Some Principles of Effective Management

1. Management goals must be well-defined, and constraints, such as available technology and costs of inputs, should be considered.
2. The main aim of firms is to earn the maximum possible profit. The nature of profits under different market structures should be known well:
   • Managers should identify the conditions to enter a market. They need to calculate the entry costs, sunk costs, speed of production adjustment, and other costs of starting a business.
   • Managers should identify the market power of the suppliers of inputs. They should understand their pricing system well. Managers should decide on the level of fixed investment based on production aims.
   • Managers should know the power of consumers well to set the right prices for their products.
   • Managers should know the market that they operate in well. The level of competition in the market, pricing decisions, product differentiation, and availability of information in the market can make a difference in terms of the way to maximize profits.
   • Managers should know the available substitutes and complements in their market to set the right prices to maximize profit.
3. Trade-offs involved in the decision-making process and related opportunity costs should be considered:
   • The opportunity cost of any decision is whatever must be given up to realize it. It is like the second-best use of limited resources.
   • Example: The opportunity cost of investing your money in a firm is not just the cost of funds (real costs of investment) but also the foregone interest income (opportunity cost). If you had deposited your money at a bank instead of investing at a firm, you would have earned interest income. So foregone interest income is the opportunity cost of your money invested in a firm. If the benefits of investment in a firm are higher than the opportunity cost, then you would pick the option of investment in a firm.
4. It is important to understand the incentives of consumers, competitors, and suppliers of inputs:
   • Incentive: something that motivates any individual to act. The motivation source can be punishment or reward.
   • Examples: When gas prices increase (negative incentive), consumers buy more hybrid or electric cars (rational response to a negative incentive).
   • When alcohol taxes rise (negative incentive), teen drinking falls (rational response to a negative incentive).
5. Managers should understand the input and output markets well:
   • Markets consist of a group of sellers and buyers. They can be physical markets or online markets.
   • Organizing management activities in a market means determining
     • what goods to produce (output),
     • how to produce them (inputs),
     • how much to produce (quantity),
     • how much to charge (price), and
     • who gets them (buyers).
6. Managers should understand the role of the government in the production process and its control mechanism.
7. Managers should understand the importance of the macroeconomic environment while making decisions in the production process, such as economic growth, recession periods, inflation, unemployment, and interest rates.
8. Managers should recognize the importance of some economic concepts, such as the difference between nominal and real variables, the time value of money, and marginal analysis.