Managerial economics basics for traditional and new managers

Economists agree at one point, "The resources are scarce."

You need not only to know managerial economics basics but also tools to redirect and utilize these limited resources to achieve goals of your organization like higher profits, cost-cutting, maximization of revenues, etc. Your primary goal would be to help the company to maximize its profits.

You will surely face problems in pursuing your business goals. What they might be?

Let’s take a simple example to understand the nature of problems that managers of manufacturing companies may have to face. Assume that you are a manager as well as an owner of a medium sized business organization which makes bicycles and sell to distributors.  You know you are solely responsible for the outcomes of any business decision you take. You may have two or more options in any situation:

  • Should you purchase raw material such as bicycle metallic frame and rimmed-wheels from other manufacturers or produce them within your firm?
  • Should you specialize in making only one type of bicycle for adults or produce mini-bicycles too to target children market?
  • How many bicycles should you produce, and at what price should you set to sell them?
  • How many workers should you hire, and how much you should pay them?
  • How can you monitor workers for their efficiency to produce standard quality bicycles?
  • How will the business actions of your current or potential competitors in your area can affect your own business decisions?

Such problems will need quick and timely decisions to resolve them. Logical and rational decisions are always efficient, and they are based on the precise/correct knowledge of business problems along with an accurate picture of your organization’s economic and financial state.

How will you acquire that knowledge?

The answer lies in adopting scientific methods, i.e., using statistical tools and quantitative techniques. Of course, these methods don’t ensure ideal solutions to business problems. But they can assist you in making optimized decisions in the annoying presence of scarcity issues regarding resources.


Such approach of making optimized decisions using statistical tools and quantitative techniques under scarce inputs for business is all that is discussed in managerial economics.

Why managerial economics basic so important?

OK

It’s the beginning of a beautiful sunny day.

You tap your laptop and browse for today’s news.

It’s reuters.com.

Here are a few headlines

·         Low at cash, AMD thinking about a possible downsize

·         AT&T to acquire Mexico's Iusacell for $1.7 billion

·         Anton Ivanov, A 27-year-old millionaire reveals how he built his wealth

·         JP Morgan to cut 3,000 more retail banking jobs

·         Japan's Ezaki Glico aims to conquer world with Pocky stick snacks

You can see many news flashing on your screen. 

Can you sense something common about all of these news flashing?

Yes, there is.

All involve managerial economics in a way or other.

It’s a fact that several companies face downfall every year just for poor managers. Billions of dollars are wasted just because the managers there, cannot or don’t use very managerial economics basic statistical tools to optimize pricing and output decisions regarding products/services, optimize the process engineering, production process, and various input combinations, selection of product quality, etc.

Managerial Economics is everywhere around you!

This set of methodologies to tackle business problems is being practiced everywhere around you. Whether you are heading a Governmental body responsible for managing revenues, or a housewife taking care of domestic budget, your practices involve managerial economics.

The managerial economics is not only useful to managers of profit oriented organizations; it is also quite valuable to managers of non-profit organizations like charity organization where inputs are usually highly scarce and there is uncertainty about availability of resource.

Just imagine you have a very tight budget while managing a N.G.O aimed at providing shelter, food, medical facilities and education for orphans or abandoned children. Think about the scale and intensity of impact whether it’s positive or negative due to your managerial decisions there… Managerial economics can help you here, to give you a powerful insight into the dimensions of managing resources efficiently and effectively along useful tools to sort out problems.

Of course, the managerial economics is a vast field of knowledge. If you a new entrant in the business or a traditional manager with intuitive approaches, you may take some time to entrench economic reasoning in your managerial decision making.

What should you do?

Well… You can start from managerial economics basics.

Choose something that’s more relevant to your business nature.

An insight into practical application of managerial economics basics

Let’s take a classic example of Economic Order Quantity (EOQ). It is a simple mathematical tool to minimize total inventory holding costs and ordering costs; the most economical and optimal order size that you can place to your suppliers. It will save you from losing money and a possible headache.

For example, if you are a furniture manufacturer. You get orders from your customers. You have to decide how much wooden log is required every month to maintain a supply of tables and chairs which are being demanded by the consumers. You can’t afford to order too much wood as it shall involve storage and inventory costs. You can also not afford to purchase log in small quantities as it shall be harmful to your business for not meeting the demand of the customers in time.

The science of managerial economics can sort this issue out for you.

eoq

Where

D = Demand in units

S= Cost per order

H= Carrying cost per unit

C= Cost of placing an order

I don’t want you to go for number crunching now. This formula and many others are straightforward to use as they are even amended in spreadsheet software like MS Excel.

So let’s get to the point. You did a calculation and got a figure, say EOQ= 451 units. This little effort has solved you most of the risk associated with that economics issue and saved your time and energy. Customers’ demand is 2000 chairs. It says, order for 451 units/wooden logs right now so that you can make 2000 chairs. No worries!

Congratulations! If you are new to it, you have just learned a way to handle a business decision using a simple tool of managerial economics. Remember, this is a very fast-paced and dynamic business world where cut-throat competition only allows smart and productive managers to survive.

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