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Scope of managerial economics
Applicability of managerial economics
Application of managerial economic
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Management are responsible for making decisions within firms and these decisions often involve risk and uncertainty. Models have been developed, all of which are based upon the objective of firms, to help identify the decision which must be made in order to achieve the desired outcome (Moschandreas, 2000). The neoclassical model states the firm’s main objective is profit maximisation. However, economists believe it is unrealistic to assume firm’s aim for maximum profits in this modern economy for reasons discussed later. The managerial school offers alternative models in substitute of the neoclassical model which assumes profit maximisation. This essay will examine Baumol’s revenue maximising model and Williamson’s managerial utility model in further detail. Marris’s model of managerial enterprise will also be examined as it helps us to understand in more detail why shareholders may complain about their firm growing too fast.
The Neoclassical Model
The neoclassical model states the main objective of a firm is profit maximisation; output is set at a level where marginal revenue equals marginal cost as shown in figure 1. This model can be used to predict how a firm will respond to changes in its environment. It assumes the firm produces a single, standardized product and assumes perfect certainty and knowledge regarding present and future costs as well as demand conditions. More importantly it assumes the firm is owned and managed by a single individual or few individuals meaning there is no conflict of interest between principle and agent and profit maximisation is the sole objective of the firm (Petrochilos, 2009).
The neoclassical model does not consider over which period profits are to be maximised. Therefore it assumes firms...
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... sacrificed for growth which may lead to a takeover or selling of their shares.
Works Cited
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Davies, H. & Lam, P.-L., 2001. Managerial Economics: An Analysis of Business Issues. s.l.:s.n.
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Marris, R., 1963. A Model of the "Managerial" Enterprise. s.l.:s.n.
Moschandreas, M., 2000. Business Economics Second Edition. s.l.:Thomson Learning.
Petrochilos, G., 2009. Managerial Economics 4th Edition. s.l.:Pearson.
Reekie, W. D. & Crook, J. N., 1995. Managerial Economics A European Text. s.l.:Prentice Hall.
Townsend, H., 1995. Foundations of Business Economics: Markets and Prices. New York and London: Routledge.
Lila J. Truett & Dale B. Truett (1992). Managerial Economics 4th edition Analysis Problems Cases. South-Western publishing co.
Princeton, 1963. Hailstone, Thomas and Rothwell, John. Managerial Economics, pp. 93-95. Prentice Hall, 1993.
What major technology change has had the greatest impact on the quality of your life?
Alford and Friedland, Chapter Seven, “State and Society in Managerial Perspective,'; in Powers of Theory, 1985, p.161-83.
Neo-classical economics assumes that workers and employers are perfectly rational and that labor markets function efficient...
Robbins, S.P., & Coulter, M. (2009). Management (10th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.
Grand Metropolitan PLC is the world’s largest wine and spirits seller. It mainly operated in London, USA. In 1991, it beats market expectation with a 4.8% increase in pretax profits, and the company Chairman stated that company’s goal “to constantly improve on”. Despite the great performance in the world recession in 1991, the price of GrandMet shares was 10% below the average price/earnings ratio of the companies in the Standard & Poor’s 500 index. And more important, rumors had that GrandMet, valued at more than $14 billion in the stock market, maybe a takeover target. The management dilemma is to understand why the company’s stock is traded below of what considered being the right price and whether the company is truly being undervalued by the market or there are consistent issues with negative NPV projects and lines of businesses.
The crucial importance and relevance of economics related disciplines to the modern world have led me to want to pursue the study of these social sciences at a higher level. My study of Economics has shown me the fundamental part it plays in our lives and I would like to approach it with an open mind - interested but not yet fully informed.
To begin we must first understand what Neoclassical Economics actually covers and is all about. Thorstein Veblen first brought up the term neoclassical economics in the early 1900’s. What many economics believe that follow neoclassical economist believe is that everyone wants to maximize there own personal utility and will make all of there decisions based on this concept. It is thought that everyone essentially thinks like this to maximize his or her personal satisfaction. Also, that everyone makes this decision when they have fully
Sullivan, A., & Steven M., (2003). Economics: Principles in action. Upper Saddle River, New Jersey : Pearson Prentice Hal
Stephen P. Robbins and David A.Decenzo, Fundamentals of management: essential concepts and applications (USA: pearson prentice hall, 2003), PP.13-14.
Tragakes, E. (2012). Economics for the IB diploma (2nd ed.). Cambridge, UK: Cambridge University Press.
Jensen, M. C., and Meckling, W. H., (1976) Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics 3: 305-360.
Although it maximized efficiency and productivity but its main limitation was ignoring human aspects of employment. This is manifested in the following:
Schermerhorn, ‘Management, Foundations and Applications’ (2nd Asia-Pacific ed.) John Wiley and Sons, 2013, PP 279 - 280
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