1.
Question: Briefly discuss the
focus of Managerial economics to the best of your understanding.
Answer: Define Managerial Economics: Managerial
economics is best defined as applied microeconomics. That is, managerial economics can be thought
of as an application of that part of microeconomics focusing on those topics of
greatest interest and importance to managers.
These topics include demand, production, cost pricing, market structure and government regulation.
The
Scope of Managerial Economics
Economics
has two major branches (1) Microeconomics. Both micro and macro economics are
applied to business analysis and decision-making directly or indirectly. Managerial economics comprises, therefore
both micro and micro-economic theories.
The
areas of business issues to which economic theories can be directly applied may
be broadly divided into two categories (a) operational or internal issues, and
(b) environment or external issues.
Microeconomics
Applied to Operational Issues
Operational
problems are of internal nature. They
include all those problems which arise within the business organization and
fall within the purview and control of the management. Some of the basic Internal issues are: (i)
Choice of business and the nature of product, i.e. what to produce (ii) choice
of size of the firm i.e. how much to produce (iii) choice of technology i.e.
choosing the factor-combination; (iv) Choice of price, i.e. how to price the
commodity (v) how to promote sales (vi) how to face price competition (vii) how
to decide on new investments (viii) how to manage profit and capital (ix) how
to manage inventory i.e. stock of both finished goods & raw materials. These problems may also figure in forward
planning.
Microeconomics
deals with these questions and the like confronted by managers of the business
enterprises. The microeconomic theories
which deal with most of these questions are as outlined below:
Theory
of Demand, Theory of Production and Production Decision, Analysis of
Market-Structure and Pricing Theory, Profit Analysis and Profit Management,
Theory of Capital and Investment Decision
Macroeconomics
Applied to Business Environment
Environmental issues pertain to the general
business environment in which a business operates. They are related to the overall economic,
social and political atmosphere of the country.
The factors which constitute economic environment of a country include
the following factors:
i.
The type of economic system of the country ii. General trends in production
employment, income, prices, saving and investment etc iii. Structure of and
trends in the working of financial institutions e.g banks, financial corporations,
insurance iv. Magnitude of and trends in foreign trade v. trends in labour and
capital markets vi. Government’s economic policies e.g industrial policy,
monetary policy, fiscal policy, price policy etc. vii. Social factors like the value system of the
society, property rights, customs and habits viii. Social organisation like
trade unions, consumers cooperatives and producers unions.
2.
Question: Identify any five objectives of the business
and explain the appropriate decisions that can be employed to attain them.
Answer: OBJECTIVES OF THE
BUSINESS-Conventional theory of firm assumes profit maximization as the sole
objective of business firms. Recent
researchers on this issue reveal that the objectives that business firms pursue
are more than one, some important objectives, other than profit maximization
are:
a.
Maximization of
sales revenue b. Maximization of firm’s growth rate c. maximization of
manager’s utility function d. making satisfactory rate of profit e. long-run
survival of the firm and f. entry-prevention and risk-avoidance.
Profit as Business Objective – Profit in a general sense is regarded
as income accruing to the equity holders, in the same sense as wages accrue to
the labour, rent accrues to the owners of rentable assets etc. Pure profit may thus be defined as a residual
left after all contractual cost have been met, including the transfer costs of
management, insurable risks, depreciation and payments to shareholders
sufficient to maintain investment at its current level.
PROFIT MAXIMIZATION AS BUSINESS OBJECTIVE
Profit maximization is regarded as the most reasonable and
analytically the most productive business objective. Profit maximization assumption has a greater
predictive power, it helps in predicting the behaviour of business firms in the
real world and also the behaviour of price and output under different market
conditions.
SALES AND OUTPUT MAXIMISATION
Perhaps, the most popular alternative to profit maximization as
motive for firm behaviour is the maximization of either sales (i.e. total
revenue) or total output.
GROWTH AS AN OBJECTIVE
Profit and sales objectives are most commonly expressed in static
terms. In contrast, a firm’s management
may be primarily concerned with the dynamic objective of growth. Growth may be measured in terms of sales,
total assets or number of employees, etc.
BUSINESS SOCIAL RESPONSIBILITY OBJECTIVE
Probably no problem has received more notice by business,
governments, politicians, and people in general in the past few years than the
problem of what the social responsibility of business is. The question, originally aimed at business,
is now being addressed with increasing frequency to government agencies and
their leaders, tertiary institutions, charitable organizations, and even
religious organizations, a society, awakened and vocal with respect to the
urgency of social problems is asking the managers of all kinds of organizations
what they are doing to discharge their social responsibilities and why they are
not doing more.
The business sector of the Nigerian economy executes many social
services directed at improving societal well being, some of these functions
are;
1.
The sector acts and works with
the governments of the country to guarantee success of the war against
inflation
2.
In the areas of education,
training, and employment, the business sector has done well
3.
The business sector acts and
works with the government in the beating down environmental pollution in
Nigeria.
3.
Question: Compare and contrast price and quantity
determination level under monopolist market structure with that of perfect
competitive market.
Answer: Although
monopolistic competition is characteristically close to perfect competition,
pricing and output decision under this kind of market are similar to those
under monopoly. The reason is that a
firm under monopolistic competition, like a monopolist, faces a downward sloping
demand curve. This kind of demand curve is as the result of :
i. a strong preference of a section of consumers for the product,
and ii. The quasi-monopoly of the seller over the supply.
The strong preference or brand loyalty of the consumers gives the
seller an opportunity to raise the price and yet retain some customers. And, since each product is a substitute for
the other, the firms can attract the consumers of other products by lowering
their prices.
Price-output determination under Monopolistic Competition
Rate of profit would not be the same for all the firms under
monopolistic competition because of difference in the elasticity of demand for
their product. Some firms may earn only
a normal profit if their costs are higher than those of others. For the same reason, some firms may make even
losses in the short run to the extent of their average fixed cost.
Price Determination Under Perfect Competition
By definition, perfect competition is a market setting in which,
there are a large number of sellers of a homogeneous product. Each seller suppliers a very small fraction
of the total supply. No single seller is
powerful enough to influence the market price.
Nor can a single buyer influence the market price. Market price in a perfectly competitive
market is determine by the market forces-market demand and market supply. Market
demand refers to the demand for the industry as a whole: it is the sum of the quantity demanded by
each individual consumer or user at different prices. Similarly, market supply is the sum of
quantity supplied by the individual firm in the industry.
The market prices is, therefore, determined for the industry, and is
given for each individual firm and for each buyer. Thus, a seller in a perfectly competitive
market is a price-taker, not a price-maker.
In a perfectly competitive market, therefore, the main problem for a
profit maximizing firm is not to determine the price of its product but to
adjust its output to the market price so that profit is maximum.
In monopolistic competition, there will be too many firms in the
industry each producing an output less than the optimal, that is at a cost
higher than the minimum. This is due to the fact that the tangency of AC and
demand occurs necessarily at the falling part of the LAC, that is, at a point where
LAC has not reached it minimum level.
4.
Question: Explain the reasons why the theory of utility
might not be a perfect explanation to the behaviour of consumer
Answer: The cardinal and
ordinal utility approaches to demand analysis, are based on some concept of
utility cardinal or ordinal. The
cardinal approach assumes absolute or cardinal measurability of utility and
ordinal approach assumes relative or ordinal or introspective measurability of
utility.
While measurement of cardinal utility is not practicable, the
introspective utility is non-observable. Thus, both these approaches involve
problems of measurability. In an attempt
to overcome this problem, Samuelson proposed in 1947 another theory of demand
called Revealed Preference Theory of consumer behaviour.
The main merit of the revealed preference theory is that the law of
demand can be directly derived from the revealed preference axioms without
using indifference curves and most of the restrictive assumptions. What is
needed is simply to record the observed behaviour of the consumer in the
market. The consumer reveals his
behaviour by the basket of goods a consumer buys at difference prices.
5.
Discuss the reason for the
inevitable position of forecasting in business
Answer: Usually, the future
is unknown, yet managers must take decision today which either depends on or
affect conditions ruling tomorrow.
Because of this uncertainty in the business world, there is the need to
forecast far into the future.
Forecasting therefore deals with the determination of the future
occurrence of events through prediction based on the past and present behaviour
of such event. Forecasting is very
essential in business in the area of determining the sales, manpower
requirement, financial, research and development, price. Advertisement and in
fact al the resources necessary for their operation.
Business forecasting as stated aims at reducing uncertainty about
tomorrow so that more effective decisions can be made by proving predictions of
future values of variables from past and present information. The reasons therefore of the inevitable
position of forecasting in business cannot be too distance form the role
forecasting palys in the decision making process, which are outline below:
i.
It helps managers to predict
the circumstances that surrounds that decision and the situation
ii.
It helps to facilitate planning, for example production
planning based on sales forecast
iii.
It helps to anticipate and evolve
corrective measures to certain problems.
iv.
It has been useful in the area
of finance and accounting.
6.
Question: Briefly analyze any five regulatory measures
of government policies
Answer: Regulatory roles of
government include all direct and indirect policy measures which the government
employs from time to time to control and regulates private business to prevent
the growth of socially undesirable business activities, to prevent the
concentration of economic power and to direct private business activities
towards the goals of growth and prosperity, employment and social justice.
The regulatory measures of the government include, by and large, the
following polices:
i. Taxation Policy ii. Monetary and credit policy iii. Income and
wage policy iv. Control and regulation of monopolies v. Import and export
policy.
7.
Question: Advance reasons for the preference of
competition to monopoly in a less developed country like Nigeria. Cite cases of practical examples to the
Nigerian economy.
Answer: Pure or Perfect
competition is a market structure characterised by a large number of buyers and
sellers, each of whose transactions are so small in relation to industry output
that they cannot affect the price of the product. Individual buyers and sellers are price
takers. No firm earns above-normal
profits in the long-run.
Pure monopoly is a market structure characterised by the, existence
of a single producer. A monopolistic firm simultaneously determines product
price and output. It is possible for a
monopoly to earn above-normal profits, even in the long run. The market structure influences firm’s
pricing decisions a great deal. The
degree of competition determines a firm degree of freedom in determining the
price of its product.
As a matter of rule, the higher the degree of competition, the lower
the firm’s degree of freedom in pricing decisions and control over the price of
its own product and vice versa. Under
perfectly competition, a large number of firms compete against each other. Therefore, firm’s have little or no choice in
price determination.
In the case of monopoly, the degree of competition is close to
nil. The monopoly firm has a
considerable control over the price of its product. A monopoly, in the true sense of the term, is
free to fix any price for its product, of course, under certain constraints.
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