Managerial Economics Essay

Introduction

According to Froeb and McCann (2009) the study of Managerial Economics deals with aspects of economics and tools of analysis, which are employed by managers of business enterprises for decision-making. Managerial decisions are important cogs in the working wheel of an organisation. Business and industrial enterprises have to undertake varied decisions that entail managerial issues and decisions, for example, when Atkinson met Steward and Paula to decide whether it is necessary to produce multiple versions of Modeller. This is because of the external forces that influences the market, for instance in a perfect market (Marshal 2013). Decision making is a process where a particular course of action is carefully chosen from a number of alternatives. Therefore, this calls for a comprehensive understanding of the technical and environmental conditions, which are integral to decision making. The decision maker must possess a thorough knowledge of aspects of economic theory and its tools of analysis (Froeb & McCann 2009). The basic concepts of decision-making theory have been culled from microeconomic theory and have been furnished with new tools of analysis. Decision-making theory and game theory, which recognize the conditions of uncertainty and imperfect knowledge under which business managers operate, have contributed to systematic methods of assessing investment opportunities (Boyes 2011).

CASE 1: Cambridge Software Corporation

Brief/Executive Summary - of the case study

Cambridge Software Corporation (CSC) is a software developing company majoring in development of software used by business and academic institutions. It makes a lot of profits since Steward converted the Modeller software for use in personal computers. However, CSC management was faced with the challenge of developing a multiple version of Modeller for use by clients. However, this decision is hindered by market forces, for example, the time utility aspect because the company had a very short time to develop multiple versions of Modeller. Therefore, this section highlights the major problem, which is whether and how to develop multiple versions of Modeller within a very short time limit. It also provides alternatives that the CSC Company can adopt instead of rushing into development of these versions. The critical analysis section of this case discusses the CSC Company in relation with market forces and how the forces influence decision making process. 

Article Critique of the case study

This article is a classical example of how an oligopolistic market structure operates. An oligopoly market structures, where there are only a few firms that make up an industry (Marshal, 2013). This select group of firms has control over the price and, like a monopoly; an oligopoly has high barriers to entry. This is because CSC is the only major company which produced the Modeller software. The products that the oligopolistic firms produce are often nearly identical, therefore, the companies, which are competing for market share, are interdependent as a result of market forces. There are also few and smaller companies which offered similar products; therefore, there is no stiff competition in terms of influencing the market prices. Steward demonstrated good marketing skills when she advised Atkinson not to engage in the production of multiple versions of Modeller, instead modify the current version. The CSC Company carried out a lot of research regarding market situation, its clients and the demand for multiple versions of Modeller. This provides them with the necessary knowledge of the market which is used in decision making process. The high demand of the Modeller for personal computers helped the Company to make more profits as stated in the law of demand and supply; higher demand leads to higher prices thus more earnings.

 Define the business problem in the case study.

In this case study, the major problem here was whether to offer a multiple version of Modeller, which is new modelling software. In addition to this, there was also a challenge as to whether the experts in the Company would be able to make and complete the necessary changes in the product in time for the targeted clients to use it. Time is limited on the side of the software developers because it was already thanksgiving and any further delay meant that the product will not be ready for the forthcoming academic year. There is also the problem of developing, documenting and supporting one the multiple versions of the Modeller among the developers led by Steward. The push for the three versions of Modeller was a tall order for the software developers because of time limitation, yet, there is not even one version ready.

Alternative options/solutions to the business problem.

In every business organization, there arise several problems at every level of management (Strategic, middle and low level of management). Therefore, individuals in each level of management ought to have several skills of business management in order to find solutions to these problems. Among the skills necessary for a business manager are technical skills, financial skills, human skills, marketing skills and conceptual/problem solving skills (Akrani, 2011). One of the alternatives the Company can choose is to recruit more experts in the software development team so that they could be able to complete the production process within the available time. If this could prove hasty and costly, the Company can also opt to distribute the only available version of Modeller as they take time develop the multiple versions to be used in the next academic year. This option will give them enough time to develop and carry out beta test on the multiple versions to ensure that it suits the needs of the target groups.

Recommendations

The main objective of a business is to the increase the profits of the company as well as ensuring a steady and high standard of performance in the market (Marshal 2013). In order to achieve these, the CSC Company should do the following.

CSC should increase the possibility production frontier (PPF) by increasing the number of their employees and capital in order to increase the quantity and quality of production. This is because increase in number of employees means an increase in labor force who will better exploit the available resources, thereby increased production. Another step of increasing their PPF is by increasing their investments in terms of capital that they invest in production. Increasing the amount of capital means availability of more resources to be used in production, thus more production of soft wares. Considering that CSC is operating in an oligopolistic market, these steps will put them a head of their competitors in the market, thereby; they will have a great influence in the market decisions.

The figure below indicates how proper allocation of resources leads to achievement of the PPF.

According to the PPF, points A, B and C - all appearing on the curve - represent the most efficient use of resources by CSC Company. Point X represents an inefficient use of resources, while point Y represents the goals that the Company cannot attain with its present levels of resources. However, point Y can be achieved if the Company increase its capital investments and enhanced technology.

The CSC Company should also change and enhance the technology that they are using in their production.  Change in technology means advancement the level of and skills and machines used in production process. This will translate into a more advanced and reliable products (soft wares) for their clients. This is very possible because the sales of the Company increased six folds when Steward converted the old software which was used in super computer into a new one which could be used in personal computers. Higher level of technology will reduce the time used in production, hence more software. Employment of advanced technology will give them absolute advantage over other rival Companies which may be producing the same software.

In order to win more clients as well as to increase their sales, the CSC Company should highly embrace non-price competition methods (Marshal 2013). These methods include, a lot of mass media advertising and marketing, extension of opening hours and internet shopping for their clients.

The CSC Company should also choose and major in production of one particular product. This will lead to quality products due to specialization as well as uniformity in their products. Consequently, there will be a rise in sales and profits as witnessed when Steward converted the old software which was used in super computer into a new one which could be used in personal computers.

Case study 2: Brown’s Lobster Pounds

Brief/Executive Summary - of the case study

This is a case study about Bob Brown business activity or nurturing and selling of Lobsters. The business thrived over the past years, for example in the year 2002 because supply of lobsters is plenty, therefore, more profits. Despite this, lobstermen experience several challenges such as a reduction in the number of lobsters due to migration or death caused by disease, fall in prices as well as fall in demand. The critical analysis section explains how market forces and structure determine decision making, for example, the cost-pricing process which is determined by the forces of demand and supply. This is a perfect market environment where decisions made are influenced both by buyers and sellers, for example, it illustrates how the law of demand and supply affects prices (Boyes 2011). Therefore, lobster suppliers have to set their prices according to the market standards keeping In mind that whatever price they set will negatively or positively affect their profits. Setting high prices in this case will make consumers turn to other seller or to other substitute products, for example, fish.

A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity 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).

The problem definition section defines the major problem in this case study which is the destruction of Lobsters nurtured in the pounds. It also discusses and provides solutions to this problem, for example, installation of aeration system to secure the pounds in order to provide a conducive environment for growth of Lobsters. It also highlights several recommendations useful for Browns business, for example, the use of larger and more advanced boats fro deep sea lobster catching during winter seasons.

Article Critique of the case study

This case study describes a perfect competition market where there are many buyers and sellers, therefore, prices are influenced by the laws of demand and supply (Marshal, 2013). As indicated in the article, there are periods which the supply of lobsters reduced leading to a shoot up of prices. This is in agreement with the law of demand and supply which dictates that reduced supply leads to increase in prices (Boyes 2011). There is also application of economic managerial skills. This is where Brown analyzes the market and chooses to buy three pounds in order to sell them at a profit during peak season, this is a demonstration of good marketing skills which requires a manager to know when and how to position products in the market (Froeb & McCann 2009). A business environment is full of risks which bring about losses (Marshal, 2013). In this case study, there are several risks affecting the selling and buying of lobsters. An example of risks present in this business is the disease that destroys lobsters in the ponds. The owners are, therefore, required to come up with ways of countering these risks, and one of them is the installation of aeration system.

Define the business problem in the case study.

In this case study, the major problem is the destruction of Lobsters nurtured in the pounds. The Lobstermen must find ways of dealing with diseases, rotten lobsters which consume more oxygen and the increased mortality rate of Lobsters. It is mentioned that in the previous year that diseases had spread in the pounds and destroyed the entire stock belonging to Mr. Brown who in turn lost thousands of dollars. In addition to that Mr. Brown was facing tough financial choices; he has three pounds of which he has to take care of. He has to incur the cost of buying equipments such as pumps and other maintenance overheads. The wholesalers are also faced with the challenge of keeping the Lobsters alive, fresh and free from disease in the pounds for longer periods.

There is also the problem of low prices, as a result of scarcity of Lobsters which migrate to the deeper parts of the sea making them difficult to catch.

Alternative options/solutions to the business problem

As it was stated in the fist study case above, every business activities have challenges which must be solved in order for the owner to realize a profit. In this case, Mr. Brown has a wide range of alternatives regarding his problems. Firstly, Brown can opt to open up a single pound and provide all the necessary equipments needed to provide the best environment for Lobsters to thrive. With one pound, he is able to install an aeration system and meet other maintenance cost without stretching his budget. This will also ensure that he takes as good care as possible for this pound in order to produce the largest amount of Lobsters as possible for sale. Secondly, the lobstermen can reduce the number of Lobster destroyed by disease while in the pound by ensuring they harvest them early enough, for example, the fifth month after their introduction in the pounds.

Recommendations

In order to overcome the above challenges, the lobstermen should implement the following strategies.

Each and every individual owning a lobster pond should install an aeration system in order to protect the lobsters form disease. Even though, installing an aeration system might be costly, it is very helpful in the production of Lobsters. An aeration system increases the capacity of the pound by 20% as well as reducing the mortality rate of the Lobsters by 1.25 %.

The responsible authorities should also pass a law regulatory law requiring Lobstermen to own a maximum number of pounds which they can take good care off. This is to ensure there is no water intoxication caused by the large number of lobster deaths due to negligence by irresponsible lobstermen.

Lobstermen owning pounds should harvest the lobsters early enough, for example, the fifth month in order to prevent deaths caused by disease in the sixth month from the date the lobsters were introduced in the pounds.

Lobstermen should embrace more advanced technology in terms of boats and the nets that they use for catching lobsters. This will ensure that they are able to easily catch more lobsters when they migrate into the deep sea during winter seasons.

Conclusion

From the discussions above, it is worth to notice that economics involves the process of making of a lot of choice considering the unlimited ends and scarce resources which have alternative uses. Therefore, managers and decision makers are required to choose the best amongst the available alternatives. Economics address is the choice of the best uses of resources among the alternative uses, as it was noticed in both cases; Bob Bronwn had to choose between installing aeration system into his pounds while the CSC Company had to choose between developing multiple versions of Modeller or modifying the current one. Because it Microeconomics focuses on the behavior of the individual actors on the economic stage, that is, firms and individuals and their interaction in markets. Mangers of a business firm have to take decisions in the face of scarcity and alternative uses of resources (opportunity cost). The success of a business firm largely depends upon the efficiency in utilization of limited resources remaining in the disposal of the business firm. Since most of the problems of the firm emerge in the allocation of scarce resources the proper allocation and exploitation of available resources helps a firm to achieve the PPF effectively. Business firms do not operate in vacuum; rather, they operate in a market that is influenced by so many forces. These forces including the law of demand and supply determine the market prices. However, in monopoly market, the sole supplier has the advantage of deciding the market prices. Managerial economics is by nature goal oriented, and prescriptive which may be viewed as economics applied in decision making at the level of firm. A perfect market structure is favorable to consumers because prices are regulated since there are many suppliers. It is also favorable because there are several substitute commodities which consumers can choose from in case of the rise in prices.

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