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Business Management - Managerial Economics

Part 1:
•Is the advice, "Know your customer" a management strategy or economic concept or both? Explain.
•How can managers use economic concepts to manage more strategically? Give three specific examples.
•How does making tradeoffs apply to business management?

• Consider illegal immigration. How would illegal immigration be affected if all countries had property ownership rights as well defined as in the United States?
• Consider the following statement by Charles Wheelan, author of the Naked Economist: "The problem with Asian sweatshops is that there are not enough of them." How is Wheelan's statement illustrative of fundamental economic concepts?
• Describe the types of information that market prices provide.

Part 2:
• What are the incentives of government bureaucrats who run public services such as the water services, the parking services, and the airports? Do these incentives differ from those of private companies in running these services? Why or why not?
• Why would the general public want the government to provide water rather than a private for-profit company?
• How does the government protect property ownership rights?

• Can trade and exchange occur within the firm without the existence of private property rights? If individual property rights are necessary for economic success, how might the firm allow property rights?
• What are the "boundaries" of a firm? What determines the extent of vertical boundaries? What determines the extent of horizontal integration? Use a cost-benefit analysis to describe the optimal boundaries of a firm.
• Why does the evolution of large firms lead to a principal-agent problem? How can the principal-agent problem between owners and managers be minimized?

Solution Preview

Economic concepts are related to studying how individuals make choices about the use of resources in order to satisfy needs. Specifically it means scarcity and the factors of production which are also scarce. Know your customer means getting information from customers for doing business with them. This is a management strategy. A company can do business without knowing its customers, for example a retailer sells goods to whoever pays him for the goods. In cases of banks, the law requires it to know its customers.
Economic concepts can be used by individuals to make choices about the use of resources to satisfy needs. Similarly the managers can make use of economic concepts to manage more strategically. The first example is that of a manager who uses division of labor and specialization to reduce costs. Strategically he can become a cost leader. The second example is that of the economic concept of incentives. A manager can give incentives to increase productivity and reduce costs. Strategically the manager is able to improve his market presence. The third example is that the manager can use the concept of opportunity costs. If the manager considers opportunity cost in making decisions about the production choice, he is likely to make a strategically better choice. For example, a manager is currently using his machines for making drilling machines that bring him annual revenue of $150,000. The same facility can be used to make lathe machines which would bring in an annual revenue of $230,000. If the manager uses the concept of opportunity cost he will select to make lathes.
Tradeoff applies to business management. Trade off is a compromise. If the company makes one product it cannot make another product. Trade off necessitates a balanced ...

Solution Summary

The answer to this problem explains several management issues such as agency problem and management strategy. The references related to the answer are also included.