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1.1 Introduction
Economics impacts our day-to-day lives. Economics also influences the
decisions taken by managers of business firms. Any business is part of an
economy. As we know, economic conditions heavily impact business
activities and vice versa. The per capita income of the citizens will define the
purchasing power on the basis of which, the business enterprises will decide
what products to manufacture and sell. A new enterprise has to forecast the
demand for the product, which it wants to sell. The day to day product
market has to decide a viable price depending upon the interaction between
the demand and the supply. Thus, management practitioners and
academicians brought economics to their perspective and developed
‘Managerial Economics’.
Objectives:
After studying this unit, you should be able to:
describe the relevance and context for managerial economics
explain the salient and distinguishing features of the subject
recognise the role of the Managerial Economist in a business firm
Case Let
Slowdowns and booms in the global economy affect business firms either
negatively or positively. The recent slowdown in the global and Indian
economy has forced many Indian companies to revise their revenue
outlook for the current as well as the coming fiscal year. The impact of
the global turmoil has hit export-oriented firms the hardest, but the
decline in their sales is expected to be partly offset by the depreciation of
the Rupee against the US Dollar. In spite of the difficult business
conditions, investors in Indian firms are expecting the firms’ managers to
achieve good returns on investment by taking prudent decisions.
In this turbulent condition, how can managers take decisions that lead to
better utilisation of resources? How can the firms’ performance be
sustained in the prevailing conditions of volatile macroeconomic
conditions?
1.2 Definitions
In this section, we will discuss a few definitions. Managerial economics is a
science that deals with the application of various economic theories,
principles, concepts and techniques to business management in order to
solve business and management problems. It deals with the practical
application of economic theory and methodology in decision-making
problems faced by private, public and non-profit making organisations.
The same idea has been expressed by Spencer and Siegelman, in the
following words: “Managerial economics is the integration of economic
theory with business practice for the purpose of facilitating decision making
and forward planning by the management”1. Mc Nair and Meriam say,
“Managerial economics is the use of economic modes of thought to analyse
business situation”2. Brighman and Pappas define managerial economics
as, “the application of economic theory and methodology to business
External environment
The external environment has a significant role in managerial economics.
Few examples of external environment impacting managerial economics are
as follows:
1. Macroeconomic management of the country relating to economic
system, national income, trade cycles, savings and investments and its
impact on the working of a firm
2. Budgetary operations of the government and its implications on the firm
3. Knowledge and information about various government policies such as
monetary, fiscal, physical, industrial, labour, foreign trade, foreign capital
and technology, MNCs, etc. as well as their impact on the working of a
firm
4. Impact of liberalisation, globalisation, privatisation and marketisation on
the operations of a firm
5. Impact of international changes, role of international financial and trade
institutions in formulating domestic polices of a firm
6. Problems of environmental degradation and pollution and its impact on
the policies of a firm
7. Improvements in the field of science and technology and its impact on a
firm, etc
8. 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 growth of modern business and business environment.
Activity 1:
Select any type of business and prepare a plan with the predetermined
goals and means to carry them out. List down any 2-3 goals.
1.6 Summary
Let us recapitulate the important concepts discussed in this unit:
Managerial economics is a new and a highly specialised branch of
economics. It brings together economic theory and business practice. It
assists in applying various economic theories and principles to find
solutions to business and management problems.
It is applied economics and makes an attempt to explain how various
economic concepts are usefully employed in business management. It is
a practical subject. It opens up the mind of a managerial 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 gives information about the wide coverage of the subject.
The concepts of decision-making and forward planning are the two basic
functions of a managerial economist. In a way, the entire subject matter
of managerial economics is to be understood in the background of these
two functions.
1.7 Glossary
Decision: It is a deliberate choice made out of several possible alternative
courses of action after carefully considering them.
Managerial economics: Managerial economics is the integration of
economic theory with business practice for the purpose of facilitating
decision making and forward planning by the management.
Planning: It is a consciously directed activity with certain predetermined
goals and means to carry them out.
1.9 Answers
Terminal Questions
1. Managerial economics is a science that deals with the application of
various economic theories, principles, concepts and techniques to
business management in order to solve business and management
problems. Refer to unit 1.2.
2. The scope helps in understanding the subject, area of the study,
boundaries and width of the subject. Refer to unit 1.3.
3. The main concern of the subject is to apply theories to find solutions to
day-to-day practical problems faced by a firm. Refer to unit 1.4.
4. A managerial economist has to perform several functions in an
organisation. Decisions making and forward planning are described as
the two major (basic) functions and remaining functions are derived
from the two basic functions. Refer to unit 1.5.
Discussion Questions:
Imagine that you are a manager in one of the lighting companies.
1. How could the increase in prices of your company’s CFLs impact the
demand for your CFLs? How would you address any potential
negative impact?
2. How does the depreciating Rupee affect the cost of imported
phosphor?
3. How does taxation affect the cost of imported phosphor?
4. What strategies could you adopt to minimise the risks arising from
increase in the price of imported phosphor?
(Source: The Economic Times, Nov 24, 2011)
Hint: Use the theoretical concept and answer the questions
Reference:
Spencer, Milton H. & Siegelman, Louis (1959), Managerial Economics,
Homewood, Illinois: Richard. D. Irwin, Inc.
McNair, Malcolm P. & Meriam, Richard S., (1941), Problems in Business
Economics, New York & London: McGraw Hill Book Co. Inc.
Pappas, James L., & Brigham, Eugene F., (1979), Managerial
Economics, Hinsdale: Ill Dryden Press.
Dean Joel, (1951), Managerial Economics, Englewood Cliffs: N J,
Prentice Hall.
E-Reference:
www.Economictimes.com – retrieved on 24th November 2011