MBA Study Material - Managerial Economics- Introduction

MANAGERIAL ECONOMICS

Introduction:-

Managerial Economics is economics applied in decision making.  It serves as a link between abstract theory and managerial practice.  Managerial Economics involves analysis of allocation of the resources available to firm or a unit of management among the activities of that unit.  Managerial Economics is by nature goal oriented and prescriptive and aims at maximum achievement of objectives.

Definitions:

“Managerial Economics is the integration of economic theory with business practices for the purpose of facilitating decision-making and forward planning by management”

-      Spencer and Siegelman

“Managerial Economics is the use of economic modes of thought to analyze business situation”.

-      M.C. Nair and M.C. Meriam

“The application of economic theory and methodology to business administration practice”.

-      Brigham and Pappas

In a sense, Managerial Economics provides a link between traditional economics and the decision sciences for managerial decision-making as shown in Fig 1.1.

Define your goals clearly so that others can see them as you do

              

Nature of Managerial Economics: Managerial Economics is concerned with the business firm and economic problems that every business management need to solve.

Macro-economic conditions:

We know that the decisions of the firm are made almost always within the broad framework of economic environment within the firm operates, known as Macro-Economic conditions.  This kind of understanding helps the executive to adjust out-forces over which has no control but they play a vital role in welfare of the concern, such as the business cycles, government policy regarding prices and taxation, foreign trade and anti-monopoly.

Micro-economic Analysis :

The study of an individual or a firm is called Micro Economics.  Micro Economics deals with the behavior and problems of single individual of Micro Organization.  Managerial Economics is concerned with finding the solutions for different managerial problems of a particular firm.  Thus it is more close to micro economics.

                                                         

Positive v/s Normative Statements:

A Normative Statement usually includes or implies the words “ought” or “should”.  They reflect people’s moral attitudes and are expressions of what a team of people ought to do.  It deals with statement such as “Government of India should open up the economy.  Such statements are based on value judgments and express views of what is “Good” or “bad”, “right” or “wrong”.

Scope of Managerial Economics:

The main focus in managerial economics is to find an optimal solution to a given managerial problems.  The problem may relate to production, reduction or control of costs, determination of price of a given product or service, make or buy decisions, inventory decisions, capital management or profit planning and investment decisions or human resource management.  While all these are the problems, the managerial economist make use of the concepts, tools and techniques of economics and other related disciplines to find an optimal solution to a given managerial problem.  This concept is explained in the below figure.

The following aspects may be said to generally fall under Managerial Economics.

Demand Analysis:

A business firm is an economic organism which transforms productive resources into goods that are to be sold in a market.  The analysis of a demand for a given product and service is the first task of managerial economist.  Before production schedules can be prepared and resources employed, a forecast of future sales is essential.  This forecast can also serve as a guide to management for maintaining or strengthening the market position and enlarging profits.  Demand Analysis helps in identify the various factors influencing the demand for a firm’s product and thus provides guidelines to manipulating demand. Demand analysis and forecasting, therefore, is essential for business planning and occupies a strategic place in Managerial Economics.

Cost Analysis:

A study of economic costs, combined with the data drawn from the firm’s accounting records, can yield significant cost estimates that are useful for managerial decisions.  The factors causing variations in costs must be recognized and allowed for if management is to arrive at cost estimates which are significant for planning purpose.  The chief topics covered under cost analysis are cost concept and classifications, cost output relationship, economies and diseconomies of scale and cost control and cost reduction.

Pricing Decisions:

Pricing is very important area of managerial economics.  In fact, price is the source of the revenue of a firm and as such the success of a business firm largely depends on the correctness of the price determination in various market forms, pricing, methods, differential pricing, product line pricing and price fore costing.

Production and supply Analysis :

Production Analysis is narrower in scope that cost analysis production Analysis frequently proceed in physical term while cost analysis proceeds in monetary terms.  Production analysis mainly deals with different production functions and their managerial use.

Supply analysis deals with various aspects of supply of a commodity.  Certain important aspects of supply analysis are :  supply schedule, curves and function, law of supply and its limitations.  Elasticity of supply and factors influencing supply.

Capital Management:

Among the various problems of a business, the most complex and difficult for the business manager are likely to be those relating to the firms capital investments.  Relatively large sums are involved and the problems are so complex that their disposal not only requires considerate time and labor but is a matter for top level decisions.  Briefly capital management implies planning and control of capital expenditure.  The main topics dealt with are cost of capital, rate of return and selection or projects.

Conclusion:

The various aspects outlined above represent the major uncertainties which a business firm has to reckon with, viz, demand uncertainty, cost uncertainty, price uncertainty, profit uncertainty and capital uncertainty.

We can therefore, conclude that the subject matter or managerial economics consists of applying economic principles and concepts towards adjusting with various uncertainties faced by a business firm.

Managerial Economics Linkages with other Disciplines :

Managerial Economics is closely linked with money other disciplines such as economics, accountancy, mathematics, statistics, operation research, psychology and organizational behavior.

Let us see linkages in detail:

Economics:

Managerial Economics is the offshoot of economics and hence the concepts of managerial economics are basically economic concepts.  If economics deals with theoretical concepts, managerial economics is the application of these in real life.  In the process of addressing various managerial problems, several empirically estimated functions such as demand function, cost function, revenue function and so on are extensively used.

Operation Research:

Decision-making is the main focus in Operation Research and Managerial Economics.  If Managerial Economics focuses on “problems of decision making” Operation Research Focus on solving the Managerial problems.

The Operation Research Models such as linear programming,  transportation, optimization techniques and so on, are extensively used in solving the managerial problems.

Mathematics:

Managerial Economist is concerned with estimating and predicting.  The relevant economic factors for decision-making and foreword planning.  In this process, he extensively makes use of the tools and techniques of mathematics such as algebra, calculus, vectors, input-output tables such other.

Statistics :

Statistics deals with different techniques useful to analyze the cause and effect relationships in a given variable or phenomenon.  It also empowers the managers to deal with the situations of risk and uncertainty through its techniques such as probability. The business environment for the managerial economist is full of risk and uncertainty and extensively makes use of the statistical techniques such as averages, measures of dispersion, correlation, regression time series, and probability and so on.  These techniques enhance the relevance of the conceptual base in managerial economics.

Accountancy:

The accountant provides accounting information relating to costs, revenues, receivables, payables, profit and loss etc. and this forms the basis for the managerial economist to act upon.  This forms authentic source of data about the performance of the firm.  The main objective of accounting function is to record, classify and interpret the given accounting data.  The managerial economist profusely depends upon accounting data for decision-making and foreword planning.

Psychology:

Consumer psychology is the basis on which managerial economist acts upon.  How the customers react to a given change in price or supply and its consequential effect on demand / profits is the main focus of study in managerial economics.  We assume that the behavior of the consumer is always rational which in reality is not so.  Psychology contributes towards understanding the behavioral implications, attitude and motivations of each of the micro economics variables such as consumer, supplier investor worker or an employee.

Organizational Behavior: 

Organization Behavior enables the managerial economist to study and develop behavioral models of the firm integrating the manager is behavior with that of the owner.  This further analysis the economic rationality of the firm in a focused way.

The Roles and Responsibilities of Managerial Economist:

A Managerial Economist can play a very important role by assisting the management in using the increasingly specialized skills and sophisticated techniques which are required to solve the difficult problems of successful decision making and foreword planning.

The functions of a managerial economist are divided into two types

1. Specific tasks

2. General tasks

1. Specific tasks

These are some specific functions performed by the managerial economist.

• Sales forecasting
• Individual marked Research
• Economic Analysis for competing companies
• Pricing problems of Industry
• Capital projects
• Production programmed
• Security Investment Analysis and Forecast 
• Advice on trade and public relations
• Advise on foreign exchange
• Economic Analysis of agriculture
• Analysis of under developed economics
• Environmental Scanning.

2. General tasks

One of the principle objectives of any management is to determine the key factors which influence the business over a period of time.  This function is performed by managerial economist.  In general, the following factors will influence the business over a period of time.  These factors can be divided into two categories.

(i)  Internal Factors

(ii) External Factors

(i) Internal Factors:

Internal Factors are those over which the management has control such as determination of level activity, expansion or contraction of business, investment and etc.  The managerial economist helps the management in the following relevant questions .

• What will be the reasonable sales and profit budget for the year?
• What will be the most appropriate production schedules and inventory policies for the next five or six months?
• What changes in wage and price policies should be made now ?
• How much cash will be available next month and how much should be invested?

(ii) External Factors:

External factors are factors which generally operate outside the firm and the firm has no control over them. The managerial economist is responsible to know and communicate with management that  how the fallowing factors will influence on business     

1. Prospects of demand for the product.

2. The managerial economist  also tries to find out if there is anything which influencing the input cost of the firm

3. Study of market conditions of raw materials and finished products

4. Managerial economist can also help in the expansion of the firm’s share in the market                                                       

Responsibilities of a Managerial Economist :

As mentioned above, managerial economist has an important role to play.  Let us now find out how best a managerial economist can serve the management.  In other wards, what are the responsibilities towards his job.

Responsibilities:

•  Since the most important objective of a firm is to maximize profits on investment, the managerial economist must also help in achieving this goal.
• The most important responsibility of a managerial economist is to make as accurate forecasts as possible.
•  A managerial economist caliber is generally judged by his ability to obtain necessary information quickly by personal contacts rather than by lengthy research from either the readily available sources or obscure reference sources.

Finally, the contribution of a managerial economist will be adequate only when he is a member of full status in the business team.  He must be ready to take up challenging tasks.  Whenever some special assignments come to him, he should be ready to undertake them with full seriousness.

He Profits who serves best….

Prepared & Sponsored by               

 Mr. M. Jakkaraiah                            

M.B.A., M.C.A., APSET.

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Written by Ramu Magham

Ramu Magham is an English Language Teacher who drives his students crazy with trending technologies and current happenings.