Case Study Of Managerial Economics

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Global Issue – Economics Fundamentals
In 2008, Lehman Brothers was ranked 37 on the Forbes 500 list. It recorded phenomenal growth between 1999 and 2007 and by 2008 had revenues of more than $59 billion. During the United States housing boom era, the company invested heavily in mortgage-backed securities and real estate. By 2007, the company’s leverage ratio was averaging 31-to-1, meaning it borrowed $31 for every $1 in equity. This resulted in massive profits in the boom era but became a serious problem when the housing bubble burst. The firm was unable to unload those assets onto the market once home and commercial real estate prices began falling, leading to unsustainable losses. Lehman Brother executives overleveraged
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The manager then is responsible for his/her own actions, the actions of other, and the use of all resources, no matter how scarce or plentiful, under his/his purview. The economics of effective management include identifying goals and constraints, recognizing the nature and importance of profits, understanding incentives, understanding markets, recognizing the time value of money, and using marginal analysis.
The first steps in making sound decisions is for managers to have well-defined goals and to understand their constraints (Baye & Prince, 2014). Organizational goals serves some basic purposes. These are: (1) provide guidance and direction, (2) facilitate planning, (3) motivate and inspire employees, and (4) help organizations evaluate and control performance (Feliciano, 2008). However, the overall goal of most firms is to maximize profits or the firm’s value (Baye & Prince, 2014).
Profit is the difference between income and expenses, and reflects how well or not a company controls costs (McClintock, 2017). Earning a profit is important to all businesses because profitability impacts whether a company can secure financing from a bank, attract investors to fund its operations and grow its business. Companies cannot remain in business without turning a profit (Johnson, 2017). Sometimes the only way to make profit is through cost saving
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