Features of Managerial Economics

The price of an airline ticket, a bottle of orange juice and a flat-screen television are all determined with the help of a managerial economist. Firms hire managerial economists to assess their operations and develop the best business strategy. This strategy is designed based on factors such as market forces and industry regulations.

  1. Assessing Market Competition

    • A managerial economist determines how the competition and market structure affect the product’s sales level and price. In a perfectly competitive market, the managerial economist realizes companies accept market pricing based on supply and demand. If the firm is part of an oligopoly, i.e., the company and just a handful of others control the majority of the market, an economist uses principles from Nash’s equilibrium which states that the firm must engage in pricing strategy to undercut its competitors. How many substitutes are available in the company’s niche is also a factor: If two other companies sell a beverage that tastes the same, the firm must either keep the drink price lower or establish strong brand loyalty among consumers.

    Factors of Production

    • In addition to the market structure, pricing strategy is designed based on the firm’s inherent factors of production. Nick Wilkinson, author of the textbook, “Managerial Economics: A Problem-Solving Approach,” explains these factors include the education level and skill set of its labor force, access to scarce resources such as oil, and the level of technology available to the firm. Managerial economists calculate the firm’s variable and fixed costs to determine its economic profit and break-even price. From these factors of production, economists assess the short- and long-term viability of the company.

    Legal Regulations

    • A managerial economist assesses how current legislation affects business operations. For instance, if the company wants to merge with another firm, an economist analyzes the impact of reduced competition, increased market share and if antitrust regulations may serve as an impediment to the merger. G.S. Gupta, author of the textbook, “Managerial Economics,” explains other legal considerations include minimum wage laws, taxes, subsidies and health and safety standards. Other legal regulations might include environmental mandates. If the government requires reduced carbon emissions, an economist determines which option is better: incur higher fixed costs by replacing machinery or pay for carbon credits if the company exceeds the standard amount. Foreign legislation is also of great interest to an economist. Countries that enact regulations on their labor industry could have severe effects on a multinational corporation’s bottom line that relies on overseas labor. For example, a managerial economist determines what switching costs are incurred, if any, should the company relocate labor from Mexico to China. Export and import quotas, subsidies, tariffs and differential taxes are other foreign legal considerations.

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References

  • “Managerial Economics;” G.S. Gupta; 2001
  • “Managerial Economics: A Problem-Solving Approach;” Nick Wilkinson; 2005
  • Drexel University: Game Theory
  • Photo Credit corporate greed image by Steve Johnson from Fotolia.com

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