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Managerial Economics and Business Strategy

Question 1: Economic Perspectives

Microeconomics refers to a study of an individual and business decision-making regarding the allocation of resources as well as the consumption of goods and services (Frank & Elia 2012). Since the human’s wants are insatiable, a proper economic analysis should be done in order to utilize the scarcely available economic resources. Such an analysis, thus, aims at striking a balance between the desired and the economics resources and, hence, arriving at equilibrium (Baye & Prince 2013). Macroeconomics, on the other hand, focuses on the overall effects of the prevailing economic situation in the country on the existence of a business firm (Kishtainy 2012). It aims at analysing an interaction between the firm and the prevailing economic conditions in order to form better strategies of business performance.

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In managing a manufacturing firm based in the UK, I will consider many factors in efficiently running the operations of the business. Relating to a microeconomic environment, I will consider the level of demand and supply of commodities in the market (Kishtainy 2012). Competition in the environment will also be studied as well as the availability of complements (Baye & Prince 2013). Government policies, tax rates, interest and inflation rates shall also be taken into consideration.

The availability of the factors of production is also instrumental to the success of the business firm. The firm should operate within the guidelines of its statutory provisions governing the production of goods and services (Arestis 2011). The political environment prevailing in the market shall dictate the survival of the firm in the industry. The environment marred by the political unrest is, thus, rendered inappropriately for the survival of business activities (Bishop et al. 2013). The firm is affected by social and cultural beliefs as well as practices of consumers.

Question 2: Analysis

In ensuring that the company is a success, it is necessary to formulate robust strategies to overcome the uncertainties in the economic environment. Demand and supply forces shall be adequately analysed in order to ensure that an appropriate equilibrium has arrived at (Baye & Prince 2013). Demand refers to the willingness and ability of consumers to buy a product of the company. Some of the factors that affect the level of demand include the price of the product, the income of consumers, and the availability of substitute as well as complement products. Demand has different levels of elasticity (Arestis 2011). Price elasticity refers to a change in demand with changing a unit price of the product. Appropriate products should be those whose demand is less sensitive to the price changes and, hence, described as having the inelastic demand. Such products will not record a massive reduction in the sales volume with a slight increase in the price of the commodity (Kishtainy N. 2012). The firm is, thus, guaranteed a survival in the market.

The supply of competing products in the market should also be analysed. Existence of competitors will pose a threat to the survival of the firm. Better strategies will, thus, help in outdoing a high competition. This is through the development of a superior brand that meets the customers’ tastes and preferences. An objective of the firm should be to dominate the market share and, hence, satisfy the demand of consumers. The aggressive product promotion strategies should also be adopted by the firm in order to promote the awareness of its products in the market (Kishtainy 2012). The advertisement medium selected should reach as many consumers as possible. The firm should also consider offering after sales services to attract more customers. As the production increases, the firm will enjoy production economies of scale (Baye & Prince 2013). This should prompt the firm towards competitive pricing policies to enhance the consumer brand loyalty. Modern technology shall aid in the production of quality products and, hence, consumer satisfaction (Bishop et al. 2013). Consumers should derive as much utility as possible from the consumption of the product.

The levels of the national income have a direct impact on a success or failure of organizations in the economy. This refers to the total income that accrues to the country from both local and foreign fronts. It is measured by the Gross National Product (GNP) and the Gross Domestic Product (GDP). Net amounts are also used as some measures of the national income. Per capita income measures the income per an individual member of the population. It depicts the living standards of the members of the population. The level of the national income directly influences the purchasing power of consumers (Langdana 2009). This, thus, affects the sales volume by the company. Affordable prices should be adopted by the firm in order to maintain the sales volume (Ohri & Jain 2012). In evaluating various investments projects, the firm should factor in the fluctuations in the economic conditions for computing a net present value of investments. Financing decisions will be made effectively based on an analysis of the prevailing market situation (Baye & Prince 2013). After the exploitation of retained earnings, the firm should consider an increased debt in order to benefit from the interest tax shield.

Question 3: Foreign Direct Investment

In expanding the manufacturing operations to the non-EU country, the most preferred destination for a foreign direct investment is China. This is because of China's attractive policies for its direct investment. The Chinese Government has developed incentives that attract foreign investors to inject capital into the economy (Baye & Prince 2013). Over the last decade, China has remained as a leading hub for the foreign direct investment. Conducive political climate has existed in China over the years, hence, a motivating factor to any investor who intends to maximize the returns. According to the Capital Asset Pricing Model (CAPM), any rational investor is always considered as risk averse (Frank & Elia 2012). Since an objective of the firm is to maximize returns at the lowest risk possible. It is, thus, important to invest in a stable market environment. China, therefore, emerges as the best destination to establish manufacturing operations of a branch of this business. This is supported by the factors below:


China's economy has recorded a consistent economic growth with some time (Ohri & Jain. 2012). Despite the fluctuations in the economic situations in the world, China's economy has remained stable. An example is a global financial crisis in 2008 that devastated the world economies leading to a decline in the rate of the economic growth. In spite of negative effects of this depression, China’s economy has registered a positive economic growth (Baye & Prince 2013). The political environment has also been stable with smooth transitions of governments without unrest or upheavals. In addition, the inflation rates in China have been stable over the years. This environment maintains the consumer purchasing power, hence, sales made by the company. Such incentives, therefore, corroborate the urge to invest in this economy.

Size of the Chinese Local Market and Business Climate

China has the population of more than 1.5billion people. This accounts for about one quarter of the population of the whole world. Such huge population acts as a ready local market for the products manufactured by the firm. Since the operations of the firm will be located in China, a robust strategy will be made to penetrate the local market (Ohri & Jain 2012). If the firm can control the majority share of the local market, that are already huge profits before exporting to other countries (Arestis 2011). The business will, thus, adopt the proper product promotion strategies that would boost the firm's sales. It can aid the firm in adopting competitive prices, as the increased sales volume will cushion the firm against the reduced contribution.

Availability of Factors of Production

China is endowed with vast economic resources. The robust technology available in China will be instrumental to the production of the firm's commodities. This is contributed by the lower cost of technology than that in other countries. In addition, the high population will provide the labour required by the country in its operations at an affordable cost. The low cost of labour reduces the overall cost of production (Baye & Prince 2013). The reduced production cost can enable the company to sell its products at more competitive prices than competitors', hence, realizing more profits. An infrastructural development in China facilitates the production activities by the company. The firm can transport raw materials to the industry. In addition, finished goods can easily be transported to access the market (Bishop et al. 2013). Such a population also provides highly qualified managers to run the operations of the business.

Attractive Regional and International Trade Policies

China has good relations with other countries. Friendly international trade policies also exist aiming at abolishing trade restrictions (Bishop et al. 2013). Bilateral and multilateral trade agreements with other countries enhance the exportation of manufactured goods to other countries (Baye & Prince 2013). This will boost the sales of the company in penetrating different markets in the world. Since China has recently developed some strategies to penetrate the African continent, the firm will then exploit the opportunities to supply its commodities in this unexploited market.

Monetary and Fiscal Policies

Fiscal policies refer to the government efforts in varying its revenue and expenditure with the change in the economic conditions in the market (Ohri & Jain 2012). This is on a verge of cushioning the citizens against hard economic times. It helps in keeping in check the inflation rates that prevents a negative impact on the living standards of the population. Such policies include varying the taxation rates depending on the economic environment and regulating the government revenue and expenditure (Frank & Elia 2012). Monetary policies, on the other hand, are instituted by the Central Bank of the country. This aims at regulating lending and inflation rates. In order to maintain the strength of the country's local currency, the Central Bank will institute some measures geared towards regulating the supply of money (Langdana 2009). It helps in preventing the devaluation of the local currency compared to other international currencies, hence, improved purchasing power (Bishop et al. 2013).

China adopted the proactive fiscal as well as prudent monetary policies in 2011. These policies have seen an upsurge of the country's economy despite the challenges facing other countries leading to an overall downward trend (Arestis 2011). The country has still resorted to maintain these policies for the near future. The specific fiscal measures adopted by China include adjustments of the government expenditure with the prevailing economic situations as well as an improvement of structural tax cuts (Langdana 2009). Policies are also in place to replace the turnover tax by value added tax. Such an initiative will work towards enabling businesses to claim the input value added tax. With the reduction of taxation rates, more investors are attracted, hence, the development of the country (Frank & Elia 2012). All these fiscal policies are aimed at ensuring that the country progresses while maintaining the economic stability.

Monetarily, China aims at increasing the direct financing and optimizing its funding as well as a credit structure. The Chinese currency, Yuan, has recorded a remarkable increase in its strength over the years (Langdana 2009). This has increased its competitiveness with other major currencies like the American dollars and Sterling Pound. The foreign exchange is, thus, enhanced by such a policy (Bishop et al. 2013).


In making capital budgeting decisions, it is important to consider the time value of money. This analysis will help in coming up with a viable investment decision. According to the systems theory, business firms are classified as open systems as they are in a constant interaction with the environment (Arestis 2011). It is, thus, necessary that proper micro and macroeconomic analyses be done in order to avoid losses occasioned by an improper decision-making. This will contribute to the achievement of the major goal of the business of profit maximization (Bishop et al. 2013).

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