Managerial Economics Analysis

Managerial economics is based upon how to gain the most benefit from one’s company depending on the market and decisions made to help compensate the changes within the market. This form of economics dives into applying economic ideas and analyzing the economic world to make rational and critical managerial decisions. However, starting with managerial economics, one has to create a system of organization to build a foundation for one’s company. Many successful businesses have this systematic framework that can be applied consistently in addressing organizational problems to structure more effective organizations.

The book suggests creating an “organizational architecture” which describes a framework identifying three critical aspects of a corporation.

The economic model used by most managers is ranking their choices in terms of preference, then choosing their most preferred alternatives. This procedure is of selecting the most valuable option is completed by marginal analysis. Marginal analysis is calculating marginal costs and marginal benefit, ensuring that marginal benefit exceeds marginal costs. Marginal costs and benefits are the incremental costs and benefits that are associated with making a decision. Within marginal costs, one must also compute opportunity cost, which means that individuals make decisions on what can maximize their personal happiness, both financially and emotionally, by choosing the best alterative when dealing with infinite wants and limited resources. There are various types of economic models made to increase productivity and maximize benefit of employees used by managers. These models are listed as Only-Money-Matters model, Happy-Is-Productive, model, Good-Citizen model, and Product-of-the-Environment model. Managers using the behavior model of Only-Money-Matters, believe the only important component of the job is a level of monetary compensation. The Happy-Is-Productive behavior model assumes that happy employees are more productive than unhappy employees, meaning their goal is designing work environments to satisfy employees

These types of uncertain circumstances arise when the individual does not know the precise trade-off, such as purchasing stocks and bonds. Key concepts used to mitigate risk are titled Expected Value, Variability, Risk Aversion, Certainty Equivalent and Risk Premium, and Risk Aversion and Compensation. The first concept, Expected Value, is defined as the weighted average of all the possible outcomes, where the probability of each outcome is used as the weights. The expected value is used to soften risk by measuring the average payoff that will occur. An example of this would be turning a paper with three questions on it. The concept of expected value is calculated by multiplying the probability of each outcome (1/4) by each possibility (0, 33, 66, and 100), then adding them all together, to find the average (50), or expected value. Once Expected Value is calculated, it is important to follow up with the next concept, Variability, because the expected value is not certain. Variance, meaning the measure of variability, can be found by multiplying the probability of each outcome (1/4) by the difference between each possible payoff and the expected value (0-50, 33-50, 66-50, and 100-50), squaring each individual calculation, then adding each calculation together (619). However, the