Economics For Managers docx.

ECONOMICS FOR MANAGERS

Contents
INTRODUCTION...........................................................................................................................3
MICROECONOMIC THEORIES IMPACTING BUSINESS.......................................................4
THEORY OF PRODUCTION AND COST................................................................................4
THEORY OF DEMAND AND SUPPLY...................................................................................7
THEORY OF MARKET STRUCTURE.....................................................................................9
PRODUCTION POSSIBILITY THEORY................................................................................11
MICROECONOMIC THEORIES AND SMALL BUSINESS....................................................12
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
There are numerous activities that has to be carried out for managing and running a business in
an efficient manner. One should have proper knowledge of the various theories for running the
operations of the business smoothly and successfully. There are many theories existing but the
most important is the micro economic theories relating production, cost, demand, supply, market
structure, etc. The objective of preparing this report is to know the impact of such theories on a
small business firm. The branch of economics that takes into consideration the behavior of
decision makers present in the economy. As the word ‘Microeconomics’ suggest, it focuses on
small or micro level segments of the firm and it gives an idea of how to use the limited resources
in an optimum manner (Alex, 2012).

MICROECONOMIC THEORIES IMPACTING BUSINESS
There are certain theories that a owner of a small business firm must take into account while
carrying out business operations. Such theories include- theory of production and cost, theory of
demand and supply, theory of market structure, Production possibility theory. All these theories
are discussed in details in this report.
THEORY OF PRODUCTION AND COST
Production is the activity which helps a business enterprise to gain market share and start earning
profits. There are two factors that are associated with the production of goods and services.
These factors are production factors and cost factors. Let us discuss both of them in detail. The
two most important production functions are labor and capital. A product or service can be
produced when both these factors combine (Berman, Knight, & Case, 2013). A production
function can be called efficient when it is able to produce larger quantities of products with the
minimum resources that are available without compromising with the quality of the product.
Based on the cost function, a firm should aim at cost reduction as it would directly have a
favorable impact on the profits. There are various costs which need to be taken into
consideration while producing a product.
The production function defines the relationship between the inputs and the outputs. Although
there are various factors of production but we will take into consideration capital and labor. The
volume output that is produced by a firm depends majorly on these two factors. In the short run,
capital is considered to be the fixed factor whereas labor is the variable component. Both capital
and labor is variable in the long run (Berman, Knight, Case, & Berman, 2008). Also, factor
substitution can be done in the long run i.e. increase or decrease capital and labor as per
requirement.
In the cost function, there are two categories of cost – Fixed cost and Variable cost. In the short
run, either of the factors of production is fixed and therefore, the firm has to suffer both fixed and
variable costs. Fixed costs can be defined as those costs which do not differ at different levels of
production and is incurred even when there is production activity ongoing. Variable costs differ
with the units of production and over a period of time. The total cost of a product includes both
variable cost and fixed cost.