Question

Q1. Clearly distinguish between economics and managerial economics Q2. Define the concept of opportunity cost. What are its applications in decision making? Q3. (a) Discuss the types of risks faced by a business firm (b) Explain the ways of managing risk in an organization

Answer 1

1) economics may be defined as the branch of social science which deals with the process of consumption , production and allocation of the resources in an economy while managerial economics is the branch of economics which deals with the application of economic tools in business decision making. Economics is both micro and macro in nature while managerial economics is micro in nature.

2) opportunity cost may be defined as the cost of the alternative opportunity Foregone or surrendered.In economics opportunity cost explains the relationship between scarcity and choice. Opportunity cost has many application in decision making , decision are tested based on opportunity cost while pursuing an business opportunity.it is also helpful in estimating the risks in potential investments and time management in businesses.

3) a) Business risk vary in scale from minor risk to major risks which makes the firms to stand on the verge of serious insolvency. Some types of risks faced by business firm are as follows:

A) operational risk:

It is the risk associated with the function of the firm.It generally occurs due to insufficiency of the firm.

B) strategy risk:

It connotes the chances of failure of strategy of a firm ,it may be due to technological changes

C) compliance risk:

It addresses the chances of failing to follow certain form of laws and regulations.

D) Financial risk:

It is associated with the abrupt financial loss in a business.It may be due to changes in financial market.

There are many other business risks such as economy risk ,legal risk reputation risk etc.

b) managing risk is the process of analysing and managing the risk .the process of managing risk contains identification, evaluation and reduction of the risk. There are different ways of managing risk ,some of them are as follows:

A) Avoiding the risk-

Avoiding the risk when risk is large in scale and which can be avoided is a good strategy.

B) Transfer of risk-

The best of example of transferring of risk is through insurance where a firm directly transfer the risk from its head to other party.

C) Accepting the risk-

This strategy is best in the situation where the risk factor is small and risk cannot be avoided.

Accepting the risk and working to eliminate it is the best a firm can choose.