of decline, FedEx matched its investments with growing opportunity in over-night mail delivery (Jain & Khana. 2009, p.32).

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Risk assessment

While Using the Monte Carlo Simulation, holding other variables constant while varying a particular variable provides accurate influence of the factor in the entire module used in establishing a correlation effect. Risk management involves providing measures that mitigate against possible future uncertainties. A business may perform well in the short-run. However, the future prospects of any successful firm depend on how well it employs the techniques of management economics. Since, management economics provides the frameworks upon which the business decisions rests. The net present value and discounted cash flow quotient in the models used in risk estimations yields actual values used as benchmark for investment decisions (Mansfield, 1997, p. 169).

In simple approximations used by managers to determine the future adaptability and success of a firm, the experiences of the business act as primary data for computing the efficiency of the business’ best practices thereby yielding the desired results. Successful firms project their returns on investments to capture market peaks. This also allows them to take over other firms that fail to prepare for a possible down turn. Hence, the strategy of FedEx to penetrate international markets through a vast team of networked professionals who double their role as marketers and analysts given the amount of documentation they do for the corporation (Webster, 2003, p. 561).

Conclusion

Obviously, an effective Managerial Economics takes a very important role for running a successful company, as this is the road to success. Through its vast tools and techniques for measuring the possible outcomes of each decision, managers of companies such as FedEx and Royal mail in mail delivery markets boast success even in the midst of economic down turn. Since managerial economics techniques reinforces the action plan for managers, it also motivates the leaders to act in a timely manner towards meeting the challenges brought about by the interplay between production functions and marketing dynamics.

Recommendation

Since, various companies operate in different market structures, managers need to chose whichever technique provided by management economics to improve their decision making process. The running a successful company significantly depend on the decisions made and the execution of these decisions against the company’s objectives. In this respect, managerial economics provides both the means and the way. Through its methods managers make optimal decisions that makes use of only available resource, through its broad simulations managerial economics techniques indicates the best path fit for the company to execute its production, sales and marketing plans considering the nature of the market. Hence, managerial economics is recommended for running a successful company.

Reference List

  1. Anderson, D. P., Sweeney, D. J. & Thomas A. W. (1997). An Introduction to Management Science: Quantitative Approaches to Decision Making. (8th ed.) New York: West Publishing Co.
  2. Hammersley, J. M. & Handscomb, D. C. (1975). Monte Carlo Methods. London: Methuen.
  3. Hirschey, M. (2009). Fundamentals of managerial economics (9th ed). Mason, OH: Cengage Learning. pp. 432-4
  4. Hirschey, M. & Pappas. J. L. (1996). Managerial Economics. 8th ed. Chicago: Harcourt Brace Jovanovich College Publishers,
  5. Jain. T. R. & Khana. O. P. (2009). Managerial economics. New Delhi: V.K. Publications p. 31-34.
  6. Mansfield, E. ed. (1987) Managerial Economics and Operations Research: Techniques, Applications, Cases. 5th ed. New York: W. W. Norton & Co.,
  7. Mansfield, E. (1997). Principles of Microeconomics. 9th ed. New York: W. W. Norton & Co.
  8. McCann, B. T. & Froeb, M, L. (2008). Managerial Economics: a problem solving approach (2nd ed.). Mason, OH: Cengage Learning pp. 132-8
  9. Waschik, R. G. & Fisher, T. G. (1992). Managerial economics: a game theory approach London: Routledge. pp. 3-11
  10. Webster, T. J. (2003). Managerial economics: theory and practice. San Diego: Elsevier. pp. 559-66

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BusinessEssay. "Managerial Economics Importance for Running a Strong Company." December 2, 2021. https://business-essay.com/managerial-economics-importance-for-running-a-strong-company/.