Unit 1 Meaning & Imp of Mgrl Economics

8/8/2019 Unit 1 Meaning & Imp of Mgrl Economics

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MB0026- Unit 1- Meaning And ImportanceOf Managerial Economics Unit 1- Meaning And Importance Of Managerial Economics

Introduction

Economics is a growing subject. Many new branches have been developed byvarious economists from time to time to meet the requirements of the Time. Onesuch new addition is Managerial Economics. It is interesting to study the reasons

for the emergence of this new branch of economics. In the last few decades allover the world business has expanded and diversified at a fast rate. Variety of goods and services unheard of so far have been developed. Wide-rangingchanges have taken place both in the scope and the modes of businessoperation. Government interference in business has become very common in allnations. Side by side, the business world has become increasingly complex,challenging and competitive in recent years. Business uncertainties andfluctuations have become the order of the day. The traditional micro economictheories have failed to offer solutions to the problems faced by business unitstoday. In order to help the business executives to solve their business andmanagerial problems, a new branch of economics now popularly known asmanagerial economics has been developed by modern economists.

Learning Objective 1:

Learn the meaning and special features of managerial econamic

Meaning

Managerial economics is a science that deals with the application of various economic theories, principles, concepts and techniques tobusiness management in order to solve business and managementproblems. It deals with the practical application of economic theory andmethodology to decision-making problems faced by private, public andnon-profit making organizations.

The same idea has been expressed by Spencer and Seigelman in the followingwords. Managerial Economics is the integration of economic theory withbusiness practice for the purpose of facilitating decision making and forwardplanning by the management.According to Mc Nair and Meriam, Managerialeconomics is the use of economic modes of thought to analyze businesssituation. Brighman and Pappas define managerial economics as, the

application of economic theory and methodology to business administration
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practice.Joel dean is of the opinion that use of economic analysis in formulatingbusiness and management policies is known as managerial economics.

Managerial economics is a highly specialized and new branch of economicsdeveloped in recent years. It highlights on practical application of principles andconcepts of economics in to business decision making process in order to findout optimal solutions to managerial problems. It fills up the gap betweenabstract economic theory and managerial practice. It lies mid-way betweeneconomic theory and business practice and serves as a connecting link betweenthe two.

Features of managerial Economics

1. It is a new discipline and of recent origin2. It is a highly specialized and separate branch by itself.3. It is basically a branch of microeconomics and as such it studies the

problems of only one

firm in detail.

1. It is mainly a normative science and as such it is a goal oriented andprescriptive science.

2. It is more realistic, pragmatic and highlights on practical application of various economic

theories to solve business and management problems.

1. It is a science of decision-making. It concentrates on decision-makingprocess, decision-

models and decision variables and their relationships.

1. It is both conceptual and metrical and it helps the decision-maker byproviding measurement

of various economic variables and their interrelationships.

2. It uses various macro economic concepts like national income, inflation,deflation, trade

cycles etc to understand and adjust its policies to the environment inwhich the firm operates.

3. It also gives importance to the study of non-economic variables havingimplications of economic performance of the firm. For example, impact of technology, environmental forces, socio-political and cultural factors etc.


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4. It uses the services of many other sister sciences like mathematics,statistics, engineering, accounting, operation research and psychology etcto find solutions to business and management problems.

It should be clearly remembered that Managerial Economics does not provide

ready-made solutions to all kinds of problems faced by a firm. It provides onlythe logic and methodology to find out answers and not the answers themselves.It all depends on the managers ability, experience, expertise and intelligence touse different tools of economic analysis to find out the correct answers tobusiness problems.

Learning objective 2

SCOPE OF MANAGERIAL ECONOMICS

The term scope indicates the area of study, boundaries, subject matter and width of asubject. Business economics is comparatively a new and upcoming subject. Consequently,there is no unanimity among different economists with respect to the exact scope of businesseconomics. However, the following topics are covered in this subject.

1. OBJECTIVES OF A FIRM

Profit maximization has been considered as the main objective of a business unit in oldendays. But in the context of present day business environment, many new objectives have

come to the fore. Today, there are multiple objectives and they are multi dimensional innature. Some of them are competitive while others are supplementary in nature. A few othersare inter-connected and a few others are opposing in nature. There are economic, social,organizational, human, and national goals. There are managerial and behavioral theories. Allthe objectives are determined by various factors and forces like corporate environment, socio-economic conditions, and nature of power in the organization and external constraints under which a firm operates. In the midst of several objectives, the traditional profit maximizationobjective even today has a very high place. All other policies and programmes of a firmrevolve round this objective. However, a firm aims at profit- optimization rather than profitmaximization today.

2. DEMAND ANALYSIS AND FORECASTING

A firm is basically a producing unit. It produces different kinds of goods and services. It hasto meet the requirements of consumers in the market. The basic problems of what to produce,where to produce, for whom to produce, how to produce, how much to produce and how todistribute them in the market are to be answered by a firm. Hence, it has to study in detail thevarious determinants of demand, nature, composition and characteristics of demand, elasticityof demand, demand distinctions, demand forecasting and so on. The production plan prepared

by a firm should take all these points into account.


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3. PRODUCTION AND COST ANALYSIS

Production implies transformation of inputs into outputs. It may be either in physical or monetary terms. The physical production deals with how output is to be produced by a firm

by employing different factor inputs in proper proportions. Maximization of output is one of

the basic goals of a firm. Production analysis deals with production function, laws of returns,returns to scale, economies of scale, etc. Production cost is concerned with estimation of costs to produce a given quantity of output. Cost controls, cost reduction, cost cutting andcost minimization receive top most priority in production and cost analysis. Maximization of output with minimum cost is the basic slogan of any firm. Cost analysis deals with the studyof various cost concepts, their classification, cost-output relationship in the short run and longrun.

4. PRICING DECISIONS, POLICIES AND PRACTICES

Pricing decision is related to fixing the prices of goods and services.This depends on the pricing policy and practices adopted by a firm. Price setting is one of the most important policies of a firm. The amount of revenue, the level of income and above all the volume of profits earned by a firm directly depend on its pricing decisions. Hence, we have to study price-output determination under different market conditions, objectives and considerationsof pricing policies, pricing methods, practices, policies etc. we also study price forecasting,marketing channel, distribution channel, sales promotion policies etc.

5. PROFIT MANAGEMENT

A firm is basically a commercial or business unit. Consequently, the success or failure of it ismeasured in terms of the amount of profit it is able to earn in a competitive market. Themanagement gives top most priority to this aspect. Under profit management, one has tostudy various theories of profit, emergence of profit, functions of profit, and its measurement,

profit policies, techniques, profit planning, profit forecasting and Break Even Point etc.

6. CAPITAL MANAGEMENT

It is another crucial area of business.Success of any business depends on adequate capitalinvestment and its proper management. Basically one has to study the cost of employingcapital and the rate of return expected from each and every project. It is cost-benefit analysis.Under capital management, one has to study capital requirement, methods of capitalmobilization, capital budgeting, optimal allocation of capital, selection of highly profitable

projects, cost of capital, return on capital, planning and control of capital expenditure etc.

7. LINEAR PROGRAMMING AND THE THEORY OF GAMES


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The term linear means that the relationships handled are the same as those represented bystraight lines and programming implies systematic planning or decision-making. It impliesmaximization or minimization of a linear function of variables subject to a constraint of linear inequalities. It offers actual numerical solution to the problems of making optimum choices.It involves either maximization of profits or minimization of costs.

The theory of games basically attempts to explain what is the rational course of action for anindividual firm or an entrepreneur who is confronted with the a situation where in theoutcome depends not only on his own actions, but also on the actions of others who are alsoconfronted with the same problem of selecting a rational course of action. In short, under theconditions of conflicts and uncertainty, a firm or an individual faces problem similar to thatof the player of any game. Both these techniques are extensively used in business economicsto solve various business and managerial problems.

8. MARKET STRUCTURE AND CONDITIONS

The knowledge of market structure and conditions existing in various kinds of markets are of great importance in any business. The number of sellers and buyers, the nature, extent anddegree of competition etc determines the nature of policies to be adopted by a firm in themarket.

9. STRATEGIC PLANNING

It provides a framework on which long term decisions can be made which have an impact onthe behavior of the firm. The firm sets certain long-term goals and objectives and selects thestrategy to achieve the same. It is now a new addition to the scope of business economicswith the emergence of MNCs. The perspective of strategic planning is global. In fact, theintegration of business economics and strategic planning has given rise to a new area of studycalled corporate economics.

10. OTHER AREAS

1. Macroeconomic management of the country relating to economic system, nationalincome, trade cycles Savings and investments and its impact on the working of a firm.

1. Budgetary operations of the government and its implications on the firm2. Knowledge and information about various government policies like monetary, fiscal,

physical, industrial, labor, foreign trade, foreign capital and technology, MNCs etcand their impact on the working of a firm.

1. Impact of liberalization, globalization, privatization and marketization on theoperations of firm.

3. Impact of international changes, role of international financial and trade institutions informulating domestic polices of a firm.


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1. Problems of environmental degradation and pollution and its impact on the policies of a firm.

2. Improvements in the field of science and technology and its impact on a firmetc

3. Socio-political, cultural and other external forces and their influence of

business operations.

Thus it is clear that the scope of managerial economics is expanding with the growthof modern business and business environment.

Importance of the study of Managerial Economics

Managerial Economics does not give importance to the study of theoreticaleconomic concepts. Its main concern is to apply theories to find solutions to day

to-day practical problems faced by a firm. The following points indicate thesignificance of the study of this subject in its right perspective.

1. It gives guidance for identification of key variables in decision-makingprocess.

2. It helps the business executives to understand the various intricacies of business and managerial problems and to take right decision at the righttime.

3. It provides the necessary conceptual, technical skills, toolbox of analysisand techniques of thinking and other such most modern tools andinstruments like elasticity of demand and supply, cost and revenue,income and expenditure, profit and volume of production etc to solvevarious business problems.

4. It is both a science and an art. In the context of globalization, privatization,liberalization and marketization and a highly competitive dynamiceconomy, it helps in identifying various business and managerialproblems, their causes and consequence, and suggests various policiesand programs to overcome them.

5. It helps the business executives to become much more responsive,realistic and competent to face the ever changing challenges in themodern business world.

6. It helps in the optimum use of scarce resources of a firm to maximize itsprofits.

7. It also helps in achieving other objectives a firm like attaining industryleadership, market share expansion and social responsibilities etc.8. It helps a firm in forecasting the most important economic variables like

demand, supply, cost, revenue, price, sales and profit etc and formulatesound business polices

9. It also helps in understanding the various external factors and forceswhich affect the decision-making of a firm.

Thus, it has become a highly useful and practical discipline in recent yearsto analyze and find solutions to various kinds of problems in a systematicand rational manner.

Learning objective 3


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Forward planning implies planning in advance for the future. It isassociated with deciding the future course of action of a firm. It is prepared onthe basis of past and current experience of a firm. It is prepared in thebackground of uncertain and unpredictable environment and guess work. Futureevents and happenings cannot be predicted accurately. The success or failure of the future plan depends on a number of factors and forces which are unknown innature. Much of economic activity is forward looking. Every time we build a newfactory, add to the stocks of inputs, trucks, computers or improvements in R&D,our intension is to enhance the future productivity of the firm. Growing firmsdevote a significant share of their current output to net capital formation tobolster future economic output. A business executive must be sufficientlyintelligent enough to think in advance, prepare a sound plan and take allpossible precautionary measures to meet all types of challenges of the futurebusiness. Hence, forward planning has acquired greater significance in businesscircles.

Summary

Managerial economics is a new and a highly specialized branch of economics. Itbrings together economic theory and business practice. It assists in applyingvarious economic theories and principles to find solutions to business andmanagement problems.

It is applied economics and makes an attempt to explain how various economic concepts areusefully employed in business management. It is a practical subject. It opens up the mind of amanagerial economist to the complex and highly challenging business world. The features of managerial economics throw light on the nature of the emerging subject and the scope givesinformation about the wide coverage of the subject. The concepts of decision- making andforward planning are the two basic functions of a managerial economist. In a way the entiresubject matter of managerial economics is to be understood in the background of these twofunctions

Nature Of Managerial Economics

Managerial Economics and Business economics are the two terms, which, at times have been used

interchangeably. Of late, however, the term Managerial Economics has become more popular and seems to

displace progressively the term Business Economics.

The prime function of a management executive in a business organization is decision-making and forward

planning. Decision-making means the process of selecting one action from two or more alternative courses of

action whereas forward planning means establishing plans for the future. The question of choice arises because

resources such as capital, land, labour and management are limited and can be employed in alternative uses.

The decision-making function thus becomes one of making choices or decisions that will provide the most

efficient means of attaining a desired end, say, profit maximization. Once decision is made about the particular


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goal to be achieved, plans as to production, pricing, capital, raw materials, labour, etc., are prepared. Forward

planning thus goes hand in hand with decision-making.

A significant characteristic of the conditions, in which business organizations work and take decisions, is

uncertainty. And this fact of uncertainty not only makes the function of decision-making and forward planning

complicated but adds a different dimension to it. If knowledge of the future were perfect, plans could be

formulated without error and hence without any need for subsequent revision. In the real world, however, the

business manager rarely has complete information and the estimates about future predicted as best as possible.

As plans are implemented over time, more facts become known so that in their light, plans may have to be

revised, and a different course of action adopted. Managers are thus engaged in a continuous process of

decision-making through an uncertain future and the overall problem confronting them is one of adjusting to

uncertainty.

In fulfilling the function of decision-making in an uncertainty framework, economic theory can be pressed into

service with considerable advantage. Economic theory deals with a number of concepts and principles relating,

for example, to profit, demand, cost, pricing production, competition, business cycles, national income, etc.,

which aided by allied disciplines like Accounting. Statistics and Mathematics can be used to solve or at least

throw some light upon the problems of business management. The way economic analysis can be used towards

solving business problems. Constitutes the subject-matte of Managerial Economics.

Definition Of Managerial Economics

According to McNair and Meriam, Managerial Economics consists of the use of economic modes of thought to

analyse business situation 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. We may, therefore define Managerial Economics as the discipline which deals with the application

of economic theory to business management. Managerial Economics thus lies on the borderline between

economics and business management and serves as abridge between economics and business management

and serves as a bridge between the two disciplines.See Chart1

Chart 1 Economics, Business Management and Managerial Economics.


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Aspects of Application Of Economics

The application of economics to business management or the integration of economic theory with business

practice, as Spencer and Siegelman have put it, has the following aspects:

1. Reconciling traditional theoretical concepts of economics in relation to the actual business behavior and

conditions. In economic theory, the technique of analysis is one of model building whereby certain

assumptions are made and on that basis, conclusions as to the behavior of the firms are drown. The

assumptions, however, make the theory of the firm unrealistic since it fails to provide a satisfactory explanationof that what the firms actually do. Hence the need to reconcile the theoretical principles based on simplified

assumptions with actual business practice and develops appropriate extensions and reformulation of

economic theory, if necessary.

2. Estimating economic relationships, viz., measurement of various types of elasticities of demand such as

price elasticity, income elasticity, cross-elasticity, promotional elasticity, cost-output relationships, etc. the

estimates of these economic relation-ships are to be used for purposes of forecasting.

3. Predicting relevant economic quantities, eg., profit, demand, production, costs, pricing, capital, etc., in

numerical terms together with their probabilities. As the business manager has to work in an environment of

uncertainty, future is to be predicted so that in the light of the predicted estimates, decision-making and

forward planning may be possible.

4. Using economic quantities in decision-making and forward planning, that is, formulating business

policies and, on that basis, establishing business plans for the future pertaining to profit, prices, costs, capital,

etc. The nature of economic forecasting is such that it indicates the degree of probability of various possible

outcomes, i.e. losses or gains as a result of following each one of the strategies available. Hence, before a

business manager there exists a quantified picture indicating the number o courses open, their possible

outcomes and the quantified probability of each outcome. Keeping this picture in view, he decides about the

strategy to be chosen.

5. Understanding significant external forces constituting the environment in which the business is operating

and to which it must adjust, e.g., business cycles, fluctuations in national income and government policies

pertaining to public finance, fiscal policy and taxation, international economics and foreign trade, monetary

economics, labour relations, anti-monopoly measures, industrial licensing, price controls, etc. The business
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manager has to appraise the relevance and impact of these external forces in relation to the particular

business unit and its business policies.

Chief Characteristics Of Managerial Economics

It would be useful to point out certain chief characteristics of Managerial Economics, inasmuch its they throw

further light on the nature of the subject matter and help in a clearer understanding thereof.

1. Managerial Economics micro-economic in character.

2. Managerial Economics largely uses that body of economic concepts and principles, which is known asTheory of the firm or Economics of the firm. In addition, it also seeks to apply Profit Theory, which forms part

of Distribution Theories in Economics.

3. Managerial Economics is pragmatic. It avoids difficult abstract issues of economic theory but involves

complications ignored in economic theory to face the overall situation in which decisions are made. Economic

theory appropriately ignores the variety of backgrounds and training found in individual firms but Managerial

Economics considers the particular environment of decision-making.

4. Managerial Economics belongs to normative economics rather than positive economics (also

sometimes known as descriptive economics). In other words, it is prescriptive rather than descriptive. The

main body of economic theory confines itself to descriptive hypothesis, attempting to generalize about the

relations among different variables without judgment about what is desirable or undesirable. For instance, thelaw of demand states that as price increases. Demand goes down or vice-versa but this statement does not

tell whether the outcome is good or bad. Managerial Economics, however, is concerned with what decisions

ought to be made and hence involves value judgments.

Production and Supply

Production analysis is narrower in scope than cost analysis. Production analysis frequently proceeds in physical

terms while cost analysis proceeds in monetary terms. Production analysis mainly deals with different production

functions and their managerial uses.

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.

Pricing Decisions, Policies and Practices

Pricing is a very important area of Managerial Economics. In fact, price is the ness of the revenue of a firm and

as such the success of a business firm largely depends on the correctness of the pries decisions taken by it. The


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Economics has two main divisions: microeconomics and macroeconomics. Microeconomics has been defined as

that branch where the unit of study is an individual or a firm. Macroeconomics, on the other hand, is aggregate in

character and has the entire economy as a unit of study.

Microeconomics, also known as price theory (or Marshallian economics.) Is the main source of concepts and

analytical tools for managerial economics. To illustrate various micro-economic concepts such as elasticity of

demand, marginal cost, the short and the long runs, various market forms, etc. are all of great significance to

managerial economics. The chief contribution of macro-economics is in the area of forecasting. The modern

theory of income and employment has direct implications for forecasting general business conditions. As the

prospects of an individual firm often depend greatly on general business conditions, individual firm forecasts

depend on general business forecasts.

A survey in the U.K. has shown that business economists have found the following economic concepts quite

useful and of frequent application:

1. Price elasticity of demand

2. Income elasticity of demand

3. Opportunity cost

4. The multiplier

5. Propensity to consume6. Marginal revenue product

7. Speculative motive

8. Production function

9. Balanced growth

10. Liquidity preference.

Business economics have also found the following main areas of economi9cs as useful in their work

1. Demand theory

2. Theory of the firm-price, output and investment decisions

3. Business financing

4. Public finance and fiscal policy

5. Money and banking

6. National income and social accounting

7. Theory of international trade

8. Economics of developing countries.


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Managerial Economics and Accounting

Managerial Economics is also closely related to accounting, which is concerned with recording the financial

operations of a business firm. Indeed, accounting information is one of the principal sources of data required by a

managerial economist for his decision-making purpose. For instance, the profit and loss statement of a firm tellshow well the firm has done and the information it contains can be used by managerial economist to throw

significant light on the future course of action-whether it should improve or close down. Of course, accounting

data call for careful interpretation. Recasting and adjustment before they can be used safely and effectively.

It is in this context that the growing link between management accounting and managerial economics deserves

special mention. The main task of management accounting is now seen as being to provide the sort of data

which managers need if they are to apply the ideas of managerial economics to solve business problems

correctly; the accounting data are also to be provided in a form so as to fit easily into the concepts and analysisof managerial economics.

Uses Of Managerial Economics

Managerial economics accomplishes several objectives. First, it presents those aspects of traditional economics,

which are relevant for business decision making it real life. For the purpose, it culls from economic theory the

concepts, principles and techniques of analysis which have a bearing on the decision making process. These

are, if necessary, adapted or modified with a view to enable the manager take better decisions. Thus, managerial

economics accomplishes the objective of building suitable tool kit from traditional economics.

Secondly, it also incorporates useful ideas from other disciplines such a psychology, sociology, etc., if they are

found relevant for decision making. In face managerial economics takes the aid of other academic disciplines

having a bearing upon the business decisions of a manager in view of the carious explicit and implicit constraints

subject to which resource allocation is to be optimized.

Thirdly, managerial economics helps in reaching a variety of business decisions.

(i) What products and services should be produced?

(ii) What inputs and production techniques should be used?

(iii) How much output should be produced and at what prices it should be sold?

(iv) What are the best sizes and locations of new plants?

(v) How should the available capital be allocated?


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Fourthly, managerial economics makes a manager a more competent model guilder. Thus he can capture the

essential relationships which characterize a situation while leaving out the cluttering details and peripheral

relationships.

Fifthly, at the level of the firm, where for various functional areas functional specialists or functional departments

exist, e.g., finance, marketing, personal production, etc., managerial economics serves as an integrating agent by

co-coordinating the different areas and bringing to bear on the decisions of each department or specialist the

implications pertaining to other functional areas. It thus enables business decision- making not in watertight

compartments but in an integrated perspective, the significance of which lies in the fact that the functional

departments or specialists often enjoy considerable autonomy and achieve conflicting coals.

Finally, managerial economics takes cognizance of the interaction between the firm and society and

accomplishes the key role of business as an agent in the attainment of social and economic welfare. It has come

to be realized that business part from its obligations to shareholders has certain social obligations. Managerial

economics focuses attention on these social obligations as constraints subject to which business decisions are to

be taken. In so doing, it serves as an instrument in rehiring the economic welfare of the society through socially

oriented business decisions.

Managerial Economist Role And Responsibilities

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 forward planning. That is why, in business concerns, his importance is being growingly

recognized. In advanced countries like the U.S.A., large companies employ one or more economists. In our

country too, big industrial houses have come to recognize the need for managerial economists, and there are

frequent advertisements for such positions. Tatas, DCM and Hindustan Lever employ economists. Indian

Petrochemicals Corporation Ltd., a Government of India undertaking, also keeps an economist.

Let us examine in specific terms how a managerial economist can contribute to decision-making in business. In

this connection, two important questions need be considered:

1. What role does he play in business, that is, what particular management problems lend themselves to

solution through economic analysis?

2. How can the managerial economist best serve management, that is, what are the responsibilities of a

successful managerial economist?


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Role Of Managerial Economist

One of the principal objectives of any management in its decision-making process is to determine the key factors

which will influence the business over the period ahead. In general, these factors can be divided into two-

category (i) external and (ii) internal. The external factors lie outside the control management because they are

external to the firm and are said to constitute business environment. The internal factors he within the scope and

operations of a firm and hence within the control of management, and they are known as business operations.

To illustrate, a business firm is free to take decisions about what to invest, where to invest, how much labour to

employ and what to pay for it, how to price its products and so on but all these decisions are taken within theframework of a particular business environment and the firms degree of freedom depends on such factors as the

governments economic policy, the actions of its competitors and the like.

Environmental Studies

An analysis and forecast of external factors constituting general business conditions, e.g., prices, national income

and output, volume of trade, etc., are of great significance since every business from is affected by them. Certain

important relevant questions in this connection are as follows:

1. What is the outlook for the national economy? What are the most important local, regional or worldwide

economic trends? What phase of the business cycle lies immediately ahead?

2. What about population shifts and the resultant ups and downs in regional purchasing power?

3. What are the demands prospects in new as well as established markets? Will changes in social

behavior and fashions tend to expand or limit the sales of a companys products, or possibly make the

products obsolete?

4. Where are the market and customer opportunities likely to expand or contract most rapidly?

5. Will overseas markets expand or contract, and how will new foreign government legislations affect

operation of the overseas plants?6. Will the availability and cost of credit tend to increase or decrease buying? Are money or credit

conditions ahead likely to be easy or tight?

7. What the prices of raw materials and finished products are likely to be?

8. Is competition likely to increase or decrease?

9. What are the main components of the five-year plan? What are the areas where outlays have been

increased? What are the segments, which have suffered a cut in their outlay?

10. What is the outlook regarding governments economic policies and regulations?

11. What about changes in defense expenditure, tax rates, tariffs and import restrictions?

12. Will Reserve Banks decisions stimulate or depress industrial production and consumer spending? How

will these decisions affect the companys cost, credit, sales and profits?


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Reasonably accurate answers to these and similar questions can...

Enable managements to chalk out more wisely the scope and direction of their own business plans and to

determine the timing of their specific actions. And it is these questions which present some of the areas where a

managerial economist can make effective contribution.

The managerial economist has not only to study the economic trends at the macro-level but must also interpret

their relevance to the particular industry/firm where he works. He has to digest the ever-growing economic

literature and advise top management by means of short, business-like practical notes.

In a mixed economy like India, the managerial economist pragmatically interprets the intentions of controls and

evaluates their impact. He acts as a bridge between the government and the industry, translating the

governments intentions and transmitting the reactions of the industry. In fact, government policies charge out of

the performance of industry, the expectations of the people and political expediency.

Business Operations

A managerial economist can also be helpful to the management in making decisions relating to the internal

operations of a firm in respect of such problems as price, rate of operations, investment, expansion or

contraction. Certain relevant questions in this context would be as follows:

1. What will be a reasonable sales and profit budget for the next year?

2. What will be the most appropriate production Schedules and inventory policies for the next six months?

3. What changes in wage and price policies should be made now?

4. How much cash will be available next month and how should it be invested?

Specific Functions

A further idea of the role managerial economists can play, can be had from the following specific functions

performed by them as revealed by a survey pertaining to Britain conducted by K.J.W. Alexander and Alexander

G. Kemp:

1. Sales forecasting

2. Industrial market research.

3. Economic analysis of competing companies.


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4. Pricing problems of industry.

5. Capital projects.

6. Production programs.

7. Security/investment analysis and forecasts.

8. Advice on trade and public relations.

9. Advice on primary commodities.

10. Advice on foreign exchange.

11. Economic analysis of agriculture.

12. Analysis of underdeveloped economics.

13. Environmental forecasting.

The managerial economist has to gather economic data, analyze all pertinent information about the business

environment and prepare position papers on issues facing the firm and the industry. In the case of industries

prone to rapid technological advances, he may have to make a continuous assessment of the impact of changing

technology. He may have to evaluate the capital budget in the light of short and long-range financial, profit and

market potentialities. Very often, he may have to prepare speeches for the corporate executives.

It is thus clear that in practice managerial economists perform many and varied functions. However, of these,

marketing functions, i.e., sales forecasting and industrial market research, has been the most important. For this

purpose, they may compile statistical records of the sales performance of their own business and those relating

to their rivals, carry our analysis of these records and report on trends in demand, their market shares, and the

relative efficiency of their retail outlets. Thus while carrying out their functions; they may have to undertake

detailed statistical analysis. There are, of course, differences in the relative importance of the various functions

performed from firm to firm and in the degree of sophistication of the methods used in carrying them out. But

there is no doubt that the job of a managerial economist requires alertness and the ability to work under

pressure.

Economic Intelligence

Besides these functions involving sophisticated analysis, managerial economist may also provide general

intelligence service supplying management with economic information of general interest such as competitorsprices and products, tax rates, tariff rates, etc. In fact, a good deal of published material is already available and it

would be useful for a firm to have someone who understands it. The managerial economist can do the job with

competence.

Participating in Public Debates

May well-known business economists participate in public debates. Their advice and views are being sought by

the government and society alike. Their practical experience in business and industry ads stature to their views.

Their public recognition enhances their stature in the organization itself.

Indian Context


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In the Indian context, a managerial economist is expected to perform the following functions:

1. Macro-forecasting for demand and supply.

2. Production planning at macro and micro levels.

3. Capacity planning and product-mix determination.

4. Economics of various productions lines.

5. Economic feasibility of new production lines/processes and projects.

6. Assistance in preparation of overall development plans.

7. Preparation of periodical economic reports bearing on various matters such as the companys product-

lines, future growth opportunities, market pricing situation, general business, and various national/international

factors affecting industry and business.

8. Preparing briefs, speeches, articles and papers for top management for various

Chambers, Committees, Seminars, Conferences, etc.

9. Keeping management informed o various national and international developments on

economic/industrial matters.

With the adoption of the New Economic Policy, the macro-economic Environment is changing fast at a pace that

has been rarely witnessed before. And these

changes have tremendous implications for business. The managerial economist has to play a much more

significant role. He has to constantly gauge the possibilities of translating the rapidly changing economic scenario

into viable business opportunities. As India marches towards globalization, he will have to interpret the global

economic events and find out how his firm can avail itself of the carious export opportunities or of establishing

plants abroad either wholly owned or in association with local partners.

Responsibilities Of Managerial Economist

Having examined the significant opportunities before a managerial economist to contribute to managerial

decision-making, let us next examine how he can best serve the management. For this, he must thoroughlyrecognize his responsibilities and obligations.

A managerial economist can serve management best only if he always keeps in mind the main objective of his

business, viz., to make a profit on its invested capital. His academic training and the critical comments from

people outside the business may lead a managerial economist to adopt an apologetic or defensive attitude

towards profits. Once management notices this, his effectiveness is almost sure to be lost. In fact, he cannot

expect to succeed in serving management unless he has a strong personal conviction that profits are essential

and that his chief obligation is to help enhance the ability of the firm to make profits.


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Most management decisions necessarily concern the future, which is rather uncertain. It is, therefore, absolutely

essential that a managerial economist recognizes his responsibility to make successful forecasts. By making best

possible forecasts and through constant efforts to improve upon them, he should aim at minimizing, if not

completely eliminating, the risks involved in uncertainties, so that the management can follow a more orderly

course of business planning. At times, he will have to reassure the management that an important trend will

continue; in other cases, he may have to point out the probabilities of a turning point in some activity of

importance to management. In any case, he must be willing to make considered but fairly positive statements

about impending economic developments, based upon the best possible information and analysis and stake his

reputation upon his judgment. Nothing will build management confidence in a managerial economist more quickly

and thoroughly than a record of successful forecasts, well documented in advance and modestly evaluated when

the actual results become available.

A few corollaries to the above proposition need also be emphasized here.

First, he has a major responsibility to alert management at the earliest possible moment in case he discovers an

error in his forecast. By promptly drawing attention to changes in forecasting conditions, he will not only assist

management in making appropriate adjustment in policies and programs but will also be able to strengthen his

own position as a member of the management team by keeping his fingers on the economic pulse of the

business.

Secondly, he must establish and maintain many contacts with individuals and data sources, which would not be

immediately available to the other members of the management. Extensive familiarity with reference sources and

material is essential, but it is still more important that he knows individuals who are specialists in particular fields

having a bearing on his work. For this purpose, he should join professional associations and take active part in

them. In fact, one of the best means of determining the caliber of a managerial economist is to evaluate his ability

to obtain information quickly by personal contacts rather than by lengthy research from either readily available or

obscure reference sources. Within any business, there may be a wealth of knowledge and experience but the

managerial economist would be really useful if he can supplement the existing know-how with additionalinformation and in the quickest possible manner.

Again, if a managerial economist is to be really helpful to the management in successful decision-making and

forward planning, he must be able to earn full status on the business team. He should be ready and even offer

himself to take up special assignments, be that in study teams, committees or special projects. For, a managerial

economist can only function effectively in an atmosphere where his success or failure can be traced not only to

his basic ability, training and experience, but also to his personality and capacity to win continuing support for

himself and his professional ideas. Of course, he should be able to express himself clearly and simply and mustalways try to minimize the use of technical terminology in communicating with his management executives. For, it


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is well known that hat management does not understand, it will almost automatically reject. Further, while

intellectually he must be in tune with industrys thinking the wider national perspective should not be absents from

his advice to top management.

Question Bank

1. Define managerial economics with definition

2. How does managerial economics differ from economics?

3. Write a short note on managerial economist.

4. Explain the scope of managerial economics.

Self Assessment Questions 1

1. Managerial Economics is the integration of _Economic Theory___ with BusinessPractice____ for solving business and management problems.

2. Managerial Economics fills up the gap between _Economic Theory__ and Practice__.3. Managerial Economics is mainly a Prescriptive science.4. Basic objective a firm to day is Profit Maximisation_.5. Managerial Economic is basically a branch of Micro economics.6. Two major function of a Managerial Economic are Decision Making and Forward

Planning__.

Terminal Questions

1. Define Managerial Economic and explain its main characteristics.2. Discuss the scope of Managerial Economics3. Explain the importance of Managerial Economics4. Discuss the functions of a Managerial Economist

Answer to SAQs and TQs

Answer for Self Assessment Questions 1

1. Economic theory, Business Practice2. Economic theory Practice.


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3. Prescriptive4. Profit optimization5. Micro6. Decision- making Forward Planning

Answer to Terminal Questions)

1. Refer to unit 1.22. Refer to unit 1.33. Refer to unit 1.44. Refer to unit 1.5

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Unit 1 Meaning & Imp of Mgrl Economics