Kinds of Economic Decision / How Economic Analysis Is Useful in Managerial Decision Making

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Q1) Kinds of economic decision / how economic analysis is useful in managerial

decision making

A close interrelationship between management and economics had led to the development of
managerial economics. Economic analysis is required for various concepts such as demand,
profit, cost, and competition. In this way, managerial economics is considered as economics
applied to “problems of choice’’ or alternatives and allocation of scarce resources by the firms.

What to Produce:

This problem involves selection of goods and services to be produced. Every economy has
limited resources and thus, cannot produce all the goods. More of one good or service usually
means less of others.

For example, production of more sugar is possible only by reducing the production of other
goods. Production of more war goods is possible only by reducing the production of civil goods.
So, on the basis of the importance of various goods, an economy has to decide which goods
should be produced. This is a problem of allocation of resources among different goods.

How to Produce:

This problem refers to selection of technique to be used for production of goods and services. A
good can be produced using different techniques of production. By ‘technique’, we mean which
particular combination of inputs to be used. Generally, techniques are classified as: Labour
intensive techniques (LIT) and Capital intensive techniques (CIT).

i. In Labour intensive technique, more labour and less capital (in the form of machines, etc.) is
used.

ii. In Capital intensive technique, there is more capital and less labour utilization.

How much to produce.

This involves the quantity to be produced. There are limited resources so there should not be any
wastage. Nothing should be produced over and excess the requirement. An economy should
make correct decision about this and resources should be allocated accordingly.
For Whom to Produce:

This problem refers to selection of the category of people who will ultimately consume the
goods, i.e. whether to produce goods for more poor and less rich or more rich and less poor.
Since resources are scarce in every economy, no society can satisfy all the wants of its people.
Thus, a problem of choice arises.

Goods are produced for those people who have the paying capacity. The capacity of people to
pay for goods depends upon their level of income. It means, this problem is concerned with
distribution of income among the factors of production (land, labour, capital and enterprise),
who contribute in the production process.

Where to produce

The production should be done in the areas where there is demand for that product. If there is no
demand then there is no point of production in that area. A survey can be done before hand to
understand the demand and later production units can be set up in the area according to the
demand.

Are the resources used economically?

Economic analysis helps us to understand whether resources are used economically. There
should be economic efficiency. Economic efficiency is when all goods and factors of production
in an economy are distributed or allocated to their most valuable uses and waste is eliminated or
minimized.

Are the resources fully employed

This is one of the important basic problems of an economy because having made the earlier
decisions, the society has to see whether the resources it owns are being utilised fully or not. In
case the resources of the economy are lying idle, it has to find out ways and means to utilise
them fully.

If the idleness of resources, say manpower, land or capital, is due to their male allocation, the
society will have to adopt some monetary, fiscal, or physical measures whereby this is corrected.
Is the Economy Growing?

The last and the most important problem is to find out whether the economy is growing through
time or is it stagnant. Economic growth takes place through a higher rate of capital formation
which consists of replacing existing capital goods with new and more productive ones by
adopting more efficient production techniques or through innovations.

Q2) Perfect competition

1. There are a large number of firms in the market


2. Firms in the market sell an identical product
3. Firms are price takers
4. Each firm has a small share of the total market (no monopolies)
5. Buyers have complete information about the product
6. There are no barriers for firms to enter and exit the market

Examples: Foreign mkt, agri mkt, internet related industries

Q3) Monopoly

Q4) Oligopoly
Oligopoly is a market structure with a small number of firms, none of which can keep the others
from having significant influence. The concentration ratio measures the market share of the
largest firms. A monopoly is one firm, duopoly is two firms and oligopoly is two or more firms.
There is no precise upper limit to the number of firms in an oligopoly, but the number must be
low enough that the actions of one firm significantly influence the others.

Four characteristics of an oligopoly industry are:

1. Few sellers.
There are just several sellers who control all or most of the sales in the industry.

2. Barriers to entry.
It is difficult to enter an oligopoly industry and compete as a small start-up company. Oligopoly
firms are large and benefit from economies of scale. It takes considerable know-how and capital
to compete in this industry.

3. Interdependence.
Oligopoly firms are large relative to the market in which they operate. If one oligopoly firm
changes its price or its marketing strategy, it will significantly impact the rival firm(s). For
instance, if Pepsi lowers its price by 20 cents per bottle, Coke will be affected. If Coke does not
respond, it will lose significant market share. Therefore, Coke will most likely lower its price,
too.

4. Prevalent advertising.
Oligopoly firms frequently advertise on a national scale. Many Super Bowl, World Series,
Wimbledon finals, World Cup finals, NBA finals, and NCAA March Madness advertisements
are done by oligopoly firms.

Examples of Oligopoly Industries

The following are examples of oligopoly industries:

1. The automobile industry


2. The steel industry
3. The photographic equipment industry
4. The aircraft manufacturing industry
5. The beer (wholesale) industry
6. The cereal (breakfast) industry
7. Infant formula makers
8. The oil industry (wholesale)
9. The airline industry
10. The beverage (including soft drinks) industry
Q5) Monopolistic Competition
Definition: Monopolistic competition is a market structure which combines elements of
monopoly and competitive markets. Essentially a monopolistic competitive market is one with
freedom of entry and exit, but firms can differentiate their products. Therefore, they have an
inelastic demand curve and so they can set prices. However, because there is freedom of entry,
supernormal profits will encourage more firms to enter the market leading to normal profits in
the long term.

A monopolistic competitive industry has the following features:

 Many firms.
 Freedom of entry and exit.
 Firms produce differentiated products.
 Firms have price inelastic demand; they are price makers because the good is highly
differentiated
 Firms make normal profits in the long run but could make supernormal profits in the
short term
 Firms are allocatively and productively inefficient.

Eg, Restaurants, hairdressers, clothing, TV programmes.

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