Limitations of managerial economics

Helpful in Profit Planning and Control Managerial economics helps managers to decide on the planning and control of the benefits.

Limitations of managerial economics

Practice Test Some critics question why the value maximization criterion is used as a foundation for studying firm behavior. Do managers try to optimize seek the best result or merely satisfice seek satisfactory rather than optimal results?

Do managers seek the sharpest needle in a haystack optimizeor do they stop after finding one sharp enough for sewing satisfice? How can one tell whether company support of the United Way, for example, leads to long-run value maximization? Are generous salaries and stock options necessary to attract and retain managers who can keep the firm ahead of the competition?

When a risky venture is turned down, is this inefficient risk avoidance? Or does it reflect an appropriate decision from the standpoint of value maximization? It is impossible to give definitive answers to questions like these, and this dilemma has led to the development of alternative theories of firm behavior.

Some of the more prominent alternatives are models in which size or growth maximization is the assumed primary objective of management, models that argue that managers are most concerned with their own personal utility or welfare maximization, and models that treat the firm as a collection of individuals with widely divergent goals rather than as a single, identifiable unit.

These alternative theories, or models, of managerial behavior have added to our understanding of the firm. Still, none can supplant the basic value maximization model as a foundation for analyzing managerial decisions. Examining why provides additional insight into the value of studying managerial economics.

Research shows that vigorous competition in markets for most goods and services typically forces managers to seek value maximization in their operating decisions. Competition in the capital markets forces managers to seek value maximization in their financing decisions as well.

Stockholders are, of course, interested in value maximization because it affects their rates of return on common stock investments. Unfriendly takeovers are especially hostile to inefficient management that is replaced. Further, because recent studies show a strong correlation between firm profits and managerial compensation, managers have strong economic incentives to pursue value maximization through their decisions.

It is also sometimes overlooked that managers must fully consider costs and benefits before they can make reasoned decisions. Would it be wise to seek the best technical solution to a problem if the costs of finding this solution greatly exceed resulting benefits?

What often appears to be satisficing on the part of management can be interpreted as valuemaximizing behavior once the costs of information gathering and analysis are considered. Similarly, short-run growth maximization strategies are often consistent with long-run value maximization when the production, distribution, or promotional advantages of large firm size are better understood.

The criticism that the traditional theory of the firm emphasizes profits and value maximization while ignoring the issue of social responsibility is important and will be discussed later in the chapter.

For now, it will prove useful to examine the concept of profits, which is central to the theory of the firm.Economics is a social science that examines how people produce, distribute, and consume goods and services. This means that much of the field is based on human behavior, which can be somewhat irrational and unpredictable.

Limitations of managerial economics

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Research paper about time management of students research proposal topics in business management. Managerial economics is a discipline that is designed to provide a solid foundation of economic understanding in order for business managers to make well-informed and well-analyzed managerial decisions.

Economics E conomists are a paragon of virtue, rationality and common sense amidst a sea of ignorance, superstition and irrationality. They are probably right, but, sometimes it is good to state a case in strong terms, to make people think.

Managerial economics as defined by Edwin Mansfield is "concerned with application of economic concepts and economic analysis to the problems of formulating rational managerial decision."[1] It is sometimes referred to as business economics and is a branch of economics that applies microeconomicanalysis to decision methods of .

Limitations of the Theory of the Firm in Managerial Economics - Limitations of the Theory of the Firm in Managerial Economics courses with reference manuals and examples.

Limitations of managerial economics

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