Applied Managerial Economics - Research Paper Example

?APPLIED MANAGERIAL ECONOMICS Research Questions Table of Contents Answer to Question 3 Answer to Question 2 4 Answer to Question 3 5 Answer to Question 4 6 Bibliography 7 Answer to Question 1 a) Resources could mainly be natural or artificial of which natural resources might be renewable or non-renewable. Renewable resources include water, air, etc, while non-renewable ones are inclusive of fossil fuels. Artificial resources on the other hand, are man-made ones and might include a factory building. b) The productivities of factors of production are often considered to be enhanced with the availability of resources in the economy, since industrial production is a direct positive function of growth in natural resource component as well and hikes in industrial production assists in enhancing factor productivity. c) Mathematical formulae for production system of The Village Inn Y1 a11 a12 a13 a14 X1 Y2 = a21 a22 a23 a24 x X2 Y3 a31 a32 a33 a34 X3 X4 It could be assumed that, Y1 = buttermilk pancakes Y2 = Skillets Y3 = Crepes Thus, X1 = Milk, X2 = Butter, X3 = Wheat and X4 = Eggs Lastly, aij are the weights that are associated with each input for the production of each item and, their values range between 0 and 1; i, j = 1 ... 4 d) According to the Law of Diminishing Returns, the productivity of a factor with other factors remaining unchanged tends to diminish over time. In the above example, if any of the components are added in excess of the rest, they cannot help in producing an extra unit of output, so that increase in quantity only diminishes its productivity. Answer to Question 2 a) A department store generally deals with a large number of items under a single roof and simultaneously has to employ a large number of salespersons. In this case, productivity of each employee implies the additional number of commodities that the person is able to sale over time. In order to calculate the average productivity per employee thus, it is necessary to calculate the gross sales that the company made and divide it with the total number of transactions. b) Technical efficiency implies the efficiency with which inputs could be converted into output. Normally, the greater the volume of output that could be created with a given volume of input, higher is the efficiency of the concerned firm. In retail stores, this could be implies by the speed with which the sales are taking place. An ideal method to measure the same could be through estimating the number of days that a commodity stays in the inventory shelf. If the number of days is found to be higher than the average, technical efficiency of the company might be regarded as falling and vice-versa. Moreover, greater the technical efficiency is, lower is the per unit production cost incurred and greater is the profit generated. c) Economic efficiency is the extent to which the retail store can compromise their shelf space occupied by one commodity with that of another. In order to optimise the same, it is very important for them to be informed about the commodities which are highly demanded compared to those which are not. In case that they are able to make the substitution successfully, i.e., there is Pareto Optimality, the average cost of the company falls and its profit rises. Answer to Question 3 In the present case, the retired couple have to capture a part of the market that is largely served by the nearby chain restaurant. However, the difference between the two is that while the couple plans to establish a lunch-only restaurant, the nearby chain is a full-fledged one. Thus, the strategy that they must be adopting should be that like an oligopolistic market, where their strategies should be highly dependent upon the ones being adopted by the existing players of the industry. Four economic factors that they need to consider while determining their pricing strategy are – Firstly, the market is characterised by another major player who is already experiencing the advantage of being a first mover. Generally, in an oligopolistic market, a first mover pulls the largest demand to itself thus paving a smooth road for its future plans. Moreover, as it moves in first, it naturally enjoys the reputation of being the oldest player in the market that naturally helps it to earn considerable trust and goodwill from the customers. Secondly, the product to be sold is meant for a large market which implies the presence of high demand. High demand could be regarded as an advantage especially when there is a single seller involved. This is typically because the single seller tends to act like a monopolist that might not be welcomed by the consumers. However, if there is a small demand, then the monopolist cannot create much impact, which is why it is important to have huge demand. Thirdly, the demand for the product is characterised by high price elasticity, i.e., a low price is likely to invite high demands for the commodity. This could be held out as a strategy by the new entrant in order to curve out its position in the market. However, such a step might prove detrimental in case that the existing player moves in to price competition. But given the presence of high demand, and that the new player will be a lunch-only restaurant, chances of price competition are quite slim. Lastly, the new product, i.e., the lunch-only restaurant that the couple is contemplating to establish, will experience high barriers to entry. Despite of the fact that the new entrant is not planning to be a perfect competitor (since it deals with lunch-only service), there are chances of artificial barriers to entry in the form of fringe benefits that the older player could offer to their customers, to strengthen their loyalty. Keeping in view the above four points, the appropriate pricing policy that the couple should be adopting is that of market penetration. In a typical market penetration pricing model, the new entrant usually sets the price at a much lower price in order to beat the player(s) already present in the market. Such a strategy usually helps the entrant to build a competitive edge for itself over the one that already exists. Answer to Question 4 a) Economy of scale is usually associated with large scale production. Economic theories suggest that the profitability of a production system rises with increases in the volume being produced. In other words, per unit cost of production diminishes with increases in the volume of production. Using the example of a large store like Sears, for example, raise in input quantity results to a proportionately higher volume of output over time, given that during the primary stage, every department or segment needs a single attendant. However, their potentials are not utilised optimally. Eventually when the store size increases, the potentials of these individuals are utilised fully thus leading to an increase in the volume of output without any increase in input employed. In case of a department store like Sears, the production volume is characterised by the amount or volume of sales made. Thus, economies of scale in the present case could be held similar to an increase in sales volume without a proportional increase in the input needed to make the sales possible, i.e., without hiring proportionately as many salespeople. Increase in sales on the other hand is synonymous to a lower inventory shelf life. Since employment of input is low, the cost of input is low as well which is why it could be similarly concluded that output or volume of sales rises with lower than proportionate increase in cost of production. As the store expands and earns reputation, each salesperson is able to sell more commodities per day, implying an increase in retail production without an increase in the number of people employed or the quantity of input. Thus obviously, there is an increase in output elasticity and fall in cost elasticity. b) Output elasticity and cost elasticity could be used up to measure the degree to which a particular industry is characterised by economies of scale. While output elasticity implies the percentage change in output owing to a unit’s change in the inputs being used up in production, cost elasticity indicates the degree to which there is an increase in cost per unit increase in the output of the company. Thus, a rise in output elasticity naturally would mean a fall in cost elasticity, in the simplest terms when the only cost incurred by a company occurs due to inputs of production. Since the two measures are polar opposites, low employment of inputs would lower the cost of production as well. Hence, high output elasticity is always corresponded by a low cost elasticity as well given that the former means a more than proportional increase in output for a given increase in input. In case of Sears, when each additional employee helps in increasing the sales volume of the company more than proportionately, it means that the company is generating a revenue proportionately higher than the cost it is incurring that definitely means a fall in cost elasticity while a rise in output elasticity. Bibliography Boyes, W. & Melvin, M. 2010. Macroeconomics (8th ed.). USA: Cengage Learning. Read More