Economics of Effective Management

…Economics of Effective Management

3). Understand Incentives

Incentives affect how resources are used and how hard workers work. As a manager, you must understand the role of incentives within an organization and how to construct incentives to induce maximal effort from your subordinates. The key is to design a mechanism such that if an employee does what is in his own interest, he will indirectly do what is best for the business or the firm.

Usually, companies provide the top management with “incentives plan” in the form of bonuses. These bonuses are in direct proportion to the firm’s profitability. Some earns commissions based on the revenue they generate for the firm’s owner.

4). Understand Markets

A market is a means by which the exchange of goods and services takes place as a result of buyers and sellers being in contact with one another.

The final outcome of the market process depends on the relative power of buyers and sellers in the marketplace. The power or bargaining position of consumers and producers in the market is limited by three sources of rivalry that exist in economic transactions: consumer-producer rivalry, consumer-consumer rivalry, and producer-producer rivalry.

The ability of a manager to meet performance objectives will depend on the extent to which a product is affected by the sources of rivalry.

Consumer-Producer Rivalry

This occurs because of the competing interests of consumers and producers. Consumers attempt to negotiate low prices while producers want to sell at high prices. The consumers and suppliers bargaining power provide a natural check and balance on the market process.

Consumer-Consumer Rivalry

This reduces the negotiating power of consumers in the marketplace. It arises because of the economic concept of scarcity. When limited quantities of goods are available, consumers will compete with one another for the right to purchase the available goods. The consumer who are willing to pay the highest price will outbid other consumers for the right to consume the goods.

Producer-Producer Rivalry

This exists only when multiple sellers of a product compete in the marketplace. Given that customers are scarce, producers compete with one another for the right to serve the customers available. Those firms that offer the best quality product at the lowest price earn the right to serve the customers.

5). Recognize the Time Value of Money

Money received today is worth more than the money received in the future.

This concept holds that money can earn interest and any amount of money is worth more the sooner it is received. The opportunity cost of receiving the money in the future is the forgone interest that could be earned if that money was received today.