Spencer and Siegelman have defined Managerial Economics as “the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management.”
The above definitions suggest that Managerial economics is the discipline, which deals with the application of economic theory to business management. Managerial Economics thus lies on the margin between economics and business management and serves as the bridge between the two disciplines. The following Figure 1.1 shows the relationship between economics, business management and managerial economics.
NATURE OF MANAGERIAL ECONOMICS There are certain chief characteristics of managerial economics, which can help to understand the nature of the subject matter and help in a clear understanding of the following terms:
Managerial economics is micro-economic in character. This is because the unit of study is a firm and its problems. Managerial economics does not deal with the entire economy as a unit of study.
Managerial economics largely uses that body of economic concepts and principles, which is known as Theory of the Firm or Economics of the Firm. Managerial economics is concrete and realistic. It avoids difficult abstract issues of economic theory. But it also involves complications ignored in economic theory in order to face the overall situation in which decisions are made. Economic theory ignores the variety of backgrounds and training found in individual firms.
Managerial economics belongs to normative economics rather than positive economics. Normative economy is the branch of economics in which judgments about the desirability of various policies are made. Positive economics describes how the economy behaves and predicts how it might change. In other words, managerial economics is prescriptive rather than descriptive. It remains confined to descriptive hypothesis.
Managerial economics also simplifies the relations among different variables without judging what is desirable or undesirable. For instance, the law of demand states that as price increases, demand goes down or vice-versa but this statement does not imply if the result is desirable or not. Managerial economics, however, is concerned with what decisions ought to be made and hence involves value judgments. This further has two aspects: first, it tells what aims and objectives a firm should pursue; and secondly, how best to achieve these aims in particular situations.
Macroeconomics is also useful to managerial economics since it provides an intelligent understanding of the business environment. This understanding enables a business executive to adjust with the external forces that are beyond the management’s control but which play a crucial role in the well being of the firm.
SCOPE OF MANAGERIAL ECONOMICS As regards the scope of managerial economics, there is no general uniform pattern. However, the following aspects may be said to be inclusive under managerial economics:
Demand analysis and forecasting.
Cost and production analysis.
Pricing decisions, policies and practices.
Demand Analysis and Forecasting A business firm is an economic Organisation, which transforms productive resources into goods that are to be sold in a market. A major part of managerial decision-making depends on accurate estimates of demand. This is because before production schedules can be prepared and resources are employed, a forecast of future sales is essential. This forecast can also guide the management in maintaining or strengthening the market position and enlarging profits. The demand analysis helps to identify the various factors influencing demand for a firm’s product and thus provides guidelines to manipulate demand. Demand analysis and forecasting, thus, is essential for business planning and occupies a strategic place in managerial economics. It comprises of discovering the forces determining sales and their measurementDemand determinants
Cost and Production Analysis A study of economic costs, combined with the data drawn from the firm’s accounting records, can yield significant cost estimates. These estimates are useful for management decisions. The factors causing variations in costs must be recognised and thereby should be used for taking management decisions. This facilitates the management to arrive at cost estimates, which are significant for planning purposes. An element of cost uncertainty exists in this because all the factors determining costs are not always known or controllable. Therefore, it is essential to discover economic costs and measure them for effective profit planning, cost control and sound pricing practices. Production analysis is narrower in scope than cost analysis. The chief topics covered under cost and production analysis are:
Cost concepts and classifications
Economics of scale
Pricing Decisions, Policies and Practices Pricing is a very important area of managerial economics. In fact price is the origin of the revenue of a firm. As such the success of a usiness firm largely depends on the accuracy of price decisions of that firm. The important aspects dealt under area, are as follows:
Price determination in various market forms
Differential pricing product-line pricing and price forecasting.
Profit Management Business firms are generally organised with the purpose of making profits. In the long run, profits provide the chief measure of success. In this connection, an important point worth considering is the element of uncertainty existing about profits. This uncertainty occurs because of variations in costs and revenues. These are caused by factors such as internal and external. If knowledge about the future were perfect, profit analysis would have been a very easy task. However, in a world of uncertainty, expectations are not always realised. Thus profit planning and measurement make up the difficult area of managerial economics. The important aspects covered under this area are:
Nature and measurement of profit.
Profit policies and techniques of profit planning.
Capital Management Among the various types and classes of business problems, the most complex and troublesome for the business manager are those relating to the firm’s capital investments. Capital management implies planning and control and capital expenditure. In this procedure, relatively large sums are involved and the problems are so complex that their disposal not only requires considerable time and labour but also top-level decisions. The main elements dealt with cost management are:
Cost of capital
Rate of return and selection of projects.
The various aspects outlined above represent the major uncertainties, which a business firm has to consider viz., demand uncertainty, cost uncertainty, price uncertainty, profit uncertainty and capital uncertainty. We can, therefore, conclude that managerial economics is mainly concerned with applying economic principles and concepts to adjust with the various uncertainties faced by a business firm.
Managerial Economics serves as ‘a link between traditional economics and the decision making sciences’ for business decision making.
The best way to get acquainted with managerial economics and decision making is to come face to face with real world decision problems.
Managerial economics is used by firms to improve their profitability. It is the economics applied to problems of choices and allocation of scarce resources by the firms. It refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objective most efficiently.
Ques No 2.
Discuss the role of Managerial Economist in a Business Organization.
A managerial economist helps the management by using his analytical skills and highly developed techniques in solving complex issues of successful decision-making and future advanced planning.
The role of managerial economist can be summarized as follows:
He studies the economic patterns at macro-level and analysis it’s significance to the specific firm he is working in.
He has to consistently examine the probabilities of transforming an ever-changing economic environment into profitable business avenues.
He assists the business planning process of a firm.
He also carries cost-benefit analysis.
He assists the management in the decisions pertaining to internal functioning of a firm such as changes in price, investment plans, type of goods /services to be produced, inputs to be used, techniques of production to be employed, expansion/ contraction of firm, allocation of capital, location of new plants, quantity of output to be produced, replacement of plant equipment, sales forecasting, inventory forecasting, etc.
In addition, a managerial economist has to analyze changes in macro- economic indicators such as national income, population, business cycles, and their possible effect on the firm’s functioning.
He is also involved in advising the management on public relations, foreign exchange, and trade. He guides the firm on the likely impact of changes in monetary and fiscal policy on the firm’s functioning.
He also makes an economic analysis of the firms in competition. He has to collect economic data and examine all crucial information about the environment in which the firm operates.
The most significant function of a managerial economist is to conduct a detailed research on industrial market.
In order to perform all these roles, a managerial economist has to conduct an elaborate statistical analysis.
He must be vigilant and must have ability to cope up with the pressures.
He also provides management with economic information such as tax rates, competitor’s price and product, etc. They give their valuable advice to government authorities as well.
At times, a managerial economist has to prepare speeches for top management.
Ques No 3.
Critically explain the role of the concept of Time value of Money in Mangerial decisions?
The time value concept of money assumes importance because of the fact that future is always associated with uncertainty. A rupee in hand today is valued higher than the one rupee that is expecting to be recovered tomorrow. The following are points that come in support of the fact that the concept of time value of money is quite relevant in any area of decision making :
(a) The purchasing power of money over period of tinw goes down in real times. That means, though numerically the same, the purchasing power of one rupee today is considered to be high economically than its value as on a future date.
(b) Individuals prefer present consumption to future consuiilption. This is because of the risk a n d uncertainty associated with future.
(c) There is always related costs in any investinent. These costs tend to bring down future value of money.
The concept of time value of money figures in rnany day-to-day decisions. For example. in the vital decision making areas in the management like the effective rate of interest on a business loan. The mortgage payment in real estate transaction and evaluation of true Return on investment etc. the time value of money plays an important role. Wherever use Of money is involved and its inflow and outflow patterns are spread over a time horizon, this concept very useful. For example consider the following:
* A banker must establish the term of loan
* A finance manager is who considers various alternatives sources of funds in terms of cost.
* A portfolio manager is one who evaluates various securities
Ques No 4
Compare the Cardinal
Characteristics Of A Oligopolistic Market Structure Economics Essay
This essay aims to identify main economic features of an oligopoly. An oligopoly is a market structure where few firms share a large proportion of industry output among them. This situation occurs when new firms are not able to enter the market and compete with existing firms and demand of output is not fluctuating. As under oligopolistic market few firms hold the market share, firms business decisions are interdependent. Essay also explains the economic theories of price fixing.
Characteristics of oligopolistic market structure There are few characteristics of oligopoly that distinguishes it from other market structures:
Few firms share large portion of industry, the firms under oligopoly may produce identical products or differentiated products, interdependence of the firms decision making, long term price stability and non fluctuating demand. To understand that why only few firms share large portion, the factors effecting entry of new entrants in market need to be explained. According to Maunder et al. (1991) these factors can be licensing policy of government, patents, and control over critical resources, huge investment required to match maximum efficiency scale achieved by economies of scale, mergers of firms and brand development.
Industry Concentration According to Maunder et al. (1991), degree to which output of the industry is concentrated in a few hands is industry concentration, Industry concentration can be measured by using concentration ratio and Herfindahl-Hirschman Index (HHI) .As per Wonnacott