...Producers and Profit Maximization In economic theory, people play two main roles in the market. As we have just seen, they are consumers. The other main role is producers. For producers, the economic problem is to maximize profits. The key decisions are which outputs to produce, how much of each output to produce, and which inputs to use to produce the outputs. We will take these decisions one at at time. How Much Output? Let us return to Josh's lawn mowing business, and focus on the decision of how many lawns to mow each day. To make things simple, suppose he already has leased a lawnmower and a pickup truck. Also, to avoid confusing the output decision with Josh's labor-leisure choice, let us assume that all of the labor is done by two hired workers. Now, Josh has to decide how many hours for which to hire the workers, which in turn will determine how many lawns his company mows. For example, if each worker works 5 hours, then the total hours worked will be 10 and the total number of lawns mowed will be, say, 9. The key factors in Josh's decision will be worker productivity, the wage rate, and the price he can charge for mowing lawns. Suppose that Josh receives $18 for each lawn that his workers mow. Finally, suppose that his workers' lawnmowing productivity is as follows. Total Hours Worked Per Day | Lawns Mowed Per Day | Cost ($11 per hour) | Revenue ($18 per lawn) | 8 | 7 | $88 | $126 | 10 | 9 | $110 | $162 | 12 | 11 | $132 | $198 | 14 | 13 | $154 | $234...
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...------------------------------------------------- Top of Form Powered by JRank Bottom of Form Reference for Business Encyclopedia of Business, 2nd ed. Reference for Business » Encyclopedia of Business, 2nd ed. » Man-Mix » Managerial Economics MANAGERIAL ECONOMICS Ads by Google 1 year diploma courses - Info on Courses, Scholarships & Admissions from IDP Experts. -india.idp.com/18001022233 SWOT Analysis Tool - Get a free 30 day trial of Mindjet the leading Mindmapping Tool! -www.Mindjet.com online gcp courses - Online, Classroom & Blended Courses Certification Programs & More! -www.cfpie.com CAT Scholarships-T.I.M.E. - Must for all cat and mba aspirants Register Now-Upto 100% scholarships - www.time4education.com/ttse Photo by: nyul Ads by Google MBA - Supply Chain Mgmt. 100% Online backed by Textbooks Academic support,E-Library.Join Now utsglobal.edu.in Rapid eLearning Train your employees with Rapid eLearning, cut your business costs www.niidtech.com MBA Distance Education Online 1 Yr MBA @ 29000. Approved from AIMA India & IAD UK. Enrol Now www.iibmindia.in Papermaking Technology Download white papers on new papermaking machines and processes www.risiinfo.com/whitepapers Decisions made by managers are crucial to the success or failure of a business. Roles played by business managers are becoming increasingly more challenging as complexity in the business world grows. Business decisions are increasingly dependent...
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...However the supply chain managers wanted less complexity and were interested in more predictable order cycle times. HP needed to implement a fact-based, data-driven tool to improve decision making. HP developed a team of individuals internally and externally from consultancies and universities to help with the challenges the company faced. This team developed a process for evaluating new products for introduction, created a tool for prioritizing existing products in a portfolio, and developed an algorithm that solved problems faster than previous technologies (Turban, Sharda, Delen. (2011)). The team developed a pre-launch and post-launch plan to assess whether product ideas were great enough investments to bring forth returns and maximize profits. The team also developed a Revenue Coverage Optimization (RCO) tool to manage product portfolios as sales data became available. The RCO algorithm...
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...Equimarginal Principle to determine how a consumer would divide up her spending among different consumer goods. That worked pretty well, and so some other economists, especially the American economist John Bates Clark, tried using the same approach in the theory of the firm. Following the Neoclassical approach, we will interpret "rational decisions to supply goods and services" to mean decisions that maximize -- something! What does a supplier maximize? The operations of the firm will, of course, depend on its objectives. One objective that all three kinds of firms share is profits, and it seems that profits are the primary objective in most cases. We will follow the neoclassical tradition by assuming that firms aim at maximizing their profits. There are two reasons for this assumption. First, despite the growing importance of nonprofit organizations and the frequent calls for corporate social responsibility, profits still seem to be the most important single objective of producers in our market economy. Thus it is the right place to start. Second, a good deal of the controversy in the reasonable dialog of economics has centered on the implications of...
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...The cost of capital, corporation finance and the theory of investment Modigliani & Miller – 1958 Introduction In a world of certainty investment decision should be in line with either profit maximization or market value maximization. - According to profit maximization, a physical asset is worth acquiring if it increases the net profit of the owners of the firm. But net profit increases only if the expected rate of return on the asset exceeds the rate of interest - According to market value maximization an asset is worth acquiring if it increases the value of the owners equity i.e. if it adds more to the market value of the firm then the costs of its acquisition. At a micro – economic level a world of certainty has little descriptive value. A risk factor should be taken into account when pricing capital. Profit maximization and market value maximization seemed to have equivalent implications in a world of certainty, however in a world of uncertainty this equivalence vanishes. - Under uncertainty the profit outcome has become a random variable and as such its maximization no longer has operational meaning. - Market value maximization provides a workable theory of investment in a world of uncertainty. Under this approach any investment project and its financing plan must only pass the following test: Will the project, as financed, raise the market value of the firm’s shares? If so, is it worth undertaking; if not, its return is less ten the...
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...introduction a plan to improve existing goods and services. The recommendation suggests applications for increasing revenue, maximizing profits, achieving ideal production levels, determining fixed and variable costs, and identifying methods to reduce the costs. The business proposal will establish that it is in the best interest for both clients and consumers. The current economy has been declining which has driven Thomas Money Service Inc. to find other methods to stabilize their profits, reduce loss, and help to gain or maintain market share. Thomas Money Service Inc. has been hit by the slow economy and the decease in the homebuilding market. The business proposal model will help Thomas Money Services Inc. to put in place applications to increase revenue, profit maximization quantities and to establish a mix of pricing and non-price strategies with low marginal cost and revenue theories. These applications will offset the negative impact of the decease in the homebuilding market. The business proposal presents methods to overcoming barriers to entry in to the market, how to increase product differentiation, how to input applications that will show potential cost savings for productivity and product pricing, and how to increase separations. Increase Revenue and Profit-Maximization Quantity To increase revenue and profit maximization for production quantities, Thomas Money Service Inc. needs to invest into another subsidiary within the medical industry. The company needs...
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...Company, Ltd., 10 Coptic Street, London WClA 1PU CONTENTS PREFACE 1 Technology Measurement of inputs and outputs 1 Specification of technology 2 Example: Input requzrement set Example: Isoquant Example: Shortrun productzon posszbzlztzes set Example: Pt-oductzon functzon Example: Transformatzon functzon Example: Cobb-Douglas technology Example: Leontzef technology Activity analysis 5 Monotonic technologies 6 Convex technologies 7 Regular technologies 9 Parametric representations of technology 10 The technical rate of substitution 11 Example: T R S for a Cobb-Douglas technology The elasticity of substitution 13 Example: The elastzczty of substztutzon for the Cobb-Douglas productzon functzon Returns to scale 14 Example: Returns to scale and the Cobb-Douglas technology Homogeneous and homothetic technologies 17 Example: The CES productzon functzon Exercises 21 2 Profit Maximization . Profit maximization 25 Difficulties 28 Example: The profit functzon for Cobb-Douglas technology Properties of demand and supply functions 31 Comparative statics using the first-order conditions 32 Comparative statics using algebra 35 Recoverability 36 Exercises 39 VI CONTENTS 3 Profit Function Properties of the profit function 40 Example: The eflects of price stabilization Supply and demand functions from the profit function...
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...of its products and services based on costs, value, demand, and competition. Managers should start setting prices during the development stage as part of strategic pricing to avoid launching products or services that cannot sustain profitable prices in the market. This approach to pricing enables companies to either fit costs to prices or scrap products or services that cannot be generated cost-effectively. Through systematic pricing policies and strategies, companies can reap greater profits and increase or defend their market shares. FACTORS INVOLVED IN PRICING POLICY The pricing of the product involves consideration of the following factors: (i) Cost Data in Pricing: Cost data occupy an important place in the price setting processes. There are different types of costs incurred in the production and marketing of the product. There are production costs, promotional expenses like advertising or personal selling as well as taxation, etc. They may necessitate an upward fixing of price. For example, the prices of petrol and gas are rising due to rise in the cost of raw materials, such as crude transportation, refining, etc. If costs go up, price rise can be quite justified. However, their relevance to the pricing decision must neither be underestimated nor exaggerated. For setting prices apart from costs, a number of other factors have to be taken into consideration. They are demand and competition. Costs are of two types: fixed costs and variable costs. In the short period, that...
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...managerial economics. Berkshire’s collection of operating businesses includes the GEICO Insurance Company, Buffalo News newspaper, See’s Candies, and the Nebraska Furniture Mart. They commonly earn 30%–50% per year on invested capital. This is astonishingly good performance in light of the 10%–12% return typical of industry in general. A second and equally important contributor to Berkshire’s outstanding performance is a handful of substantial holdings in publicly traded common stocks such as The American Express Company, The Coca-Cola Company, and Wells Fargo & Company. As both manager and investor, Buffett looks for ‘‘wonderful businesses’’ with outstanding economic characteristics: high rates of return on invested capital, substantial profit margins on sales, and consistent earnings growth. Complicated businesses that face fierce competition or require large capital investment and ongoing innovation are shunned.1 Buffett’s success is powerful testimony to the practical usefulness of managerial economics. Managerial economics answers fundamental questions. When are the characteristics of a market so attractive that entry becomes appealing? When is exit preferable to continued operation? Why do some professions pay well, whereas others offer meager pay? Successful managers make good decisions, and one of their most useful tools is the methodology of managerial economics. T HE M ANAGERIAL D ECISION -M AKING P ROCESS Managerial economics Applies economic tools and techniques to...
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...Monopolistic competition: An evolutionary approach EXECUTIVE SUMMARY This term paper shows that a monopolistically competitive equilibrium can evolve without purposive profit maximization. Firms exit the industry if they fail to pass the survival test of making nonnegative wealth. Industry converges in probability to the monopolistically competitive equilibrium as the size of each firm becomes small relative to the market, as the entry cost becomes sufficiently small, and as time gets sufficiently large. Consequently, in the limit, the only surviving firms are those producing at the tangency of the demand curve to the average cost curve and no potential entrant can make a positive profit by entry. Introduction The criterion by which the economic system selects survivors: those who realize profits are the survivors; those who suffer losses disappear. In the late 1920s and early 1930s it became apparent that there were severe limitations in conducting economic analysis using a framework of either pure competition or pure monopoly. Consequently, economists began shifting their attention to middle ground between monopoly and perfect competition. One of the most notable achievements was Chamberlin’s, 1933 blending of elements of perfect competition and pure monopoly in a notion of ‘‘large group’’ monopolistic competition where there are many competing firms producing similar but different commodities which are not perfect substitutes. Because of the product...
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...Question 1 Introduction Louw and Venter (2010:20) explain that strategic management is concerned with the overall effectiveness and choice of direction in a dynamic, complex and ambiguous environment. The success of an organisation is mainly determined by the effectiveness and efficiency of its management. In the words of Peter Drucker, efficiency is concerned with ‘doing things right’, while effectiveness is concerned with ‘doing the right thing’. Strategic management is the deliberate effort to allocate resource and get above average returns through competitive advantage so that in the long run the organisation can generate wealth maximization for its stakeholders. There are a number of advantages of strategic management as stated by Pearce and Robinson (2009:10), it helps reduce resistance to change therefore getting buy in from all stakeholders is critically important. It also results in better decisions because it facilitates group interaction. Group based strategic decisions generate a variety of specialized input which involves all the different areas in the organisation and an in depth range of alternatives and makes it more likely that the best solutions will be chosen. Strategic management enhances the organisation’s ability to prevent problems. It creates a framework through which managers can encourage their staff to focus on planning, monitoring and evaluating the success of these plans. There are also disadvantages of strategic management as Pearce and Robinson...
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...Monopolistic competition Oligopoly Example organization Old Navy, Belk’s, Forever 21 Standard Oil Wal-Mart, Lowe’s, Sam’s Club Delta Airlines, United Airlines, OPEC Goods or services produced by the organization Identical to competitors No close substitutes, which allows for the monopoly to control the supply and market. Competitors create different products or goods. Can produce either differentiated or identical products Barriers to entry None Very High No barriers to enter or exit the marketplace High barriers of entry Number of organizations Many, to create competition One large one single firm Many, to create competition Few large firms that are interdependent Price elasticity of demand Price elastic Price inelastic Price more inelastic if the firm produces different goods from its competitor, and elastic if similar products are produced. The firm has less control over the price it can charge for output. Price is located somewhere between competitive and monopolistic pricing, but can vary depending on interdependence with among competitors. Is there a presence of economic profits? Short term yes, but long term no Possibility in the long term for profit Zero economic profit in the long term Can maximize profits by working together. Some long-run economic profit possible 3.2 Evaluate the...
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...1. Is use of least-cost input combinations a necessary condition for profit maximization? Is it a sufficient condition? Explain. ANSWER Employment of least-cost input combinations is a necessary but not sufficientcondition for profit maximization. It is necessary because a failure to operate with aleast-cost input combination means that costs could be lowered and profits increasedat any given output level. It is not a sufficient condition because the cost-minimizinglevel does not incorporate any information concerning demand relations, andtherefore provides no information about the optimal level at which to operate: that is,information concerning demand relations must be added to the analysis to determinehow much to produce for profit maximization (an optimal level of output).In short, employment of a least-cost input combination will result in an optimal production of a target level of output. Conversely, employment of inputs such thatMRPi= Pi for each input will result in an optimal production of an optimal level of output. 2. “Output per worker is expected to increase by 10 percent during the next year.Therefore, wages can also increase by 10 percent with no harmful effects onemployment, output prices, or employer profits.” Discuss this statement. ANSWER This statement is correct so long as the projected increase in output per worker issolely due to an improvement in labor productivity and provided that the demand for output is also expected to rise. Gains in labor productivity...
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...Running head: MAXIMIZING PROFIT WITH MARGINAL ANALYSIS 1 Maximizing Profit with Marginal Analysis Timothy L. Gould Western Governors University MAXIMIZING PROFIT WITH MARGINAL ANALYSIS 2 Abstract In today’s market it is important to not only stay competitive but be able to grow with the market. In order to accomplish this, a company must pay close attention to its total revenue earned versus its total costs incurred. It must maximize its earnings while assuring that the reward is outweighing the cost of pursuing that reward. MAXIMIZING PROFIT WITH MARGINAL ANALYSIS 3 Total revenue to total cost Of course we want to make money. We have also heard the term “it takes money to make money”. This is very true in any institution that manufactures goods that it then resells for a profit. We do not want to spend five dollars of “total cost” to make only 4 dollars of ”total revenue”. Therefore we must evaluate our total costs of producing an item and assure that we make a profit when we sell the item to a customer. We also want to assure we are maximizing our profit by getting the most we can in our market. As a company that produces widgets we will always have certain costs to do business. Electricity, labor, materials and even rent are always present in our expenses. Some costs are going to be present regardless of how many items we make. These costs are considered fixed expenses. Rent...
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...factors that you need to consider: • Positioning - How are you positioning your product in the market? Is pricing going to be a key part of that positioning? If you're running a discount store, you're always going to be trying to keep your prices as low as possible (or at least lower than your competitors). On the other hand, if you're positioning your product as an exclusive luxury product, a price that's too low may actually hurt your image. The pricing has to be consistent with the positioning. People really do hold strongly to the idea that you get what you pay for. • Demand Curve - How will your pricing affect demand? You're going to have to do some basic market research to find this out, even if it's informal. Get 10 people to answer a simple questionnaire, asking them, "Would you buy this product/service at X price? Y price? Z price?" For a larger venture, you'll want to do something more formal, of course -- perhaps hire a market research firm. But even a sole practitioner can chart a basic curve that says that at X price, X' percentage will buy, at Y price, Y' will buy, and at Z price Z' will buy. • Cost - Calculate the fixed and variable costs associated with your product or service. How much is the "cost of goods", i.e., a cost associated with each item sold or service delivered, and how much is "fixed overhead", i.e., it doesn't change unless your company changes dramatically in size? Remember that your gross margin (price minus...
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