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Managerial Economics

Due to the increasing in demand the company has been experiencing the management should hire new workers on a temporarily basis. Business firms apply managerial economic in their decision making process in order to improve the decisions that are made to optimize their goals. The primary motive of any given firm going into business is to maximize the profits. By applying managerial economic concepts firms are enabled to evaluate the alternative choices that are available to them and come up with the best choice that can enable it attain its goals. This is possible because when a business firm management applies managerial economics concept they are enabled develop optimal solutions to the problems that are encountered in their business activities  .Problems such as how much output should be produced, the best production methods ,whether they should increase the workforce and the best combination of inputs. They are also able to estimate profits, product costs, capital expenditure and product demand .additionally the management can be able to analyze their product prices, market structures, or whether they are accruing economies of scale. In general when economic managerial concepts are applied a firm’s management can be able to plan their capital expenditures, plan on production method and evaluate the best production techniques that can help a business attain the set goals. Therefore when a firm is faced with increased demand the management can apply managerial concept to evaluate whether they should hire more employees in order to meet the required output.


            Managerial economics can be describes applying economics theories in business management in order to develop or facilitate optimal solutions to problems that are faced by business organizations. This is achieved through rational problem analysis by studying a business firm behavior to develop rational practical solutions to all the arising challenges CITATION Ada03 \l 1033. Managerial economics can therefore be defined as the application of economics facts in order to allocate scarce resources in an optimal manner.

            Demand determines how much a firm should produce it is an important indicator of consumers’ sensitivity to the quality of the products that are produced, their prices, sales among other consumer behaviors .By analyzing demand a firm can be able to determine the amount of labor required to increase the output in order to meet the additional production required o meet the supply gap existing in the market CITATION Fro10 \l 1033. Demand therefore can be defined as the level of commodity and services required to meet the needs or requirements of the consumers in the market. The level of demand in the market can be affected by the prices of products and services. This means that the higher the prices the lower the levels of demand. It is also affected by the amount of disposable income the consumers can be able o spend to fulfill their needs and requirements. That is if the consumers have the resources necessary to enable them to buy commodities and services which imply their needs or requirement. Disposable income is determined by subtracting taxes and saving from an individual’s income the portion that remains is the disposable income that can be spent to fulfill or to buy the commodities and services that a consumer needs. Disposable income can affect the aggregate demand in an economy in that when there is an increase in disposable incomes in the economy CITATION Hir09 \l 1033. Consumers have additional resources to spend on commodities and services to satisfy their needs. Therefore to meet this increase in commodities and services, firms or producers are required to increase their output to meet the increased demand. This means that the firms need to apply more labor and other factors of production to meet the require demand in the economy. An increase in deposable incomes therefore means an increase in demand in the economy.

            Demand is also affected by the availability of substitute commodities and services .substitute goods are goods that can be used to satisfy the same needs or to fulfill the same requirement. In other word these goods can be used to meet the same needs .therefore if there are substitute goods in the market for a commodity that has an increase in demand. These goods can be bought by the consumers to satisfy their needs .therefore meet the raising demand. Therefore the availability of substitute commodities in the market lowers the demand for a good or product. Demand is also affected by the complementary goods and services; these are products that go hand in hand such that a rise in demand for one product triggers an increase in demand for the other. Therefore if a firm is producing products or services that are complementary to goods or services with an increased demand its output level has to increase CITATION Far05 \l 1033 . In that more the consumers consume a product or services the more they will demand for the goods and services that accompany the given product or services therefore an increase in demand for complementary goods and services increase the levels of demand for a product or services. When the demand levels for such products and services increase, this implies therefore that there will definitely be an increase in demand for a complementary product or services. The direct implication here is that for a firm to meet this increase in demand it is required to raise its output levels to meet that raise in demand. This also means an increase in the use of factors of production such as labor .Therefore there will be need to hire more employees in order to raise the output levels. In terms of costs the firm will be required to spend extra resources to compensate the increasing labor requirements in terms of wages to the employees. 

            Wages are therefore are the amounts that are spent to compensate labor or more appropriately the amount of money paid to the employees for their services. The price for wages in the economy is determined by a number of factors .These factors include the supply of labor, this means that the more available labor is in the market the more cheaply it is compensated. Labor is defined here as the number of individuals willing to work in an economy CITATION Mah05 \l 1033. In an economy if there many individuals willing to work in the economy and the demand for their services is low then there is unemployment ,or under employment in the economy.

Economic profit

            All firms are assumed to be in business in order to maximize their profits .A firm realizes economic profit when its total cost are subtracted from the total revenues. Total revenues are computed by multiplying the total quantities of the products sold by the market price of the commodity and the subtracting the total cost. The cost of the quantity sold is referred to as the explicit costs while the implicit cost is the cost accrued when marketing the product. The explicit costs include the cost of the raw materials CITATION Sid08 \l 1033. The cost of power used in the production and the cost of labor. When the company is considering the possibility increasing its employees in order to increase its output, labor is the factor of production that is under scrutiny. Increase in the workforce implies that the firm will increase its cost of labor. This directly affects the cost of production in that an increase in the workforce means that the firm will spend extra resources to compensate the additional labor force. Thus the profit margins will be affected negatively by this increase. In other words when the cost of labors increases the total cost of production for the firm also increases. The management therefore needs to consider whether this increase in the labor cost is necessary or more appropriately whether this additional cost is justifiable. Labor is one of the four main factors of production that are normally necessary for any given firm to enable it to produce an output. Labor enables a firm exploit all the other factors in order to produce commodity and services. In other word without labor, a firm may have capital, land or the technology but be unable to make any commodities or provide any services without labor.


            The amount of labor that an employee contributes to a firm cab is measured according to the amounts that are used to compensate him or her. Wages as earlier defined is the amount that is paid to an employee per every hour of his services. This differs with earnings in that earnings are considered for a given period such as in weeks, months or years. Therefore the amounts that are paid to an employee over a given period of time are his or her earnings for the period. The total compensation for any given employee for a specified period such as a month is the total earnings for the month plus any other benefits that an employee is paid  CITATION Sid08 \l 1033.Such benefits as commuter allowances, medical allowances or house allowances among other benefits that are paid to employees .However it should be noted that the additional benefits are not used when determining the labor input of an employee. The additional compensation is used to make the working for any given employer attractive. This means that the more allowances an employer is willing to compensate his labor the more attractive working it becomes to work for him or her. Employers therefore use additional allowances to attract the most skilled employees to their service. Wage rates also differ from one firm to another, however governments imposes the minimum compensations that employers can pay their labor force per hour depending on the skills required to perform any given task. Wage rates therefore depend on the type of tasks that any particular task requires in order for an employee to carry out efficiently and effectively. The more skills that are required for a given labor task the higher the compensation rate. Wage rate can also be influenced by the amount of labor available in an economy. In that when there is abundance labor in the market the wage rates tend to be lower while in the economies where labor is scarce the wage rates tend to be higher  CITATION Fro10 \l 1033. Therefore the total compensation that the labor earns plus any other income that an individual gets from such sources as investments or inheritance is equal to the total income is equal to the total income due to an individual. This income less taxes or any other deductions such as retirement benefits or insurance premium is what is referred to the disposable income ,as earlier noted the higher the deposable income individual in an economy have the higher the demand for products and services in the economy. When there is higher demand for products and services in a given economy the higher the demand for labor in order to meet the rising demand. Economic rent is the total compensation that is accrued by an individual minus the opportunity cost. This means that the opportunities that an individual forgoes when he chooses to work for a given employer instead of the other employers in an economy.

Wages =payment multiplied by time (in hours)

Earnings = wages multiplied by a period (either in weeks, months or years)

Total compensation = total earnings plus all other benefits paid to the labor

Division of labor can be described or defined as specialization of labor in favor of any given skill. Therefore employees specialize in fields where their skills are more appropriate. Or put differently tasks are differentiated through the skills that are required to perform them.

            Unemployment can be describes a situation whereby the members of the society who have attained the age to work in an economy are unable to find employment opportunities though they actively seek for working opportunities. There are several types of unemployment such as Structural Unemployment this is a situation whereby individuals are unable to secure employment opportunities due to their immobility such from one country to another or from one geographical area to another  CITATION Fro10 \l 1033. It can also result due to lack of the skills required in the labor market. Therefore although an individual is willing to work and there are employment opportunities available in the economy, he or she lacks the skills necessary to perform the required tasks that an employment opportunity requires they therefore remain unemployed. Frictional unemployment is a situation which arises when employees are in between one job to the next .Therefore they remain unemployed during the transition from one employer to the next. Demand- Deficient- Unemployment results when the aggregate demand in an economy declines. Therefore since the demand for products and services is low employers’ are forced to lay off workers in order to reduce their expenses. In other word firms are forced to lower their output since their products and services are not in high demand CITATION Hir09 \l 1033. The laid off employees are therefore unemployed, this normally happens when an economy is in recession. The other type of unemployment is Real -Wage –Unemployment or classical this results when the wages in the economy are above the equilibrium. In other word for such reasons as powerful labor unions the wages in the economy are raised to high levels such that employers find it uneconomical to compensate the labor at such high rate. There is also Voluntary Unemployment that arises when individuals in an economy choose not to work despite having skills and ample employment opportunities being available in the economy.

            Unemployment levels can be determined in the economy by the availability of skills, labor mobility, wage rates, demand for products and services in the economy among other factors. This therefore that when a firm is considering whether to hire additional employees among the factors that the management should put under consideration is the structure of labor in the economy. Additionally the wage rates to be compensated to the additional employees are of paramount importance since they will increase the firm’s expenditure CITATION Hir09 \l 1033. Therefore the management should consider the cost and benefit analysis of hiring new employees on a temporarily basis.


            Production level or the output of the firm can be determined by the efficiency of the firm’s workforce. Among the factors that contribute to labor efficiency include division of labor. Employees should be assigned tasks according to their skills. Employees’ motivation can also determine how efficiently they are able to perform their tasks. A highly motivated workforce is a productive workforce.  Among the factors that contribute to motivation include the work environment, amount of compensation and the skill of the labor force among other factors. To ensure that a firm’s employee are highly motivate their compensation packages should be reflective of the market trends .This would also enable the firm attract the best skills in the labor market.


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