Managerial Economics

Topics: Economics, Management, Operations management Pages: 11 (3428 words) Published: April 11, 2013
A.“The objective of economic analysis is not merely to discover the truth but also to assist in the solution of concrete problems.” Comment.

Economic analysis provides a systematic approach for studying the allocation of resources to achieve an organization's objectives. Techniques of economic analysis help ensure efficient operations, minimize overhead and compare costs and benefits

Economic analysis provides a systematic approach for industry, government agencies and nonprofit organizations to study their operations and how well they satisfy organizational goals. Types
Three main types of economic analysis include cost-effectiveness, cost-benefit and cost-minimization. Significance
Economic analysis is especially common in the medical and pharmaceutical industries, which use the techniques to weigh the costs and benefits and to compare the effectiveness of new drugs and therapies. Considerations

In cost-benefit analysis, it may be difficult, or even inappropriate, to place a monetary value on some benefits, such as longer lifespan resulting from a new medical technology. An economic analysis is like performing a check-up on a business: it assesses internal conditions, external influences and provides recommendations for improvement. Stephen Morris, Nancy Devlin and David Parkin, authors of "Economic Analysis in Health Care," explain that this type of an analysis weighs decision-making in terms of its potential benefits or disadvantages. The ultimate goal of an economic analysis is to determine if a business is allocating their resources in the most effective manner. In most cases, a business always has room for improvement, be it through overhauling outdated computers or improving the delivery ordering system.

An internal staff member can perform an economic analysis, though hiring a consultant to provide an outsider's view of the organization tends to be a more common approach. If a consultant is hired to give a review, she may spend months observing how the company functions. At the end of it, she drafts a report and delivers it either orally in front of the company management team or submits an extensive written evaluation. The analysis highlights the areas for improvement with regards to efficiency and what hurdles the organization might have to overcome from external economic conditions. Internal Conditions

An economic analysis interprets internal economic conditions facing the company. The economic goal of an organization is to maximize its output and efficiency given its constraints. Internal economic conditions affecting an organization include the quality of its labor force, machinery, capital and innovation. Common constraints include adhering to a budget and drawing from a limited labor pool. For instance, a company is not being economical by hiring MBA graduates and paying them a high salary for work that could be performed by a high school graduate for significantly less money. Similarly, hiring too many unskilled workers will inhibit growth in the long run due to a lack of innovation. An economic analysis might also reveal the company should pay to upgrade its machinery or computer systems. Such a recommendation is made after assessing the level of output, expected consumer demand and the potential profit derived from having higher-caliber machinery. External Conditions

External conditions include the effects of the overall economic climate, changes in technology, presence of competition and globalization. Each of these factors affects the performance and long-term well-being of the company. Hal Root and Steve Koenig, authors of "The Small Business Start-Up Guide," explain that legal issues and growth trends in the industry are other examples of factors to consider. A downturn economy decreases consumer confidence and could decrease profits. Changes in technology could render a product line of the company obsolete, as was the case for companies...
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