Homework Writing Help on Managerial Economics

Managerial Economics

Introduction

Most organizations operate with an aim of making business profits and achieving positive economic status. Economics refers to the study of how organizations produce; distribute goods and services to the end user and their consumption (Edward, 2008). The manufacturer produces goods and ensures that they reach the market for the consumer to acquire them. This process requires control, monitoring and making decisions to ensure the products are in good quantity, quality, and in the right time. Management in an organization is the function that incorporates the skills of controlling, coordinating and making decisions that aid in achieving organizational goals (Allen & Doherty, 2009).

Therefore, managerial economics involves the process of making strategic decisions that suggests course of action to the economics factors in the organization. It involves incorporating economic concepts and analysis that are used to solving managerial problems. These decisions include the assessment of capital, choosing the location, determining the product, incorporating factors of production, and sale promotion among others. In light of this, Jacknice Company is a newly formulated or opened branch that deals in the production of first hand clothing. The management of Jacknice has a lot of managerial decisions to make that affect the production, distribution, and consumption of the cloths. Therefore, this paper highlights and explains the factors of managerial economics that Jacknice Company will apply.   

Jacknice Company

            As mentioned earlier, Jacknice is a newly opened company that deals with first hand cloths and it seeks to highlight its managerial economics in order to achieve its objectives and goals. There are four main issues identified by the management that are affecting the operations of Jacknice Company. These issues include capital and profit management, production cost analysis, pricing policies and strategies, and risk analysis and management. The issues have been affecting the company adversely leading to significant drop in sales and revenue. In order to rekindle the company, the management has to streamline the four issues identified. This paper outlines the four factors of managerial economics in order to salvage Jacknice Company.  

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  • Managerial abilities

The expertise upheld by the manager used to assist the firm to accomplish and achieve its set objectives are referred to the managerial abilities. It also incorporates the making of decisions and offering leadership skills to the rest of the stakeholders in the organization. The manager is supposed to use his/ her own abilities such as know-how, knowledge base, experience and perception to enhance productivity. There are three main abilities by managers which include human skills, technical skills and conceptual skills.

Human skills are essential since they aid in creating a rapport with the others in habitable manner. The bridge between employees and the management can be either positive or detrimental depending on the application. A manager who is able to interact and motivate his or her employees scores high in enhancing productivity. Conceptual skills refer to the cognitive and analytical knowledge possessed by a manager. The manager is supposed to predict situations and make decisions in challenging environment. It is a common behavior that employees rush to the manager when they have been unable to fathom a certain issue. It would be embarrassing if the manager also failed to give them an answer; hence, conceptual skills are important.

Technical skills are equally important because they are the skills required to complete a specific task. A manger needs to be a guru in at least one field depending on the education background, experience and personal taste. Actually, when a manager delegates a task, most employees come back to the manager to be shown how to go about the task. New employees are faced with this challenge in most cases; hence, the manager should hold these abilities.

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  • Capital and profit management

Capital is any type of stock that can be used to bring revenue or financial benefit. Marx defined capital is the money used to buy a product that will be resold or used to produce something that will be sold to bring financial profit. It is an input that is used in the process of production. There are five types of modern capital which include financial, natural, social, human and instructional capital (Boyes & Melvin, 1999).  Financial capital is the monies owned by legal entities, which can be inform of liquid money or capital assets, that generates revenue. Natural capital is the environmental inheritance such as trees while human capital the combination of human skills.

Capital is an important factor in any organization because it enhances the organizational operations. It requires the management to control and manage capital in the firm. Therefore, capital management is the technique applied to ensure a proper balance of working capital, current assets, and the liabilities. Working capital is used to finance the expenses of the organization and as a production function to yield profits. Therefore, lack of capital management may bring a loss or mismanagement of funds in the firm. That is why it is important to draft a budget in order to ensure the company has sufficient cash flow.

One of the problems challenging Jacknice is the lack of proper capital and profit management. The profits made by the company should be used to finance the operating expenses such as labor and electricity. Mismanagement of the profits leads to losses and can lead to the company’s closure. Implementing an effective working capital management design is a good approach for the company to improve its earnings. Under capital management, there are certain approaches that are used such as analyzing capital requirement, profitable project selection, capital planning and expenditure, capital return, and cost of capital.

  • Capital planning and expenditure

Capital planning is the fundamental initial step that Jacknice should take because it enables them to plan how to utilize the owner’s equity. Capital should be utilized prudently in order to accrue profits (Cheng, 2011). This is enabled by drawing the expenses such as labor costs, rent, and money to purchase stock among others. Certain amount of money should be set aside for the expenses before the company starts raking in profits that will cater for the expenses. Managers at Jacknice Company should be cautious with capital planning to avoid funding unnecessary projects that will result to losses. This can be achieved by analyzing the minimum capital expected to run the company as explained below.  

  • Analyzing Capital Requirement (Regulatory Capital)

Capital requirement is the minimum amount of capital that an organization should retain as required by the financial regulator. Jacknice Company should always have regulatory capital to caution it against market and operational risks. Regulatory capital is more pronounce in financial institutions but it is still applicable in other firms (Allen & Doherty, 2009). This is because a business requires emergency finances after clearing its liabilities that can cater for an emergency or a risk. The management of Jacknice should always have minimum capital requirement to caution the company against market and operational risks.   

  • Return of capital (ROC)  

The investors contribute money to the business as capital to aid in the organizational operations. In some instances, this sum exceeds the growth or the net income made by the company; hence, the surplus is returned to the investors. In case of insufficient funds, Jacknice Company can solicit this money and pay the shareholders later as dividends as opposed to ROC. It is a good way of managing profit and ensuring that there is an effective cash flow in the organization.

  • Cost of capital

The cost of capital refers to the cost of company’s fund; that is, cost of obligation or debts and cost of equity. Cost of debt is calculated from the borrowed funds either from monetary institutions or other sources. The cost of investment is determined by comparing the investments to other investments that have similar risk profiles. Therefore, when the company’s capital is putted to work, there is the expected return minus the borrowed funds. The remnant is the cost of capital that can be used to finance another investment aimed at bringing profits to the parent company.

  • Profitable Project Selection/Capital Improvement Plan (CIP)

The capital improvement plan is a method of capital management because it identifies projects that can be used to bring extra profits to the company. CIP is a short-term plan that does not exceed ten years where the managers identify capital projects and equipment purchases and how to finance them without affecting the organization’s finances (Cheng, 2011). Profitable project selection is an alternative means for the company to look for funds and profits. The cost of capital is well utilized in profitable project selection to finance an alternative investment. For instance, Jacknice Company can start offering soft drinks to the customers at a fee as they are being served or as the choose their clothing. This would aid in increasing the profit in the company within a short period and it does not require huge capital to start.

            Capital planning is an integral process that an organization should embrace to avoid funds mismanagement and in order to realize profits. Identifying the organization’s expenses and the minimum capital to run the firm is the first step in capital planning. Thereafter, the management should be able to subtract the net income accrued from the capital contributed. The surplus money realized is the return on capital which is expected to be returned to the investors but it can be used to finance other profitable projects. The managers can identify a sideline investment that can be financed without affecting the cash flow of the initial company Boyes & Melvin, 1999). The identified investment if the profitable project selection or the capital improvement plan. At this point, the company can compare itself with other investment with similar risk profiles to evaluate its progress.  This is realized by starting to pay the cost of debt and comparing the remnant capital with other companies.  Therefore, Jacknice Company can assess its performance through capital planning and expenditure.

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  • Production and Cost Analysis

After acquiring capital and laying out an effective plan of how to use the capital, the management should concentrate on the production of commodities. Production in managerial economics is the act of combining physical and intangible inputs such as plans and skills in order to come up with an object for consumption. Cheng (2011) asserts that production is an essential unit of managerial economics because it is the backbone of the economic process. Production is the name given to the transformation of factors into goods (Edward, 2008). Production and cost analysis is the evaluation of the budgetary expenses of the entire process of transforming the factors of production to final good. Production commences when the organization orders for the supply of raw materials, processing them, and combining the know how to come up with a final output. This process is solely the responsibility of the company which is realized under the concept of the role of the firm.

The production process can be divided into either long-run or short-term. The terms long run and short run do not necessarily refer to the time frame of production but the degree of flexibility the firm has in changing the level of output.  Jacknice Company manager was uncertain of the right production line, economies of scale, returns to scale, and laws of return in production and cost analysis. These approaches ensure proper production and resource allocation.

  • Production Line

The chronological flow of a product in a factory; raw materials are put through a refining process to produce a finished article. A production line is that set of sequential operations in the processing unit to come up with a complete output. Since Jacknice Company specializes in clothes, its production line starts from acquiring cotton or flax. However, the company has also an option of buying clothes material and assembling them to make a complete cloth. The manager should consider the cheapest option and the most comfortable to the company (Cardona-Coll, 2003). Jacknice Company is medium size company and it is quite expensive to assemble cloths from cotton or flux. Therefore, it would be prudent for the manager to acquire material and assemble together in accordance to the consumer taste. This should be done by analyzing the available capital and the cost of production in the entire production line.

  • Economies of scale

The rate or level of production determines the benefits a company acquires during the production process. Economies of scale are the financial advantages an enterprise acquires due to size, output where the cost of producing a unit decreases with the increasing amount of output (Cheng, 2011). Bulky production is generally cheaper as compared to minimal production.  This can be transformed to the pricing where the prices of a commodity can be lower compared to other companies. Jacknice Company should incorporate bulk production to avoid incurring huge costs of production. The supply of materials should be in large size to ensure that they are assembled in a large number to ensure that the company meets the demand. Economies of scale enable a company to do things at ease with increased speed and lesser costs (Edward, 2008).  Jacknice can realize this by purchasing in bulk, order fulfillment, borrowing capital when the interests are low and minimizing marketing costs by using cheaper sales promotion methods. This will translate to lower cost of expenditure and increased revenue.

  • Returns to scale

As discussed in economies of scale, when the scale of production increases in the long run, the input levels start to change. As the firm continues to grow, the production increase and so do the level of the inputs. When these factors of production increases with the increasing level of outputs, they effect is referred to as returns to scale. It differs with the economies of scale as it shows the rapport between input and output quantities whereas economies of scale deal with the cost effects (Boyes & Melvin, 1999). The returns to scale are realized by installing efficient technology in the production line.  Technology acts as a subsidiary to the expensive labor cost and enables mass production which results to increased revenue. Therefore, Jacknice should concentrate on long run production of cloths in order to achieve increased returns to scale.   

  • Laws of return

Laws of return are intertwined with the return to scale as there are three interrelated and sequential laws. They include Law of Increasing Returns to Scale, Law Of Diminishing Returns to Scale, And the Law of Constant Returns to Scale (Cheng, 2011). In simple terms, when output increases more than the change in the level of inputs; then there is increased return on scale. Conversely, when input increases more than the realized outputs, then there are decreased returns on scale. When the level of output and input stagnates, the effect is constant return to scale.  Jacknice should increase the level of input to check which laws of return will be realized.

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  • Pricing policies and strategies

After the production process, a company needs to avail the commodity to the customer consumption. However, the product has to include a price tag that covers the production cost and can generate profit. There are various pricing strategies that the firm may use depending whether it is a new entrant to the market or existing product. Jacknice is a newly opened company that operates by selling cloths which are also supplied by other firms. Different types of pricing strategies include premium pricing, penetration strategy, economy pricing, price skimming, and psychological pricing among others.

Premium pricing is a situation where the firm sets a higher price than the competitors especially when the commodity is unique (Cardona-Coll, 2003). This strategy is commonly used by high-end products which are considered lavish. Penetration pricing involves lowering the prices in order to attract consumers while entering the market (Cardona-Coll, 2003). It can also be used in order to increase the market share of the products. Economy pricing now involves decreasing the prices to the lowest prices possible that only caters for the production costs and a minute profit. This strategy is applicable in organizations that incorporate bulk production and sales such as Wal-Mart. Price skimming apply when a business enters the market before competitors and sets a price for the commodity Boyes & Melvin, 1999). Lastly, psychology pricing involves placing a psychologically lesser price such as $99 other than $100. Therefore, it is quite clear that Jacknice Company should embrace penetration pricing.

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  • Risk Analysis and Management

Risk analysis involves a set of activities that an organization incorporates to identify, evaluate and mitigate risks. It involves acquiring data and amalgamating information to develop an understanding of the risks that surrounds the organization (Hossein, 2006). Risks are defined as the effect of uncertainty on objectives and managers should allocate enough resources to ensure that the risks do not deter the organization from its goals. Risk management involves developing a systemized and economical application of resources to minimize and control the impact of unfortunate events. There are different risks in a business such as uncertainty in financial markets, project failures, regulations, accidents, and natural calamities among others.

On conclusion, managerial economics is an important factor that business should consider before availing the product to the market. The first step is sourcing for finances and effective planning for capital and expenditure. The production analysis is very important in order to know the issues included in producing a commodity. Then the company should determine the prices to acquire sufficient profits. Finally, managers should be conscious of any risk and be able to mitigate them.

References

Allen, B. & Doherty, N. (2009). Managerial Economics Theory, Applications and Cases, 7th Edition. Nortion.

Boyes, W. J., & Melvin, M. (1999). Fundamentals of economics. Boston, MA: Houghton Mifflin

Cardona-Coll, D. (2003). Bargaining and Strategic Demand Commitment. Theory and Decision, 54(4), 357-374.

Cheng, C. (2011). Introduction to Managerial Economics. Introduction to Managerial Economics

Edward Lazear (2008). “Personnel economics,” The New Palgrave Dictionary of Economics.

 Hossein B. (2006) Handbook of Information Security, Threats, Vulnerabilities, Prevention, Detection, and Management , Risk analysis and management p. 951.