An understanding of the important concepts and worthiness of the concepts

An understanding of the important concepts and worthiness of the concepts

An understanding of the important concepts and worthiness of the concepts

The field of Managerial economics deals with ways in which business practices can be amalgamated by economic theory. The purpose is to ease the decision-making process and finding rational solutions to the firm’s problems. Here, the most important concepts associated with managerial economics shall be understood and defined clearly. The real-world application of the chosen concept shall be outlined, as well. Lastly, the significance would be discussed.

Definition of important concept and its importance

The concept of foreign exchange seems important after going through the assigned weekly reading. Foreign exchange can be understood as currency conversion, and after converting the currency, the value of the currency either increases or decreases in the foreign nation. This is because, within a free country, the value of the currency depends on supply and demand laws. Currencies constantly fluctuate because the government of most countries tends to float the nation’s currency (Frankel & Froot, 1990). Market forces associated with tourism, geo-political risks, trade, or investment affect the currency value. Banks handle foreign exchange globally. Another important concept identified is a bubble. It is an important concept because the bubble is affected by the behavior changes of investors. The rapid escalation in the case of asset prices is referred to as a bubble. The escalation occurs because a surge is created in asset prices. It is unwarranted.

Application and examples of the concepts  

Foreign exchange involves currency, and currency is affected by market forces or conditions of the country. For example, when a tourist visits another country, he or she should pay the value of services and goods as the currency of the host country. This requires a currency exchange. Similarly, when a foreign company wishes to conduct business in another country, the foreign company is supposed to pay in the local currency. The concept of the bubble can be understood with an example. The Dot-Com Bubble of 1990 is one of the classic examples. At that time, investors invested in technology and internet-based companies with the hope of getting profitable results. However, tech-companies failed to generate profitable results because, in 1995, a bubble was again formed with easy capital and cheap money (Goodnight & Green, 2010).

Significance in managerial economics

The concept of foreign exchange is vital in managerial economics because economy of a nation hardly stays stable. In order to grow the economy, the supply of money should also grow. A nation possessing greater opportunities for investment is likely to attract more international capital. Foreigners are bound to exchange the currency in order to make purchase any service or product. Consequently, the rate of foreign exchange within the nation would increase. However, markets are uncertain, and investors react negatively to uncertain events. Similarly, it is vital to understand the concept of a bubble because it would help identify the inaccurate lending standards of banks (Perloff & Brander, 2017). The standards create a vulnerable condition in the market. It is unwise for investors to rely on leveraged and short-term speculation. Therefore, an understanding of ways in which an economic bubble occurs can lead to solving the issues of investors.

References

Frankel, J. A., & Froot, K. A. (1990). Chartists, fundamentalists, and trading in the foreign exchange market. The American Economic Review, 80(2), 181-185.

Goodnight, G. T., & Green, S. (2010). Rhetoric, risk, and markets: The dot-com bubble. Quarterly Journal of Speech, 96(2), 115-140.

Perloff, J. M., & Brander, J. A. (2017). Managerial economics and strategy. Pearson.