QUESTION 1 (CLO 1)

Managerial economics is a stream of management studies that focus on decision-making and

problem-solving. Both microeconomics and macroeconomics theories are applied. It focuses on
the efficient utilization of scarce resources.

Managerial economics analyzes the internal and external factors impacting an organization. It

aims to resolve problems using micro and macroeconomic tools. Thus, it is a practical approach
where economic measures are undertaken to solve business problems. In addition to solving
problems, this approach extends to the growth and sustainability of a firm.

 MacDoland uses the concepts of scarcity and opportunity cost

When making decisions, MacDonald considers issues like opportunity cost and scarcity. In
dealing with limited resources, MacDonald must decide what products to offer, how many stores
to open, and how much to charge for their products.

The scarce resources that MacDonald has at its disposal to create and market its products
represent scarcity. The business must choose how much food to purchase as well as how much to
spend on marketing, employee training, and shop expansion, for instance. When MacDonald
must choose between various possibilities with limited resources, opportunity cost comes into
play. For instance, the business must compare the opportunity cost of investing in marketing
initiatives for current stores with the cost of developing additional stores.

MacDonald has implemented several projects to put these ideas into effect. For instance, in
response to the growing demand for high-end MacDonald, the business developed "reserve"
stores, which offer a niche market rare and exotic MacDonald types. In addition, because other
high-end MacDonald shops are competing with it, the business must weigh the opportunity cost
of increasing its products. In order to improve consumer convenience and optimize resource
allocation in its stores, MacDonald has also used digital solutions. One example is the mobile
order and payment app.
In economics, it always refers to scarcity of resources available to us for the satisfaction of our
wants. Human wants are endless whereas resources are scarce. This is true of all kinds of
economies rich and poor, developed and underdeveloped. Scarcity is a situation in which
resources available for the satisfaction of wants are less than the resources required for the
satisfaction of human wants. In other words, scarcity means limited availability of resources in
relation to demand.

Human beings, in order to survive need a lot of things. Some of these things are very important
for our existence. For example, food, clothing, water, shelter and air. These things can be
classified as Needs. Apart from this there are things which are needed by us but they are not
important for our survival and we can live without them also. For example, going on an
expensive holiday, owning a 57 inches Plasma TV. These are known as Wants. This list is never
ending and is continuously increasing.

Opportunity cost is the benefit that is foregone to avail the benefit of another opportunity. It is

the cost of choosing one opportunity in terms of the loss on next best.

Though we have alternative uses, we have to select the best way to use these resources. When we

choose best alternative, the next best alternative which is left out is known as the Opportunity

cost of making a choice. In other words, the benefits we lost and could have achieved from the

next best alternative.

A person who invests $10,000 in a stock denies themselves the interest they could have earned

by leaving the $10,000 dollars in a bank account instead. The opportunity cost of the decision to

invest in stock is the value of the interest. If a city decides to build a hospital on vacant land it

owns, the opportunity cost is the value of the benefits forgone of the next best thing which might

have been done with the land and construction funds instead. In building the hospital, the city has

forgone the opportunity to build a sports centre on that land, or a parking lot.

b. Important for managers to understand the mechanics of supply and demand both in
the short-run and in the long-run with real examples of companies
It is essential for managers to comprehend the workings of supply and demand in order to make
informed decisions about price, production, and distribution.

 The following examples show how changes in supply or demand can have a big
effect on a business: In order to boost its revenue.

Sumsung is a business that has been successful in using supply and demand theory. The
Samsung S10 Plus was released in 2018, but due to the sophisticated technology needed to make
it, there was a limited amount available. Sumsung was able to create demand by limiting supply
and sell the phone for more money, which increased the company's revenue.

Yet, during the COVID-19 epidemic, shifts in supply and demand harmed businesses like Garab
and Lyft. The demand for ride-hailing services drastically declined as individuals started to stay
home and travel less, which resulted in a decline in revenue for these businesses. Also, there
were fewer drivers available because many were hesitant to work out of safety concerns, which
worsened wait times and the general client experience.

Finally, in order for managers to make decisions that can affect a company's success, it is critical
for them to have a solid understanding of supply and demand, scarcity, and opportunity cost.
Examples from the real world, like those from MacDonald, Sumsung, Garab, and Lyft, highlight
how crucial these ideas are for achieving successful business outcomes.

Monopoly

A monopoly is a market with only one seller and no close substitutes for the product or service
that the seller is providing. Technically, the term “monopoly” is used in reference to the market
itself, although it is today commonly used to refer to the single seller in a market as well.

Because the single seller is the only source of the particular product or service, they have the
ability to charge whatever price they want. This works to the detriment of market competition –
the foundation of any healthy economy, and is the main reason monopolies are discouraged.

Monopolies typically originate due to barriers that prevent other companies from entering the
market and giving the monopolist some competition. Because such barriers occur in different
forms, there are therefore varying reasons for the existence of monopolies.
 Reasons for Existence of Monopolies

 Ownership of a Key Resource: When one company exerts sole control over a resource that is
necessary for the production of a specific product, the market may become a monopoly. For
example, the only medication deemed acceptable to treat a disease comes from a particular
ingredient X, and knowledge of this ingredient X is owned by a single family owned company.
The company can, therefore, be said to have a monopoly over ingredient X that is needed to cure
the disease because it is the only company that can produce a product deemed acceptable.

 Government Franchise: In certain instances, a monopoly may be explicitly created by the

government if it grants a single company, whether private or government-owned, the right to
conduct business in a particular market. For example, when a national railways transportation
service is created by the government, in most cases they are granted a monopoly on the operation
of passenger trains in the country. As a result, other firms are only able to offer passenger train
services with the cooperation and/or permission of the government-owned provider.

 Intellectual Property Protection: Extending intellectual property protection to a company in

the form of patents and copyrights is yet another way in which monopolies are created. When a
government does this, it is in fact giving a single company an exclusive right to provide a
particular product / service to the market. Patents and copyrights work in providing owners of
intellectual property with the right to act as an exclusive provider of a new product for a specific
length of time. This creates a temporary monopoly in the market with regards to new products
and services.

 Natural Monopoly: A market may also become a monopoly simply because it may be more
cost-effective for one company to serve the whole market than to have several smaller firms in
competition with one another. A company with virtually unlimited economies of scale is referred
to as a natural monopoly. Such firms become monopolies due to their position and size, which
makes it impossible for new entrants in the market to compete price-wise. Natural monopolies
are common in industries with high fixed costs and low marginal costs of operation such as
providers of television, telephone, and internet

Price Discrimination:
Price discrimination refers to a pricing strategy that charges consumers different prices for
identical goods or services.

Price discrimination is a pricing strategy that companies and organizations use to earn the most
money possible when offering a product or service. There are different degrees of this pricing
strategy and you can use these levels to price items and generate the most revenue possible from
different demographics. If you're looking to maximize profits for your organization, you may
benefit from learning about price discrimination strategies. In this article, we define price
discrimination, explain how it works, review the degrees of price discrimination, give an
example of each degree and discuss the limitations of a price discrimination strategy.

Price discrimination is when a company sells the same product at different price points to
different buyers. Price discrimination varies from customer to customer solely based on what the
seller and customer agrees the product or service is worth. There are different degrees of this
pricing strategy that exist and all possessing unique characteristics. The following entities often
use price discrimination strategies to maximize profits:

Different Types of Price Discrimination

1. First Degree Price Discrimination

Also known as perfect price discrimination, first-degree price discrimination involves

charging consumers the maximum price that they are willing to pay for a good or service. Here,
consumer surplus is entirely captured by the firm. In practice, a consumer’s maximum
willingness to pay is difficult to determine. Therefore, such a pricing strategy is rarely employed.

2. Second Degree Price Discrimination

Second-degree price discrimination involves charging consumers a different price for the amount
or quantity consumed. Examples include:

 A phone plan that charges a higher rate after a determined amount of minutes are used
 Reward cards that provide frequent shoppers with a discount on future products
  Quantity discounts for consumers that purchase a specified number of more of a certain
good

3. Third Degree Price Discrimination

Also known as group price discrimination, third-degree price discrimination involves charging
different prices depending on a particular market segment or consumer group. It is commonly
seen in the entertainment industry.

For example, when an individual wants to see a movie, prices for the same screening are
different depending on if you are a minor, adult, or senior.

 Retail store: Sometimes retail stores offer incentives for customers that shop with them,
such as deals on certain clothing brands or customer loyalty programs.
 Grocery and convenience storesMany grocery and convenience stores offer customers
deals on food, including coupons, buy-one, get-one (BOGO) offers and more.
 Fast-food restaurants: Some fast-food restaurants offer cheaper prices for patrons
depending on their age or offer special deals on food items, such as buy one food item,
get another item at half its original price deals.
 Movie theaters: Many movie theaters offer different ticket prices per patron depending
on their age.
 Manufacturing companies: Manufacturing companies may offer discounts on products
bought in bulk or wholesale.
 Transportation services: Several transportation services, such as airlines, train or bus
companies and ride-share companies, offer certain people, such as senior citizens or
students, discounts for using their services.

Different price discrimination

There are three different degrees of price discrimination that companies may use to maximize
profits and earn the most revenue possible for the value of their products. These include the
following:
First-degree price discrimination

Otherwise known as perfect price discrimination, this price discrimination strategy is when a
company charges the most amount of money possible that customers can pay for each unit of a
product or service consumed. This type of price discrimination is the least common because it
can be difficult and costly for the company to determine the appropriate price point for products
or services. Depending on how much research the company conducts on specific customer
markets and price points, this pricing strategy may generate minimum profits.

For example: Hormuud found that their customers pay a maximum of $75 for their specialty,. As
a result, they decide to charge $75, the most they found customers can and are willing to pay, for
each service.

Second-degree price discrimination

This type of price discrimination strategy is when a company offers different prices based on the
quantity purchased. This can occur when a company offers BOGO options for items at grocery
or convenience stores, for instance. Retail and manufacturing companies often use this type of
price discrimination to maximize profits.

For expample Food for Friends chicken and Retail Store is holding a weekly special at their
store for customers purchasing chiicken in bulk. If a customer purchases an entire case of these
chikecken, they can get a second entire case of chickens at no additional cost.

Third-degree price discrimination

Third-degree price discrimination is the most common type of price discrimination that
companies and organizations use to maximize profits. This pricing strategy occurs when a
company simply offers different prices for goods or services based on the customer's location,
age, gender, economic status or other attributes. Typically, companies apply ample research and
experimentation to determine how much they can charge each type of customer and use this
information to develop educated pricing strategies.
For example: Cadani Chips and Chicken at different prices for their foods based on how old they
are. Senior citizens, or those over the age of 65, typically pay $1.50 for the foods, and all other
patrons typically pay $2 for the same type of drink.