Ch 1 SM - Solution Manauel PDF

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1. Define scarcity and opportunity cost. What role do these two concepts play in the making of management decisions? Scarcity is when supply is less than demand. Generally, people want more than can be supplied. Major economic decisions have to be made when scarcity occurs. A decision may be, where can a company allocate other resources to make up for scarce resources? Scarcity is a company’s worst nightmare. Opportunity cost is what can the other resources that are making up for the scarce resources be valued at. The alternative resources that are used have an alternative cost, which is the opportunity cost. Scarcity is the reason for economic decisions. It is believed to be the cause of all economic downfalls. Companies must be able to identify potential scarcity and allocate needed resources to avoid disaster when scarcity happens. Basically, a company needs to be able to plan for the worst. Some companies have several different products. If scarcity happens with one product, the other products need to be allocated and make up for the loss of supply by increased demand on a different product. ……………………….. Scarcity: A condition that exists when resources are limited relative to the demand for their use. In the market process, the extent of this condition is reflected in the price of resources or the goods and services they produce. In econ scarcity is normally referred to by the demand of a product this is because if there is no demand for let’s a 1980’s Honda Civic with 5million miles on it all the car is scares it has no demand so the scarcity of the car in econ terms would be nothing without demand. Opportunity cost: The amount or subjective value forgone in choosing one activity over the next best alternative. This cost must be considered whenever decisions are made under conditions of scarcity. oIf a factory is running at full capacity fulfilling orders and a good friend comes along and ask you to build them a cabinet for 50% off. The opportunity cost would be losing 50% off another order because you ‘rerunning at full capacity. 1.Define scarcity and opportunity cost. What role d these concepts play in the making of management decisions? Scarcity is a condition that exists when resources are limited relative to the demand for their use. Another way of describing this condition is to state that scarcity exists when resources are not available in unlimited amounts. When resources are available in unlimited amounts, economists consider them to be “free” goods. Because of the scarcity of resources, choices have to be made about their allocation among competing uses. Each choice is considered by economists to involve an “opportunity cost” because the use of scarce resources in one activity implies that they cannot be used in an alternative one. In other words, this opportunity cost is the amount that is sacrificed when choosing one activity over its next best alternative. It is reasonable to assume that all organizations have to work with scarce resources, no matter how large or profitable. A key role that managers play is to decide how best to allocate their organizations’ scarce resources. From an economic standpoint, optimal decisions involve their weighing of the benefits associated with a particular decision against the opportunity cost of this decision.

2. Elaborate on the basic economic questions of what, how, and for whom. Provide specific examples of these questions with respect to the use of a country’s scarce resources. •What good and services should be produced and in what quantities? Goods and services should be produced in quantities depending on their demands. Example: What is the market looking for and what is

the demand of that product? Antimony which is an element needed in electric motors is scarce around the world and is only currently mined in China. With a global economy a country will only mine a little bit of their resources to keep the demand high and to all ensure that they don’t run out of that resource. •How should these goods and services be produced? Goods and services should be produced depending on the level of scarcity and also should be produced depending on their environmental impact. •For whom should these goods and services be produced? Scarce resources should be produced for a select category. Depending on time and need for instant if you are at war you might need people to produce vehicles for war and not for domestic travel at home. Q3. Following are examples of typical economic decisions made by the managers of a firm. Determine whether each is an example of what, how, or for whom. a. Should the company make its own spare parts or buy them from an outside vendor? Answer: the best question here is “How to produce the spare parts. What and for whom are known. Therefore, the managers of a firm should know the best way to make spare parts available weather through make or buy. b. Should the company continue to service the equipment that it sells or ask customers to use independent repair companies? Answer: the best question here is “What to do, continue to service or stop it and ask the customer to do it through another repair companies. c. Should a company expand its business to international markets or concentrate on the domestic market? Answer: the best question here is “for whom to expand or concentrate on a certain market niche. d. Should the company replace its own communications network with a "virtual private network" that is owned and operated by another company? Answer: the best question here is “How to replace the available network with another one. e. Should the company buy or lease the fleet of trucks that it uses to transport its products to market? Answer: the best question here is “How to buy or lease the fleet of trucks. 4.Define the market process, the command process, and the traditional process, how does each process deal with the basic questions of what, how and for whom.? Market Process: The use of supply, demand and material incentives (e.g., the profit motive) to decide how scarce resources are to be allocated. It answers the three questions of what, how and for whom inthe following ways: “What?”—Whatever is profitable will be produced. Profitability in turn depends on the strength of a society’s demand for a particular good or service and the cost to producers of providing such a good or service.

“How?”—Resources should be allocated and combined in the least costly way. “For whom?”—The output of goods and services should be allocated to whoever is willing and able to pay for them. Of course, the ability to pay depends on the country’s distribution of income. Many factors may account for the distribution of income in a market economy. For economists, one of the most important is the “productivity principle.” This states that income is allocated according to the relative productivity of the various factors of production Q5. Discuss the importance of the command process and the traditional process in the making of management decisions. Illustrate specific ways in which managers must consider these two processes. Answer: The Command process is influenced by the government or central authority to find the answer that best fit to the three basic questions (What, how, for whom). The government owns most of the resources of production like land and other natural resources and take decisions about the allocation of resources to controls all the factors of production. On the other side, The Traditional process uses the culture and trends of the population. In this kind of system, the customs and traditions are used to decide what to produce, how to produce, and for whom to produce. The managers should take into account both command process that related to government’s laws and regulations that govern and control the action of both consumers and products and the traditional process that related to religions, customs and traditions during answer the three questions What, how, and for whom. 6. Explain the differences between management skills and entrepreneurship. Discuss how each factor contributes to the economic success of a business. Management skills is about managers, skills what need to be learn and practice while developing new systems, tools and ways to do things in management. Involves the ability to organize and administer various task in pursuit of certain objectives. Entrepreneurship is related to the terms of production. It implies willingness to take certain risks in the pursuit of goals as producing a new product, a new business or a new service. Both are needed in the world economy nowadays and it is important to have a balance using both, while management seeks to pursue objectives, the entrepreneurship will seek that innovative part for the business. 7. Compare and contrast microeconomics with macroeconomics. Although managerial economics is based primarily on microeconomics, explain why it is also important for managers to understand macroeconomics. Microeconomics is the study of how choices are made to allocate scarce resources with competing uses. An important function of a manager is to decide how to do this. Even when the business takes the decision without having a good source or a good knowledge, there will be always another factors to consider, and those factors changes with macroeconomics. For managers, knowing the whole economics is always important, because the business moves along it, and whenever exists a change, our business will be suffering any kind of impact. Microeconomics is generally the study of individuals and business decisions; macroeconomics looks at higher up country and government decisions. Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and

price levels. Knowing macroeconomics can play a large factor in managerial economics and makes managers look beyond the microeconomics aspects to predict feature trends. 8. What do you think is the key to success in the soft drink industry? What chance do you think Global Foods has in succeeding in its new venture into the soft drink market? Explain. (Answer these questions on the basis of the information provided in the chapter and any other knowledge you might have about the food and beverage business.) Given that the market is so competitive, the key to success in the soft drink industry is differentiation. Consumers want variety; therefore, Global Foods needs to continually innovate their products and keep up with the consumer demands through market analysis. I think their expansion into energy drinks and gourmet tea is a great way to reach multiple segments of the market. Q9. (Optional) have you been personally involved in the making of a decision for a business concerning what, how, or for whom? If so, explain your rationale for making such decision. Were these decisions guided by the market process, the command process, or the traditional process? Explain. Answer: I used to make these decisions on almost a daily business. As I have a small service center in Sana’a. There were many important decisions to make, what type of services, how the services will be done and for whom to provide. Yes, many decisions were guided by a market process such as third parties choice to support once the services providing to the customers. The command process also guided many decisions, as the laws and regulations of Yemen should allow all services. Regarding tradition process, we always considered religion and customs when provided the services where we did not provide prohibited services, or the services not accepted by society. Q3. Discuss the implications of profit for managers as entrepreneurs versus owners as entrepreneurs? Answer: Entrepreneurship is the willingness to take certain risks in the pursuit of goals, so the profit may become huge. An entrepreneurship comes with new ideas lead to new products or services and take place in the economic success of a business. Management, in contract, is the ability to organize resources and administer tasks to achieve objectives and makes every effort to accomplish the job effectively. The managers take less risk than the entrepreneurship and get less profit accordingly. The managers contribute to the success of a business....