Managerial Economics

1 Managerial Economics Why the concept of controlling drugs may not be an effective-using concept of elasticity Drug consumers are expected to be addicts. This means that the price elasticity of drug consumption is very low, or even zero. Changes in the price of drugs hardly affect drugs like heroin. This is another reason why the policies tailored towards controlling the consumption of heroin may not be fruitful.

Law of diminishing Marginal utility and example The diminishing marginal utility law states that all else equal, as consumption increases, the marginal utility derived from each additional unit declines. Marginal utility is derived s the change in utility as an additional unit is consumed.

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The utility is an economic term that is used to represent happiness or satisfaction.

Marginal utility is the incremental increase in utility that results from the consumption of an additional unit. An example, in this case, can be the consumption of food. An individual may decide to purchase a slice of pizza at $2. The individual will then consume the first slice of pizza and reap some positive utility because they are hungry. The first slice of pizza has a high benefit because they are hungry. The subsequent slices will have a smaller benefit ad enjoyment.

Difference between diminishing returns and diseconomies of scale and causes of each Diseconomies of scale refer to the point in a company's production process when economies of scale are no longer viable, implying that only producing more units will not lead to a rise in profits. There are many reasons why producing more of the same unit eventually becomes unprofitable, with the main ones include coordination and control. When a company's production process expands over the several production facilities in multiple locations, keeping the whole production operation well-coordinated and efficient can lead to higher expenses than limiting production up to a certain point. The law of diminishing returns refers to decreased production output due to an increase in one input. Simultaneously, the diseconomies of scale have to do with an increase in cost per unit due to the rise in output. Causes here include limited demand, fixed costs, poor productivity, and negative employee impact.

How the demand change affects price and quantity and who benefits from the increased demand An increase in demand will create economic profits in the short run and induce entry in the long run. Profits and losses are eliminated because an infinite number of firms are producing infinitely-divisible, homogeneous products. Since some firms will be losing money in the long run, some may leave the industry, reducing the industry output and raising the price.

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Existence of natural monopolies Natural monopolies occur in two ways. First, they happen when a company takes advantage of the high barriers built up in industries to create a wall around its business operations. The high barriers are also a result of the amount of capital or cash needed to purchase essential assets that the business needs to operate. The benefits of natural monopolies include using resources efficiently to offer the lowest unit price to consumers. However, natural monopolies may sometimes exploit the benefits by restricting the supply of a good, inflating the prices, and exerting their power in damaging ways other than the prices.

Why cartels are naturally unstable Cartels tend to be unstable because many price-fixing or market sharing agreements either collapse or whither because the falling demand creates excess capacity in the industry, e.g., during the economic recession. This happened with the OPEC oil cartel, which was on the verge of collapsing due to the world economic recession that caused a fall in global demand for crude oil.

Why unskilled workers earn little economic rent, while much of an NFL quarterback's salary is rent When it comes to low skilled jobs, both demand and supply tend to be wage elastic. For these workers, the supply tends to be elastic. The workers get paid only slightly above their transfer earnings, and therefore, the economic rent is low.

Why a reduction in welfare benefits for the poor and a tax increase on the wealthy would have different effects on work effort Welfare benefits will generally motivate the poor to work harder, while tax increases will reduce the wealthy's productivity because their disposable income is negatively affected.

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Costs and benefits to union members of a strike The strike is only beneficial because it may push the employers to reach a fair deal.

However, the workers also put their jobs at risk. Employers may hire replacement workers before the strike is even over.

The new market value of the bond The bond's value is $1000, and 8% interest gives the owner $80 per year.

An increase of 10% will give (10/100)*1000= $100 per year.

Variables that affect a firm's degree of vertical integration The variables include the business's size, the level of competition in the industry, and control over a firm's economic resources, among others. Size enables the firm to tap resources to its advantage, while the level of integration enables the firm to win stakeholders such as suppliers effectively.

The effects of airline deregulation on airline pilots' salaries and airline fares The earnings for most of the pilots went down. Barriers to entry were removed hence increasing competition, which led to the lowering of airline fares.

Potential difficulties with majority-rule voting Majority rule voting leads to the tyranny of the majority. Most of the decisions made will be at the expense of the minority.

Externality argument for government regulation of the environment Government intervention is necessary to help ‘price’ negative externalities. They do this through regulations or by instituting market-based policies such as taxes, subsidies, or permit systems. Policies to address this may include permitting civil lawsuits by private parties to recover damages for negligent actions.

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The explanation for the fall in the poverty rate for the elderly at the same time, the poverty rate for children was rising.

The fall in the poverty rate for the elderly can be attributed to the increase in labor force participation and a larger increase in pension rates. Children increase the dependency ratio.

Role of rational self-interest, marginal analysis, and time and information Choice requires time and information at the disposal of an individual. I had adequate time to peruse through information and select the college that suited my needs. Time and information are scarce and, therefore, valuable. I was able to rationally select alternatives I perceived to be in my best interests.

Absolute advantage and comparative advantage Absolute advantage happens when one producer can produce a competitive product using fewer resources or the same resources in less time. In contrast, comparative advantage considers the opportunity cost when assessing a product's viability while accounting for another product.

According to comparative advantage, specialization results in a more efficient allocation of world resources. Production increases because the resources are allocated most efficiently. A larger quantity of outputs becomes available to the trading partners.

Demand curve and supply curve More price will reduce quantity demanded because consumers will not afford a higher quantity with the same income. The quantity demanded also reduces as consumers go for cheaper substitutes. Profit plays a vital role in the sense that as the business continues to increase one good production, the opportunity cost of producing the next increases, and vice versa.

Government involvement in providing important services

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The government is involved in providing essential services such as education because they are too important to be left in the private sector's hands. The same applies to security services, which are highly sensitive and vital, and therefore should be well regulated.

The basic thrust of Keynesian demand-side policies The theory focuses more on the need for increased government expenditures and lower taxes in order to stimulate demand. The U.S. utilized tax measures and increased defense spending to stimulate investment and boost aggregate demand, which worked well. In the 1970s, the measures led to high unemployment and inflation from the supply side.

Importance of labor productivity Labor productivity is essential, but not the only key to improvement in living standards. The level of productivity is the most critical determinant of a country's standard of living, with faster productivity growth leading to an increasingly better standard of living. However, there are other factors of production, such as capital.

Employment and unemployment Unemployment takes into account people who have looked for a job but cannot find one.

It does not take into consideration people who have not looked for work. Unemployed people include the jobless, actively seeking work, and available to take a job. It is measured as the number of unemployed people divided by the economically active population (those in employment and unemployed).

Limitations of using Gross Domestic Product (GDP) GDP excludes non-market transactions and fails to account for income inequality.

How changes in net wealth, the price level, interest rates, and expectations alter the consumption function

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An increase in interest rate encourages saving, and, thus, consumption is discouraged.

Wealth like shares, bonds, house property, etc., influence consumption decisions. Owners of these assets do not have enough preference for these assets.

How do changes in the price level create an aggregate demand curve?

An increase in aggregate demand corresponds with an increase in the price level; conversely, a decrease in aggregate demand corresponds with a lower price level.

Potential output and its relationship to unemployment Potential output is supposed to measure the economy's productive capacity when unemployment is at its natural rate. Given that people move from job to job as a regular event, the natural unemployment rate is generally believed to be greater than zero. This implies that there will usually be some unemployment in the economy.

How fiscal policy may affect the short-run aggregate supply curve Monetary policy impacts the money supply in an economy, which influences interest rates and the inflation rate.

"Independence" of the Fed The Fed is supposed to be insulated from the short-term political pressures, without which it can be forced to implement excessively expansionary monetary policy that can lower unemployment in the short-term. The Fed is an independent government agency but is still accountable to the public.