Managerial Economics: Practical Application in Jarve Selver, Estonia

This essay examines the applicability of managerial economics in enhancing the value of Jarve Selver, a supermarket in Estonia, where the author is currently employed. It delves into key economic concepts such as the theory of the firm, which emphasizes profit maximization, the theory of consumer behavior, focusing on demand modeling and pattern identification, and the theory related to various market structures, particularly oligopoly, relevant to the supermarket industry. The essay highlights the importance of identifying market structures and designing appropriate marketing strategies for sustainable business growth. While these theories offer practical value, the essay acknowledges the difficulties in their real-world application, including the complexities in computing the present value of expected profit, the challenges in modeling consumer behavior accurately, and the difficulties in correctly identifying competitors' strategies. The conclusion emphasizes that a comprehensive business evaluation requires a balanced consideration of both economic theories and real-world phenomena.

Running head: MANAGERIAL ECONOMICS
Managerial Economics
Name of the Student
Name of the University
Course ID

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Introduction
Managerial economics involves application of theories and method of economics for
taking administrative decision in business. It consists of rules that can improve managerial
decision. Different concepts of managerial economics help managers to understand the influence
of economic forces on business organization. It also explains consequences of different
managerial behavior. It actually links economic theories and concepts with the quantitative
methods in order to develop important tool in managerial decision making (Hirschey 2016). It
evaluates the available alternative choices and prescribes the best way to accomplish goals of a
business. For example, consider a small business seeking rapid growth to attain a size that allows
optimal use of media advertising at national level. The concepts of managerial economics here
can be used to determine the production and pricing strategies to attain the short run goal in an
efficient manner. In the same way, there are useful tools in managerial economics that suggests
rules allowing company to maximize profit. With the problem solving approach it thus adds
practical value to a company (Wynarczyk et al. 2016). The essay prescribes usefulness of
managerial economics in adding practical value to the specific company where I am currently
working. Not only the essay identifies relevant economic concepts but it also describes the
problem in applying these concepts in practice.
Scope of managerial economics in Jarve Selver
I currently work in Jarve Selver Estonia. Selver in Estonia is supermarket and
hypermarket chain. Jarve Selver is one of the biggest shopping centre in Estonia engaged in
selling different furnishing goods. It has approximately 111 shops which include 9 cafes and
restaurant (visitestonia.com 2018). Being a sales assistant my responsibility is to serving the
customers coming to the shopping centre. I suppose to resolve all the queries of the buyers

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regarding availability of stocks, price and other related information. As this is an important part
of my job, I need to understand nature of the product and relevant strategies of the company. In
doing so, it is important to evaluate applicable managerial economic concepts that add value to
the supermarket retailer.
The relevant areas of managerial decision making include assessing investible fund,
selection of business area, particular product choice, determination of optimal output and
promotion of sales. The most valuable aspect for stores operating in a supermarket is
profitability. The area of profitability is related to a vital concept of managerial economics
namely theory of firms. Of the two common economic entities namely production and
consumption – firms belong to the production side (Hahn et al. 2014). In the simplest version of
managerial decision, primary objective of the firm is to attain maximum profit. The company
needs to understand the long term profit aspect along with realizing current value of expected
profit. In order to compute present value of future expected profit, the company first needs to
record future net cash flow. The net cash value then should be discounted by appropriate interest
rate to obtain the present value. Understanding the present value of expected profit add value to
the company in current economic environment. The company faces various constraints in
maximizing profit. Profit maximization constraints that the company might face include scarcity
of resources, contractual obligation, government laws and regulation and technology. In order to
maximize present value of expected profit consideration should be given not only on short-term
consequences but also on long-run implication. All constraints to profit maximization do not
belong to company’s internal environment (Hill 2016). There are constraints related to external
environment as well. The external constraints present in profit maximization include constraint
in resource availability, key inputs, specialized equipment, space in ware house and other form

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of resources. The company should understand the concept of constraints in profit maximization
in business operation. Proper understanding and application of relevant concepts of theory of
firm can increase business valuation by smoothing out the path of profit maximization.
The next important aspect of my company is understanding behavior of consumers as the
company mostly deals with consumer goods. In economics, consumers are important economic
agent who consume the goods produced by firms. Studying consumer behavior thus is an
important aspect of business. Economists mostly use optimization model for evaluating
consumer behavior. The objective of firm is to maximize profit. consumers on the other hand
aims to maximize their utility level or satisfaction. Utility increase with increasing availability of
goods and their utilization (Ward and Begg 2016). Choice of consumers are constraints by a
number of different factor. Consumer demand and choices are generally modeled by the theory
of demand. There are four primary factors influencing behavior of consumers. First is own price.
Quantity of a product purchased by a consumer depends on price of the particular product. The
second vital determinant of consumer demand is the income (Froeb et al. 2015). Purchasing
power of consumers depends on level of income. Higher income means higher purchasing power
and hence a higher demand. Thirdly, demand varies depending on the price of available
substitutes and complementary goods. Finally, tastes and preferences of consumer determine
demand of specific good. Our company engage in selling food articles, footwear, clothing,
essential items for home and different manufactured goods (visitestonia.com 2018). The
company can use basic theory of demand to analyze the demand pattern. For a sales attendant it
is even more important to understand behaviors of consumers. Products should be presented to
the consumers such that it maximizes their satisfaction give the purchasing power. Satisfying
consumers need is the primary target of the company. Higher price most often hampers

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consumers demand following the law of demand. The company thus should charge a reasonable
price for the displayed product. The availability of useful products at a reasonable would give my
company an important position in the supermarket chain of Estonia adding greater business
value.
Managerial economies also provide important theories related to various market
structure. The marketing strategy and profit maximization varies depending on specific market
structure. All markets are popularly fall in either of the four market structure – perfect
competition, monopoly, monopolistic competition and oligopoly. Degree of competition differs
in the four different market structure. Perfect competition is an ideal form of market
characterized by various numerous buyers and sellers (Carlton and Perloff 2015). A single seller
does not have any market power because of the presence of large number of sellers. In a
monopoly market, a single seller dominates the entire market. Market power is maximum under
monopoly. A combination of perfect competition and monopoly market is monopolistic
competition. As like perfect competition, monopolistically competitive market has various sellers
present in the market. Each firm sells a differentiated product. Finally, oligopoly market is
considered as a form of imperfectly competitive market characterized by the dominance of few
firms in the industry. The supermarket structure in Estonia has an oligopolistic market structure.
The industry is dominated by few large supermarkets such as Maxima, Konsum, Rimi, Selver
and some small retailers. Demand of Selver trending more towards the premium products
(news.err.ee 2018). In an oligopolistic market, each firm tries to adapt an exclusive marketing
strategy to undercut the market share of the rivals. Rivals in the market engage in intensive
competition. Proper identification of market structure and designing marketing strategy is an
integral part of business strategy. Buyers keep a close watch on promotional offers given by the

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retailers. Attempts by the sellers to undercut market share of each other often lead to a price war
in the market (Ismagilova, Bagautdinova and Gafurov 2015). The company can apply the
principals of oligopoly market to understand nature of the industry and designing marketing
strategy. This add practical value to the company in terms of suitable marketing plan and
sustainable growth of the business.
Problems in applying specific concepts of managerial economics
Different theories of managerial economies this have long standing implication for the
particular company and for other industries in general. Implementing the theories in real world
however is not easy. Validation and application of theories of managerial economic face with
various difficulties. The theory of firm states that objective of the firm is to maximize expected
value of future profit. In real world however computation of present value of expected profit is a
complex task. There are various other factors that are of interest to the company. More
specifically, companies are interested in maintaining power, position, welfare to of the
employees, well-being of the community and others (Waldman and Jensen 2016). There is no
way to model such qualitative goal of the company and hence there is difficulty in applying
theory of firm to understand actual motive of the company. It is also difficult to distinguish
business profit from that of economic profit. Business profit is the accounting profit and obtained
as a difference between total revenue and total cost. Economic profit however include
opportunity cost in addition to the implicit cost of product. It often becomes difficult to quantify
the opportunity cost involve in the business operation (Solomon et al. 2014). The goal of profit
maximization as the primary objective of the firm as stated by economies theories thus often lost.
The theory of consumer behavior though provides useful insight in business decision
making modeling consumer behavior for a particular company is difficult. The pattern of demand

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often does not follow a steady trend. In case of supermarket, it is true that promotional offers
help to more consumers by offering goods at a lower price (Bamossy and Solomon 2016). This
can also work in a different way. Once the good is offered at a relatively lower price, buyers
become doubtful about quality of the product and do not increase their demand at all. These are
exception of demand theories where it is difficult to model demand and design appropriate
strategy. Another problem is understanding market structure and correctly identifying rivals’
strategy and act accordingly (Baumol and Blinder 2015). For me thus though concepts of
managerial economics add practical value to the company but applying these concepts depend on
particular business environment and other relevant factors.
Conclusion
The essay intends to summarize applicability of managerial economic in increasing value
of the company where I am currently working. At present, I am working in a supermarket in
Estonia. Some useful economic concepts include theory of firm, theory of consumer behavior
and theory related to various market structure. The theory of firm suggests objective of firm is to
maximize profit. The theory of consumer behavior stresses on modelling demand and identifying
the pattern of demand. Another vital dimension of business is to identify market structure and
designing marketing strategy. There are however various difficulties presents in the application
of these theories in real world. The final evaluation of business thus depends on combined state
of economic theories and real world phenomenon.

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References
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