Economic Analysis for Management
Overview – Two Companies & Industries
Economics studies how people, institutions, countries, governments, and commercial enterprises allocate scarce resources amongst competing wants (Cooper & John, 2018). The main goal of a firm is profit maximization. To find optimal solutions to business problems, managers apply the concept of managerial economics. According to (Webster, 2014), managerial economics combines the use of business disciplines, such as management, accounting and finance, and marketing, with quantitative approaches, such as forecasting, game theory, optimization analysis, and statistics. However, this paper will discuss how managers can apply microeconomic and macroeconomic factors to analyzing business problems to find optimal solutions. To achieve this goal, two companies in different industries, a real one and a hypothetical one, will be considered. KFC, a fast food industry restaurant will form the real business case scenario for analysis. On the other hand, B&Q Motors, an automobile industry player will be used as the hypothetical firm in formulating and analyzing the hypothetical business problem.
Business Problem & Application of Micro/Macroeconomic Factors
The real business for use in this analysis is KFC, a fast food industry Restaurant. In economics, consumer purchasing behavior and decisions reflects two factors, i.e., tastes and preferences and what the buyer can afford (budget) (Acemoglu, Ozdaglar, & Tahbaz-Salehi, 2015). Based on the “Microeconomics/ Macroeconomics in a Fast-Food Restaurant” case problem, one real business problem that the management of KFC need to consider both the macro and microeconomic factors to analyze is the “trade-off” between price and quantity, i.e. demand. The problem which KFC management needs to consider is making a decision that maximizes profits while being price sensitive as consumers operate with budgets. In this case, the microeconomic concern is that KFC cannot set the price for fried chicken too low, or it would incur losses (Chen, 2008). Also, KFC cannot set the price for fried chicken too high, for customers will not buy at high charges. The real challenge of pricing for KFC is finding a balance. The management of KFC needs to ensure the set price earns enough profit but is not set at rates that chase away customers. Similarly, the macroeconomic problem that KFC’s management must address is the differences in consumer income levels. Also, KFC pays taxes on its profits, and consumers pay taxes on the food products they buy. This means that KFC must be price sensitive, since higher prices mean higher taxes which leave buyers with less to spend (Foxon et al., 2013). To solve this problem, micro and macroeconomic economic factors must be considered.
The hypothetical organization for use in this paper is labelled B&Q Motors, which operates in the automobile industry. In the automobile sector, demand and supply factors are the important variable of studying economics (Jarmila, 2020). The hypothetical problem requiring the management of this hypothetical automaker to consider both micro and macroeconomic factors to solve is the problem of employment. The microeconomic problem in case is determining how many employees the company will hire, based on factors such as budget and resources allocation. In this scenario, the problem is hiring enough engineers in the production and manufacturing department in attempts to meet market demand for automobile while optimizing resources allocation and minimizing labor costs (Kar, 2021). Similarly, the macroeconomic problem is the unemployment and loss of jobs issue. Unemployment affects economic growth. Since the company wants to optimize production and profits, only competent workers are considered. In this case, the macroeconomic problem falls under the question of hiring and laying off workers. Laying off workers amounts to unemployment and yet the economic goal is to create employment (Parsa, Gregory, & Terry, 2011). To address this employment issue, the management needs to apply the macro and microeconomic concepts.
Micro and Macroeconomic Factors at Play for both Companies
According to (Perloff & Brander, 2017), microeconomic and macroeconomic factors help economic managers in analyzing business problems and coming up with viable solutions. Depending on the business problem, various micro and macroeconomic factors come at play in the problem solving process.
In both KFC and the hypothetical company, i.e., B&Q Motors, there were specific micro and macro factors utilized by the management for problem analysis and problem resolution. The specific microeconomic factors at play for the two companies included consumer tastes and preferences, consumer budget/income level of potential buyers, prices charged by rival companies, the number of loyal consumers, and wage rates (Kavussanos, Markoulis, & Arkoulis, 2002). In both KFC and the hypothetical firm, the managements were highly price sensitive. To solve the pricing concern, the managers had to first understand the trade-off between price and quantity. Others factors considered, for example, the income level of potential customers, prices charged by competitors, and loyalty level of the customers were beyond managerial control (Perloff & Brander, 2017). By analyzing these factors, KFC was able to set reasonable prices that maximizes profits while attracting more consumer sales. Similarly, B&Q Motors considered the income level of potential automobile buyers and produced vehicles that are affordable to the target market, attract new buyers, and maintain customer loyalty (Salama, 2021). Also, in both companies, consumer tastes and preferences were addressed, helping boost sales and hence maximize profits for the firms.
In both companies, the main concern by the management is addressing the employment issue. In solving this problem, the specific macroeconomic factors at play for both firms were unemployment and joblessness, government spending and taxation, and income levels/national income (Webster, 2014). In both KFC and the hypothetical company, workers are employed and laid off. In the course of a global downturn, for example, the 2007-2009 recession, KFC had to lay off employees to prevent business closure. With joblessness, the economy is unhealthy and stagnant, and this affects the production capacity of the economy at large. With economic downturns, both companies have financial problems implying that they cannot increase the salaries and wage levels of workers. To solve this issue, seeking government funding help the two companies offer more jobs while helping the economy recover from recession. Also, both KFC and the hypothetical company pay taxes on income/profits, employees’ pays PAYE, and customer pay taxes when they buy food and automobile products (Wilkins & Ireland, 2020). The outcome is giving people employment and adequate income to spend on their products, resulting to economic growth, full employment, and price stability.
Managerial Decision-Making Processes – Compare & Contrast
In KFC and B&Q Motors, there exists both similarities and differences in the managerial decision making processes taken in analyzing the underlying problems to get solutions. First, the managements of both KFC and the hypothetical company not only decides what to produce and ways of producing it but also how much each product will be charged (Parsa, Gregory, & Terry, 2011). This implies that the two companies are price sensitive, and charge reasonable and affordable prices for their brands. Also, when setting the price to charge, both companies consider the inputs and output to the production process. The cost of production/preparing the output is considered when setting the final market price. In the two companies, the management ensures that there is a trade-off between price and quantity; that the price charged in a given brand promotes more sales while attracting more consumers (Jarmila, 2020).
On the other hand, the managerial decision making processes for the two firms differ. The main reason for the difference is that the two companies operate in different sectors, i.e. fast food industry and automobile sector. For the hypothetical automaker, managerial decision making processes are mainly based on demand and supply factors. The microeconomic demand factors that inform the automobile’s decision making are the availability of substitutes, purchasing power and affordability of individuals and households, availability of funding options, and prices of oil and gas (Jarmila, 2020). Besides, the microeconomic factors influencing supply decisions in this hypothetical firm include technology position, production cost, product penetration, and competition. In contrast, KFC makes microeconomic demand and supply decisions based on the income levels of potential consumers, prices charged in nearby alternative restaurants, and the number of individuals who believe that KFC is the best fast-foods company.
Conclusion
The major concerns of macroeconomics are full employment, economic growth, and price stability. Microeconomics seeks to analyze how producers and consumers behave in different economic environments. The application of these models facilitate sound decision making by economic managers. Key concepts of microeconomics are tastes and preferences, consumer income levels, and budget. On the other hand, key macroeconomic concepts are employment, taxation, income level, and government spending and funding. This paper has discussed how economic managers consider both macro and microeconomic factors in analyzing business problems such as unemployment and the trade-off between quantity and price to get solutions. Modern day managers should consider these two theories in analyzing business problems for solutions given their proven effectiveness in serving this purpose.
References
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