Managerial economics

About: Managerial economics is a research topic. Over the lifetime, 1524 publications have been published within this topic receiving 83965 citations.

Extending the Profit Elasticity Measure of Operating Leverage in Managerial Economics Texts

Abstract: The authors suggest recasting operating leverage (DOL) treatments in managerial textbooks. They extend the profit elasticity form of DOL used by firms to other than competitive markets by introducing nonlinear cost and revenue functions. From their results, the authors urge text writers to highlight four key issues: the role and limitations of 1) management--long run versus short run operating leverage decisions, 2) engineering--variable cost changes associated with fixed cost changes, 3) economic forces--competitive versus non-competitive markets and 4) mathematical results--DOL equals zero at the maximum profit output level, regardless of the level of fixed cost. INTRODUCTION Operating leverage is important to firm management for one reason, additions to operating fixed costs affect a firm's value by increasing risk as measured by the variability of returns (Lev, 1974, and Berner, 2002). Operating leverage discussions often follow as a natural extension to linear breakeven analysis in managerial economics textbooks. Application of the generally received profit sensitivity formula, the degree of operating leverage (DOL), is limited both theoretically and practically. Most textual treatments ignore the role DOL variables other than fixed costs play. Most authors assume overly restrictive linear cost and revenue functions, while subsequent chapters develop standard non-linear economic cost and revenue functions. The roles of management, engineering and economic markets along with the measure's inherent mathematical limitations are left unstated. This article reviews unstated aspects of the DOL measure and offers a more theoretically complete framework for operating leverage textual discussions aimed at the practicing corporate managerial specialist. Aspects of DOL we consider important include a) consistency with orthodox economic theory, b) recognizing the larger business risk context within which the DOL measure is applied, c) a clearer view of management's role in influencing certain DOL parameters as business risk components and d) some important analytical limitations inherent to the measure's form. Business risk is a central determinant of a firm's value, the risk-adjusted present value of future profit. Several important parameters affect a firm's business risk position. Among them are price, variable costs, operating fixed costs, the output rate and the stability of demand. The DOL measure contains variables that capture four of these parameters. The fifth, demand stability, is a through-time assessment while DOL is a point in time measure. The level of operating fixed cost, the parameter of greatest attention in textual DOL discussions, is only one business risk parameter. A change in a single business risk parameter in the DOL expression also affects the remaining parameters. For example, increases in operating fixed cost without a compensating reduction in unit variable cost may require increases in output to sustain a desired profit level. A meaningful discussion of DOL should at least mention the distinction between management-led choices addressing the firm's business risk posture versus market forces and engineering-based limits. Finally, other than for expository simplicity, we question the use of restrictive linear cost functions in the DOL formula application, when textual narrative in the same text stresses non-linear relationships. Discussion in Section 2 confirms the mathematical equivalence between various DOL measures and presents works by Dran (1991), Long (1992) and shows that DOL is sensitive not only to changes in the firm's operating fixed cost but also to short run output. That section suggests that narrative treatments indicating which DOL parameters management can directly influence would help place the measure into a useful operational context. Section 3 extends the DOL expression to include a cubic variable (and total) cost function and parabolic total revenue function to demonstrate that DOL equals zero at the theoretically optimized output, regardless of the level of fixed cost. …

Managerial Economics for Decision Making

Abstract: Business Objectives The Economic Environment Demand Estimation and Forecasting Cost Concepts and Cost Estimation Techniques Pricing in Theory and Practice Non-Price Competition Investment Decisions and Capital Constraints Traditional versus DCF Method of Investment Appraisal Risk and Uncertainty in Investment Appraisal Investment Decisions in the Public Sector Case Study Siting a Processing Plant Managerial Decisions and the Firm's Competitive Strategy

Entrepreneurship is not a Binding Constraint on Growth and Development in the Poorest Countries

Abstract: It is often claimed that entrepreneurship is indispensable for economic growth and development. These claims are mostly generated by scholars working in the field of entrepreneurship andmanagement studies. In contrast, development economics scholars seem to be less concerned about entrepreneurship in the development process Who is right? I show that the arguments and evidence marshalled so far fails to convincingly show that entrepreneurship is a binding constraint on development in the poorest countries. In development economics institutional weakness, not entrepreneurship, is considered by many tbe a more binding constraint on development, especially over the long run. However, recent advances at the interface of entrepreneurship and development economics suggest that unpacking the .black box. nature ofinstitutions may benefit from incorporating an .entrepreneur.. Thus, even if entrepreneurship isnot a binding constraint on economic development, it may still be worthwhile to study entrepreneurship in development as it may improve our understanding of the real binding constraints.