Introduction
Managerial economics refers to the science of organizing limited resources in order to achieve organizational goals with minimal costs. According to Edwin Mansfield, managerial economics applies various economic concepts and analytical strategies to influence the decision-making process in a rational manner (Paul, 2008). The scope of managerial economics includes various organizational activities that require managerial decisions.
These areas include decisions on production, demand, pricing, and human resource management. Other crucial areas where managerial economics applies in organizational leadership include capital budgeting and risk analysis. This research paper will discuss how managerial economics influences decision-making by organizational leaders due to demand for goods and services. It will also demystify the theory of demand applies in managerial economics by discussing various types of demand.
Good decision-making is crucial for organizational success because of the need to use scarce resources to achieve organizational goals. Managerial economics influences decision-making, which is usually aimed at achieving better assessment of required capital, market needs, technological inputs, pricing strategies, and marketing of products (Harris, 2010).
All these decisions seek to meet the market demand for goods and services while reducing cost. Managerial economics seeks to meet various types of demands after the introduction of a product in the market (Paul, 2008). Examples of these demands include interrelated demand, joint demand, competitive demand, derived demand, composite demand, independent demand, and direct demand among others.
Discussion
The science of managerial economics aims at giving organizational leaders easy time when making decisions on various issues. It is a good tool for managers who want to make long-term decisions for their organizations because they are able to identify and deal with numerous obstacles with ease.
Business managers who have applied this concept in their decision-making process say that breaking down complex organizational challenges into small tasks is much easier and more result oriented than when it is not integrated into the process of making decisions (Harris, 2010). Economic experts argue that managerial economics helps managers make decisions that enable an organization to become more competitive, goal oriented and excellent in meeting customer needs.
On of the most influential areas in where managers apply the concept of managerial economics is that of making demand decisions. In economics, demand refers to the ability and desire to purchase goods and commodities. Demand decisions seek to determine the market size of a commodity.
Such decisions apply when trying to determine the kind of people who are willing to buy a commodity, and the quantity they need (Paul, 2008). Conducting a demand analysis is crucial to business success because it influences important aspects such as income, profit margins, level of production, as well as employees’ remuneration and benefits.
Demand is the driving force of business operations because they cannot exist if the demand for products and services is zero. One of the main concerns of managerial economics when making demand decisions is the relationship between price elasticity and demand for products and services. According to economic experts, if the demand elasticity of a product is zero or less, then the prices of goods do not influence the number of units sold (Harris, 2010).
This means that the price of goods and services depend on their demand. In addition, low prices of goods and services does not increase demand for products. Demand controls the price of goods and services. When the demand is high and the supply is low, prices increase. Therefore, when demand for goods and services are inelastic, their prices are also likely to be inelastic (Boyes, 2011).
The demand theory in managerial economics
A French economist called Leon Walras explained the demand theory as one of the fundamental principles of microeconomics that analyses the relationship between demand for products in a market and their corresponding prices (Paul, 2008). The theory argues that all production and market activities are due to demand for specific products and services.
Managerial economics plays the role of using available resources to produce goods and services in order to meet a certain market demand without incurring unnecessary costs. The concept behind managerial economics is to fulfill market gaps by identifying various needs, creating products and services, and meeting the demand those products and services. The theory further explains how managerial economics can alter or determine the demand of goods and services in the market.
Effective demand refers to the desire to buy, the willingness to pay, and the ability to pay for goods and services (Boyes, 2011). The three variables are very important to consider before a business introduces a new product or service in a certain market.
People can possess the desire to buy a product, yet lack the will or ability to pay for it. Likewise, people can have the will or ability to pay for a product, yet lack the desire to buy it. Therefore, it is important for the three variables to be in harmony in order to control or fulfill the demand for a good or service.
The law of demand states that the higher the price of a commodity, the lesser the desire by consumers to buy it. However, hedonic theory of economics argues that the price that an individual pays for a commodity does not reflect its demand level but the value one drives from it (Wilkinson, 2005). Therefore, business managers need to understand the need for quality products that meet all customer needs. Quality products have high market demand and attract highly competitive prices too.
When making demand decisions, it is important for organizational leaders to understand the main reasons behind demand for goods in the market. This helps them to produce quality products and develop effective marketing strategies that facilitate their sale in the market. Demand for goods and services is influenced by various factors that range from market forces, economic factors, and the nature of consumers among other factors (Boyes, 2011).
One of the factors that affect the demand for goods and services is the income effect. According to economic experts, consumers can influence demand for goods and services depending on their income and expenditure levels. The price of goods and services can go down if consumers possess the financial ability to consume the same number of units in a certain period at a low cost (Wilkinson, 2005).
The effect of this economic phenomenon is that the demand for a product will go up because consumers can meet all their needs without incurring additional costs. Another factor that explains the demand for goods and services is the effect of substitute products.
When a substitute product is introduced in a market, the price and demand for related goods often falls because consumers tend to choose the cheaper alternative. Eventually, the demand for substitute products increases while that of other products decreases due to competitive demand.
Another factor that influences demand is the taste and preferences of consumers. Consumers usually have variety of goods and services to choose from depending on their tastes and preferences (Wilkinson, 2005). Certain products are more liked by consumers when compared to other similar products. This can influence the demand for goods and services because the more a consumer likes a product, the more the demand for it and vice versa.
Expectations of product prices among consumers also affect the demand for goods and services. A consumer will often buy a product whose price is likely to stabilize or decrease in future (Paul, 2008). Certain products have unpredictable market patterns and their prices change often to the disadvantage of consumers.
Therefore, products that have predictable market patterns often have higher demand because consumers are able to manage their expenditure at all times. All these factors among others define the conditions through which demand for goods and services thrives. Therefore, demand depends on prices of goods, prices of substitutes, consumer income, price expectations, as well as consumer tastes and preferences (Boyes, 2011).
Managerial economics helps businesses in meeting market demands without compromising the economic sense of having the business in the first place. Businesses should control their production process to a level that allows them to meet the market demand fully (Wilkinson, 2005). Product demand levels dictate production and the amount of investable resources required to meet consumer needs.
Types of demands
As earlier mentioned, there are various types of demand that include direct demand, indirect demand, derived demand, independent demand, composite demand, and competitive demand among others (Harris, 2010). However, for the case of managerial economics, only two of these demands are applicable. The two are direct demand and derived demand. Direct demand refers to when people have the desire for consumable goods.
This is the demand for products that have reached the final stage of production and are ready to for use. Such products include foodstuffs, infrastructure, and clothes among others. Derived demand refers to when people desire goods that undergo further production or are used to produce other goods.
This means that the demand for final products made from these goods is dependent on how much people will desire to buy the parent product (Harris, 2010). These goods are known as producer goods and include raw materials and equipments. For example, cement is a good that has derived demand. The more people desire to build houses and construct roads the more the demand for cement will rise.
When applying managerial economics, it is important for business managers to understand market demand function and its effect on the decision-making process. According to economic experts, the market demand function shows how the level of demand for a product relates to factors that influence its demand (Wilkinson, 2005).
Therefore, a demand function shows how various factors and conditions of demand such as price of commodity and customer income influence the degree to which people will have a desire to purchase and pay for a product. Managers should specify the level of demand and all determining factors for products when making demand decisions.
In addition, it is important to understand that a market demand function is different from a demand curve (Wilkinson, 2005). Demand curve is a function that shows the connection between the level of demand for a product and the market price of those goods and services.
Conclusion
According to the contemporary nature of managing a business, managerial economics can apply as a practical integration of various economic theories into organizational management in order to maximize on productivity using limited resources. Business managers who intend to apply managerial economics in their decision-making process should make sure that they are conversant with various mathematical concepts related to applied statistics and market analysis.
Demand for goods and services are influenced by various factors that range from market forces, economic factors, and the nature of consumers. Business managers should apply managerial economics well in order to attract effective demand for their products. Effective demand refers when consumers have a desire to buy a product, have the will to pay, and have the ability to pay for the products.
When making demand decisions, it is important for organizational leaders to understand the main reasons behind demand for goods in a market. Managers should specify the level of demand and all determining factors for products when making demand decisions.
References
Boyes, W. (2011). Managerial Economics: Markets and the Firm. New York: Cengage Learning.
Harris, F. (2010). Managerial Economics: Applications, Strategy, and Tactics. California: John Wiley & Sons.
Paul, S. (2008). Fundamentals of Managerial Economics. London: Oxford University Press.
Wilkinson, N. (2005). Managerial Economics: A Problem-Solving Approach. New Jersey: Cambridge University Press.