It Is About Managerial Economics And Theory Of Markets (Essay Sample)

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Introduction
Managerial economics can be generally defined as the study of economic theories, logics and tools of economic analysis used in the business decision-making process. It entails the understanding and use of economic theories of economic analysis in analyzing and solving business problems.
The economic theories, logic and tools of analysis have been established for the analysis and prediction of market performances. The application of economic concepts, logic, theories, and analytical tools in the assessment and prediction of market conditions and business environment has proved to be a substantial help to business decision makers all over the globe CITATION Jea01 \l 1033 (Aubin, 2001).
Profit maximization
The conventional economic theory assumes that profit maximization is the only objective of business firms. Profit maximization is the basis of conventional price theory. It is the most analytical, reasonable, and productive business objective.
Profit maximization objective aids in forecasting the behavior of business firms in the real world, as well as in predicting the behavior of price and output under different market environments CITATION Gar \l 1033 (Becker). There are some theoretical profit - maximizing conditions that we must have in our finger tips.
The Profit- Maximizing Conditions.
We first define profit as:
Profit= TR – TC,
where TR stands for Total Revenue which is given as a product of Unit price (P) and Quantity ( Q ) = PQ , and,
TC = Total cost = Variable Cost (V C) + Fixed Cost (FC).
There are two major conditions that need to be fulfilled for equations above to give a maximum profit: (i) the first- order condition, and (ii) the second- order condition.
The first-order condition requires that at maximum profit, marginal revenue (M R) must equal marginal Cos t (M C). The term marginal revenue means the revenue obtained from the production and sale of one additional unit of output while marginal cost is the cost arising from the production of the one additional unit of output CITATION Mar03 \l 1033 (Casson, 2003).
The second-order condition demands that the first- order condition must be fulfilled under the condition of decreasing marginal revenue ( M R) and increasing marginal co s t (M C). Fulfillment of this two conditions makes the second- order condition the sufficient condition for profit maximizations.
The first- and second- order conditions is illustrated as in figure below:
As shown in the figure above, the first- order condition is satisfied at points P1and P2, where M R = MC. The second- order condition is satisfied at point P2, where technically, the second derivative of the profit function has negative gradient. At this point, the total profit curve has curved downward after having reached its peak.
The theory of market
The market structure determines a firm’s capability to make pricing decisions. It shows the degree of freedom in the deciding the product prices. The degree of freedom is between zero and one depending on the market structure. This degree of freedom indicates the level to which a firm is free and independent of the rival firms in determining the product prices CITATION Mic08 \l 1033 (Waterson, 2008). When the degree of competition is high, the firm’s degree of freedom in making decisions about product prices becomes lower. The inverse is also true.
Under perfect competition, many firms compete against one another. The degree of competition in perfect competition is nearly one. Subsequently, a firm’s power in determining the price of its product is almost zero. In a case of a perfectly competitive market, the prices of a commodity are determined by the demand and supply market forces. In this case, the market demand refers to the industry demand. The industry demand refers to the sum of quantity demanded by each consumer of the product at different prices. Correspondingly, market supply refers to the sum of quantity supplied by the firms in the industry. The market price is determined for both the industry and the individual firms. The consumers take the given market price. This is the reason sellers in a perfectly competitive market are referred to as price takers. The firm has to accept the price determined by the demand and supply market forces CITATION Mic08 \l 1033 (Waterson, 2008).
As the level of competition decreases, a firm’s power over the product prices and its discretion in pricing decisions rises. Under monopolistic competition, the firm has a certain level of discretion in product pricing since the degree of competition is less than one. The pure term monopoly refers to absolute power to produce and sell a product that has no close substitute. A monopoly market is one in which there is only on a seller of a product having no close substitute. The cross elasticity of demand for a monopolist’s product is either negative or zero. A monopolized industry refers to an industry with a single firm.
Under an oligopolistic market structure, the level of competition is low. The firm’s control over pricing decisions is high. The firms, therefore, can exercise their power in pricing decisions, especially where product differentiation is substantial CITATION Mar62 \l 1033 (Blaug, 1962).
The role of pricing.
From the managerial point of view, the knowledge of the relationship between produ...