Opportunity cost analysis is an important part of a company’s decision-making processes, but is not treated as an actual cost in any financial statement. While the term opportunity cost has its roots in economics, it’s also a very important concept in the investment world. It’s a model that can be applied to our everyday decisions, as we’re faced with making a choice between the many options we encounter each day. It is a very powerful concept when someone has to make a decision to select a particular product or making a choice. In simple words, opportunity cost means choosing or making a best decision from different option. When one has to make a decision in between various actions to select only one particular work at a time is called opportunity cost. When faced with a decision, the opportunity cost is the value assigned to the next best choice. The Continue reading
Managerial Economics
Managerial Economics generally refers to the integration of economic theory with business practice. It deals with the use of economic concepts and principles of business decision making. Managerial Economics is thus constituted of that part of economic knowledge or economic theories which is used as a tool of analyzing business problems for rational business decisions. Managerial economics can be viewed by most modern economists as a practical application of economics theory in using effectively the firms scarce resources.
Time Horizon in Forecasting
Business forecasts are classified according to period, time and use. There are long term forecasts as well as short term forecasts. Operation managers need long range forecasts to make strategic-decisions about products, processes and facilities. They also need short term forecasts to assist them in making decisions about production issues that span, only few weeks. Forecasting forms an integral part of planning and decision making, production managers must be clear about the horizon of forecasts. The three divisions of forecast are short range forecast, medium range forecast and long range forecast. Short range forecast: It is typically less than 3 months but has a time span of up-to 1 year. It is used in planning, purchasing for job schedules, job assignments, work force levels, product levels. Medium range forecast: It is typically 3 months to 1 year but has a time span from one to three years. It is used Continue reading
The SCP Paradigm – Structure drives Conduct which drives Performance
The SCP paradigm assumes that the market structure determines the conduct of the organization. This conduct, in turn, is the determinant of market performance. Examples of market performance include efficiency, profitability and growth. The Structure Conduct Performance Framework seeks to establish that certain structures of the industry can lead to certain kinds of conduct or behavior which then leads to various types of economic performance. The SCP paradigm was developed through evaluation of empirical studies involving American industries. Theoretical models were not used to support the paradigm. The conclusion that was drawn from empirical studies was that market structure determined performance. This is caused by the belief that the laws of competition should not be based on behavioral models but rather on structural remedies. According to J.S. Bain who developed the paradigm in the 1950s, most industries became concentrated than necessary. In concentrated industries, there are high barriers to entry. Continue reading
Profit Management And Control
Profit is the reward which goes to organization as a factor of production for its participation in the process of production. Profit in its pure accounting sense is the surplus of revenue over the cost. Thus, P = TR – TC We have also studied that every business enterprise desires to maximize its profit. The condition for profit maximization is the level of output where Marginal Revenue = Marginal Cost. We also differentiate between normal profit and super normal profit i.e. normal profit is included in average cost whereas any profit above the average cost is super normal profit. We have also considered the concepts of gross profit and net profit besides profit in accounting sense, which considers only explicit cost whereas in economic sense to consider profit we take note of both explicit and implicit costs. The firm has also to reveal to its shareholders the profit Continue reading
Setting a Reasonable Profit Target in Business
A business firm has various objectives to achieve. The survival of a firm depends on the profit it can make. So, whatever the goal of the firm may be, it has to be a profitable firm. The other goals of a business firm can be sales revenue maximization, maximization of firm’s growth, maximization of managers’ utility function, long-run survival, market share or entry-prevention. In technical sense maximization of profit, as a business objective, may not sound practical , but profit has to be there in the objective function of the firms for its survival. The firms may differ on the level of profit and the extent to which it is to be achieved by various firms. Some firms set standard profit as their objective, while some of them may set target profit and some reasonable profit as their objective to be achieved. A reasonable profit, as a business objective, Continue reading
Application of Economics to Business Management
Managerial economics is the discipline, which deals with the application of economic theory to business management. Managerial Economics thus lies on the margin between economics and business management and serves as the bridge between the two disciplines. The application of economics to business management or the integration of economic theory with business practice, as Spencer and Siegelman have put it, has the following aspects : Reconciling traditional theoretical concepts of economics in relation to the actual business behavior and conditions: In economic theory, the technique of analysis is that of model building. This involves making some assumptions and, drawing conclusions on the basis of the assumptions about the behavior of the firms. The assumptions, however, make the theory of the firm unrealistic since it fails to provide a satisfactory explanation of what the firms actually do. Hence, there is need to reconcile the theoretical principles based on simplified assumptions with Continue reading