I need help with a Economics question. All explanations and answers will be used to help me learn.
I need three responses of at least 150 words each for the below students discussions for this week. Also in the bold below are the questions the students at answering.
Consider an American automaker like GM with almost 100 production facilities located in 26 countries and sales in over 150 countries! To maximize profits, what decisions does GM have to make in regard to pricing and production?
Profit maximization is when the owner or manager of a business strives to “maximize” the firm’s short-run profits. This is typically the primary goal of all decision making processes within a company. However, profit maximization is not the same for each firm. For instance, one owner may be concerned with analyzing the size of the company to determine if this individual’s salary is linked to the growth. Another example, is when managers are concerned with their own welfare maximization. Meaning that, if that individual is more risk adverse then they are less inclined to take risks to avoid any detriment to the company. On the other hand, if the individual is a risk taker this will also be reflected in the companies profits.
There are three things that General Motors (GM) need to consider in order to optimize profit maximization. First, GM needs to examine whether or not they have enough material for production. Then, GM also needs to factor in transportation cost from where production takes place to where the final product will be put on the market. Finally, GM needs to determine which vehicle model is in most demand for each country. Then, schedule production for the selected models to maximize profits. The models that aren’t popular need to be sold in tandem with promotions to avoid unnecessary inventory costs. Therefore, GM’s output must be in sync with the demand for the product. In essence, GM has to develop products the consumers will not only want to buy at present but the future as well.
Samuelson W.F. & Marks S.G. (2015). Managerial Economics. Hoboken, NJ: Wiley & Sons Inc.
According to Samuelson & Marks (2015), there are six steps every manager should do before deciding on a course of action. They are: 1. Define the Problem, 2. Determine the objective, 3. Explore the Alternatives, 4. Predict the Consequences, 5. Make a Choice and 6. Perform Sensitivity Analysis. The GM has to define the problem which in this case is how to maximize the profit and reduce cost in manufacturing vehicles across 100 different production facilities located in 26 different countries and then selling the vehicles in over 150 countries.
The objective would be to increase profits, reduce costs and to minimize risk. There are many alternatives that the GM could explore in this board question. By exploring alternatives, the GM can determine what the constraints are for this problem. It could be cheaper to move productions from one country to other, but there might be a government relationship in that country to which the C-suites would be not allow the move; therefore, this would be a constraint. The GM would have to setup different modeling scenarios to predict the consequences. Samuelson & Marks (2015) defines a model has “a simplified description of a process, relationship, or other phenomenon (p.9, para. 2).” These modeling scenarios allows the manager to make the optimal choice for their decision.
After the GM chooses their optimal choice, the GM needs to test that choice by performing a sensitivity analysis. A sensitivity analysis is a what-if analysis. One such analysis is the marginal analysis. “A marginal analysis looks at the change in profit that results from making a small change in a decision variable” (Samuelson & Mark, 2015 p.27 para. 2). In addition to the six steps above, the GM would have to take into consideration Porters Five force analysis and the Marketing 4P to help develop the optimal solution to either maximize the profit for the firm or get the best cost benefit from their decision. I say cost benefit because the best optimal solution might not bring in the most profit but sets the firm up for benefits in the future.
Samuel, W. & Marks, S. (2015). Managerial Economics (8th ed.). Hoboken, NJ. John Wiley & Sons, Inc.
When it comes to the decision making process, there are several courses for obtaining a well calculated plan of execution. The SWOT analysis gives a general analysis of the internal strengths and weaknesses within the organization, compared to the external opportunities and threats. This is generally macro level for gaining a generalized analysis for a situation. The Six Step Process is more detailed for a precise and thorough problem solving matrix. Both of which may be used when it comes to the pricing and production decisions for large multinational firms.
All factors will come into play during the decision making processes regarding pricing and production. Through profit maximization, managers and executives conduct problem solving issues on a regular basis (Economic, 2019). The objective of a firm such as GM involves maximizing profits through strategic decisions when it comes to where production will take place, by who, and how materials will be utilized. These decisions provide direction for the pricing for the specific region of discussion. With new and unfamiliar regions, it is beneficial to look at all decision making in a formal Six Step Process due to the unreliableness with comparing the same decisions at home verses unfamiliar regions with foreign trade laws, tax codes, labor laws and cultures. All of these unfamiliar decisions will fall under the formal decision making process. A recent Penn State article puts emphasis on these decisions for multinational firms stating the firms must have ownership advantage, location advantage or internationalization advantage in order to reap the benefits and maximize profits of multinational production (Cichocki, 2016).
Cichocki, Megan (2016). Decisionmaking in multinational corporations. Presidential Leadership Academy. Penn State. Retrieved from https://sites.psu.edu/academy/2016/10/30/decisionm…
Economic Decision- Making (2019). ECON600. Managerial Economics. Lesson 1. American Military University. Retrieved from https://apus.realizeithome.com/RealizeitApp/Conten…
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