Managerial decision

Question

Describe and answer in economic terms a managerial decision you have knowledge about (for example, the oil and Gas Industry). What should one consider when starting a new business?

Answer 1

One should consider expected revenues  and costs that maybe incurred in the business before deciding to go for the new business. It must be undertaken only when positive economic profits are expected in long run. In the short run the revenues must cover the variable costs for the firm to continue. An important component of profits is opportunity costs. Suppose MR X is planning to give up $1000 a week job to start a business. When he calculates his costs of running the business he must include this $1000 as foregone income-opportunity costs. He must also include the costs of any self owned resource that is used in business, like own funds or own phone line. Besides these opportunity costs the fixed and variable costs are to be a part of total costs.  Failure to account for opportunity costs will be wrong and lead to wrong/irrational decisions in the economic sense.