Running Head: Assignment 1

Opal Ruiz

Managerial Economics

International College of the Cayman Islands

Professor Dr. Alicia Law

October 8th, 2017

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Homework Assignment Week 1

Description

Provide the following for chapter 1:

All Questions 1 - 9 pages 16 and 17

1. Define scarcity and opportunity cost. What role do these two concepts play in the making

of a management decision?

Scarcity can be defined as a condition that exist in which there are limited resources relative to

the demand for such resources (Keat, Young, & Erfle, 2013). Scarcity exist as the quantity

demanded for such resources greatly exceed the quantify suppled hence the needs and wants of the

population are not satisfied (Keat et al., 2013). While scarcity is in relation to the supply of

resources it is only makes logical sense concerning the demand for such resources (Keat et al.,

2013). On the other hand, opportunity cost can be defined as the subjective value that is given up

as the result of choosing to pursue one activity other the next best alternative activity (Keat et al.,

2013). Hence, in simpler terms, opportunity cost can be described as what is given up, to obtain

what is chosen. Both opportunity cost and scarcity play a fundamental tole in the managerial

decision-making process.

Scarcity plays an important role in management decision making as due to scarcity the more

that a manager or firm allocates to one resource, the less that will be able to be allocated to produce

another resource (Keat et al., 2013). In a similar manner, opportunity cost is an important concept

to management decision making as the opportunity cost of additional resources are the units of

other resources that a manager or firm must forgo in the resource allocation process (Keat et al.,

2013). The management decision concerning the allocation of resources amongst different business

areas involves a tradeoff between the respective areas (Keat et al., 2013). Also, in an environment
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where supply is limited relative to the demand managers must methodically determine how to

allocate the firms scare resources (Keat et al., 2013). Furthermore, opportunity cost must be taken

consideration in situations in which decisions are being made in conditions of scarcity (Keat et al.,

2013). As consequence, both scarcity and opportunity cost are important concepts which must be

taken into consideration in the making of management decisions.

2. Elaborate on the basic economic questions of what, how and for whom. Provide

specific examples of these questions with respect to the use of a Countrys scarce

resources.

There are three basic economic questions from the perspective of a company and the

perspective of a country (Keat et al., 2013). The basic economic questions from the

perspective of a company are as follows: 1) the product design 2) the hiring, staffing,

procurement, and capital budgeting decisions and 3) the market segmentation decision (Keat

et al., 2013). From the stand point of the firm these three basic economic questions form the

basis of the economic decisions for the firm (Keat et al., 2013). From the standpoint of the

firm question one is related to product decision as the company may decide to produce or

stop producing a particular product during a given time period (Keat et al., 2013). Question

two is concerning how goods and services should be produced and this is an essential

component of a managers job (Keat et al., 2013). The companys decision regarding

question three is not completely analogous from that of a country and is in relation to

segmenting the market that the company seeks to persue (Keat et al., 2013).

On the other hand, the three basic economic questions from the perspective of a country

are as follows: 1) what goods and services should be produced and in what quantities? 2)

how should these goods and services be produced and 3) for whom should these goods and
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services be produced for? (Keat et al., 2013). A Specific example of the what question with

respect to the use of a countrys scare resources is what should be produced as it relates to

should the country invest funds and resources into building a new school or building new

infrastructures such as roads or highways. From the perspective of the country, an example of

the how goods and services should be produced is should the new infrastructure be funded by

increasing taxes and tariffs or these goods/services be produced by funds within the existing

government budget. From the perspective of the country, an example of the for whom

question is should the school be built for primary, secondary, high school, or college

students.

3. Following are examples of typical economic decisions made by the managers of a firm.

Determine whether each is an example of what, how or for whom?

A. Should the company make its own spare parts or buy them from an outside vendor? The

latter is an example of the economic question how to produce.

B. Should the company continue to service the equipment that it sells or ask customers to

use independent repair companies? Latter is an example of the economic question of

what to produce.

C. Should the company expand its business to international markets or concentrate on the

domestic market? The latter is an example of the economic question of for whom to

produce.

D. Should the company replace its own communications network with a virtual private

network that is owned and operated by another company? The latter is example of the

economic question of how to produce.

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E. Should the company buy or lease the fleet of trucks that it uses to transport its products to

market? The latter is an example of the economic question of how to produce.

4. Define the market process, the command process, and the traditional process. How does

each process deal with the basic questions of what, how and for whom?

Market process

The market process can be defined as the utilization of supply, demand, and material

incentives to answer the three basic economic questions of what, how, and for whom (Keat et al.,

2013). The market process deals with the what question as firms determine what goods are

services should be produced based on the demand by consumers in the market or industry (Keat et

al., 2013). The market process deals with the how question as firms must decide how best produce

goods and services and minimize production costs in order to maximize profits (Keat et al., 2013).

The market process deals with the for whom question as firms must determine which target

market or target group of consumers it will pursue to sell its goods and services to (Keat et al.,

2013).

Command process

The command process can be described as the utilization of some central authority or other

form of government to answer the three basic economic questions of what, how, and for whom

(Keat et al., 2013). It is important to note that the command process is also commonly referred to

as the political process (Keat et al., 2013). The command process deals with the what question as

the government plays a significant role in determining what goods should be produced and in what

quantities (Keat et al., 2013). The command process deals with the how question as goods and

services are produced according to government regulations which protect the health and wellbeing

of consumers (Keat et al., 2013). The command process deals with the for whom question as
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typically goods and services produces by governments are for the entire population rather than a

specific target market.

Traditional process

The traditional process can be described as the utilization of traditions and customs to answer

the three basic economic questions of what, how, and for whom (Keat et al., 2013). The traditional

process deals with the what question as the traditions, beliefs, norms and customs of a population

often determine what goods and services are produced (Keat et al., 2013). The traditional process

deals with the how question as the norms, traditions, and beliefs of population often determines

how goods and services are produced (Keat et al., 2013). The traditional process deals with the for

whom question as the traditions and customs of a population often dictates for whom such goods

and services are produced for such as a particular religion or ethic group.

5. Discuss the importance of the command process and the traditional process in the

making of management decisions. Illustrate specific ways in which managers must

take these two processes into account.

The command process and the traditional process are important elements in managerial

decision making. The command process and the traditional process is important to the making of

management decisions as these respective processes shape the way is which a firm responds to

the three basic economic questions of what, how, and for whom (Keat et al., 2013). The

command process uses directives from government authorities to answer the three basic

economic questions (Keat et al., 2013). Hence, the command process which is also known as the

political process, impacts what a firm processes, how it processes, and for whom the firms good

or service is produced for (Keat et al., 2013). On the other hand, the traditional processes uses

the customs, norms, and traditions, of a population to answer the three basic economic questions
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of what, how, and for whom (Keat et al., 2013). Therefore, the traditional process also impacts

what the firm produces, how it produces its goods or services and for whom the firms goods and

services produced for (Keat et al., 2013). As a result, both the command and traditional

processes play a key role in the making of management decisions.

The command process does not actually mean that the government factually mandates the

production of certain goods or services over others, however, governments may utilize the

command process to stimulate incentives for the market process to allocate and distribute goods

and services in particular ways and this process is also known as indirect command (Keat et al.,

2013). Furthermore, the government can control the production and allocation of goods and

services via more direct mechanisms such as via laws that regulate both consumer and producer

behavior and well as other laws including tariffs and quotas (Keat et al., 2013). The traditional

process is important in the making of management decisions as the traditional process impacts

the patterns of work, social interaction and eating habits of consumers within a given country or

population (Keat et al., 2013). In addition, the traditional process plays an important role in the

making of management decisions as the traditional process as it relates religious restrictions

impacts the hiring process, particularly based on familial relationships, and also impacts the

allocation of certain foods such as pork and beef (Keat et al., 2013). Therefore it is vital for

managers and firms to be aware of how the command process and the traditional process can

impact the firm hence these processes should guide the management decision making of the firm

to maximize the use of its resource (Keat et al., 2013)..

6. Explain the differences between management skills and entrepreneurship. Discuss how

each factor contributes to the economic success of a business.

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There are four traditional common categories for resources and these include land, labor, capital

and entrepreneurship (Keat et al., 2013). Although the resource category entrepreneurship is

broad-based and can include management, both management and entrepreneurship entail different

types of skills and characteristics (Keat et al., 2013). Entrepreneurship is typically concerned with

the ownership of the factors of production (Keat et al., 2013). Moreover, entrepreneurship also

implies a certain willingness of one to take on risks in the pursuit of goals such as starting a new

business, marketing a new product, or providing a different type of service (Keat et al., 2013).

Based on the aforementioned information, in my opinion, entrepreneurship contributes to the

economic success of a business as without entrepreneurship business would ease to exist. Therefore,

entrepreneurship is critical to the economic success of a business as without the ownership of the

factors of production there would be no foundation of purpose for the business or managers to exist.

Additionally, entrepreneurship contributes to the economic success of a firm as willingness to take

on risks concerning starting a business or new product development often results in increase

economic activity and profitability for the business.

In relation to management skills, it is important to note that management skills or managers

are not categorized as a separate factor of production by early economist (Keat et al., 2013).

Management skills and entrepreneurship differ as management is concerned with the ability to

administer and organize various tasks in the pursuit of particular goals (Keat et al., 2013). An

essential component of a managers job is to guide and monitor employees within the organization

(Keat et al., 2013). It is the organizations management team that determines what is required and

what needs to be accomplished and management has its own tools, techniques, and skills (Drucker,

n.d.). Based upon the aforementioned information, management skills of a firms managers plays a

significant role in the economic success of a business. Without strong management skills a firm
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will be unable to successfully compete with its competitors in the industry. Management skills

contribute to the economic success of a business as it is the managers of a firm that actually manage

the factors of productive and the efficient use of the companys scare resources. Managers make

important decisions that increase the firms performance, market share and profitability. Moreover,

management skills contribute to the economic success of a firm as management is concerned with

allocating and organizing the use of the firm scare resources to obtain desired business objectives

(Keat et al., 2013).

7. Compare and contrast microeconomics with macroeconomics. Although managerial

economics is based primarily on microeconomics, explain why it is important for

managers to understand macroeconomics

Economics can be categorized into two separate categories which include macroeconomics

and microeconomics (Keat et al., 2013). Microeconomics is concerned with the analyzation of

individual consumers and producers in particular markets while macroeconomics is concerned

with the analyzation of the aggregate economy on a whole (Keat et al., 2013). Microeconomic

topics include individual supply and demand in the market, the pricing of particular inputs and

outputs which are also called resources or factors of production (Keat et al., 2013). Additional

macroeconomic topics include the distribution of income and output within a population and cost

structures and production for individual goods and services (Keat et al., 2013). In contrast,

macroeconomic topics consist of the analyzation of gross domestic product which is also

commonly referred to as national income analysis (Keat et al., 2013). Further macroeconomic

concepts include inflation, unemployment, trade and financial relationships between countries, as

well as fiscal and monetary policy (Keat et al., 2013).

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While managerial economics is primary focused upon microeconomics, it is essential for

managers to have an understanding of macroeconomics (Keat et al., 2013). As mentioned,

microeconomics is the most relevant to managerial economics, nonetheless, various facets of

macroeconomics should still be taken into consideration as decisions by managers of firms are

influenced by their perception of the present and future conditions of the macroeconomic

environment (Keat et al., 2013). For example, it is important to take into consideration

macroeconomic activity as an event like a recession could have a profound negative impact on

the firm whereas a period of robust economic expansion could have a positive impact on the firm

(Keat et al., 2013). Hence, although microeconomics is more applicable to managerial

economics, it is still important for managers to have an understanding of macroeconomics and

how factors in the macroeconomic environment may impact the operation of the firm.

8. What do you think is the key to success in the soft drink industry? What chance do you

think Global Food has in succeeding in its new venture into the soft drink market?

Explain. (Answer these questions on the basis of the information provided in the chapter

and any other knowledge you might have about the food and beverage business.)

The key to success in the soft drink industry is product differentiation (Keat et al., 2013).

Product differentiation has been consistently highlighted in the situation of Global Foods Inc. in the

discussion as to whether or not the company should enter the soft drink business (Keat et al., 2013).

Bob Burns, CEO, of Global Foods Inc., mentioned that the company must diversity its business

very soon to maintain a steady growth of profits on the same level that has been achieved in previous

years (Keat et al., 2013). He also advised that the best way for this to be accomplished is by

producing and promoting a Global Foods Inc. branded soft drink which represents a significant

diversification (Keat et al., 2013). Additional important factors that are key to success in the soft
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drink industry include establishing brand recognition and brand loyalty (Keat et al., 2013).

Moreover, other factors which contribute to success in the soft drink industry include production,

cost, distribution, pricing, advertising, organizational structure, and financing (Keat et al., 2013).

Information concerning the probable success of Global Foods, Inc. operating in the soft drink

industry is based upon the economic analysis of the soft drink market which implies that the return

on investment will be greater than the potential risks (Keat et al., 2013). In addition, it also appears

that Global Foods, Inc, will most likely succeed as the company forecasts that even through the

market is quite mature, there is still room for growth and development in the soft drink business

(Keat et al., 2013). Moreover, it is likely that the company will have success in the soft drink

business as the company already has expertise and a presence in the food market which will carry

over to the soft drink market (Keat et al., 2013). Likewise, Global Foods Inc. staff members have

spent an extensive amount of hours researching and evaluating industry data and the findings of

which support the company earning an above average return on investment if the company were to

enter the soft drink market (Keat et al., 2013).

On the other hand, some of the information presented in the discussion concerning Global

Foods, Inc. entering the soft drink business appears to imply that the company may fail at

successfully operating in the soft drink market. One of the reasons given as to why Global Foods,

Inc., may fail at operating in the soft drink business is due the maturity of the market as well as the

dominance of industry giants Coke and Pepsi which are referred to as the red team and blue

team in the text (Keat et al., 2013). Additionally, it is mentioned that other companies have tried

to enter the market and have fail miserably due to the market power of the dominant companies

Pepsi and Coke (Keat et al., 2013). Also, the assumption of success in the soft drink market is based

on the forecast that the market will continue to grow at the current rate which is a risk as this growth
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is obviously not guaranteed (Keat et al., 2013). In addition, the current trend of Americans looking

for healthier drink options such as natural juices or bottled water may also impact Global Foods

Inc. success in the soft drink market (Keat et al., 2013). However, based on the information

presented in the text, it is mentioned that potential benefits of entering the soft drink market such

as the above average return on investment outweighs the potential risk and hence, Global Foods

Inc. should enter the soft drink business (Keat et al., 2013).

9. (Optional) Have you been personally involved in the making of a decision for a

business concerning what, how, or for whom? If so, explain your rationale for making

such decisions. Were these decisions guided by the market process, the command

process, or the traditional process? Explain.

I have never personally been involved in the making of a decision for a business concerning

what, how, and for whom. However, I can use the example of a past employer to answer the

three basic economic questions of what, how, and for whom. The company I will use as an

example is Saxon Administration/Pensions Ltd / Silver Thatch Pensions, a local pension

company. The question what as it relates to product decision was guided by both the command

and market processes. The product is a pension company which is needed/demand in the local

market by local companies and was also mandated by the National Pensions Law in 1998. The

question of how as it relates to hiring, staffing, procurement, and how the service would be

produced was also guided by the command and market processes. The command process is

relevant in answering the how question as the National Pensions Law has provisions and

regulations for how the pension fund/company will operate. The market process is also relevant

in answering the how question as the owners of capital (entrepreneurs) and managers of the

pension company make the hiring, staffing, and procurement decisions based on market
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conditions. The for whom question was largely answered by the command process as the

National Pension Law dictates that each employer must contribute 5% to each employee which is

also matched with a 5% contribution from the employee. The market process is also at work in

determining for whom as employers/companies only exist because there is a need in the

market for goods and services and employees/labor is required to make those goods and services

available in the market.

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Reference

Keat, P. G., Young, P.K., & Erfle, S. E. (2013). Managerial economics: economic tools for

todays decision makers (7th ed.). Upper Saddle River, New Jersey: Pearson.