MANAGERIAL ECONOMICS

Some Definitions of Economics

Wealth Definitions-Adam Smith, FA walker,JS Mill

defined it as science of wealth Material welfare- Alfred Marshall ,Pigou, Canon defined economics as human welfare Scarcity of means- Robbins and others defined it as a relationship between ends and scarce Development oriented-Samuelson defined as equitable distribution among all

Basic units of economic analysis

Households

Firms
Industry Government Economy

Micro Economics
Relates to individual units

Includes firms, households, individual prices,

wages, incomes, particular commodities It is a study of behavior of consumers, producers, owners of factors of production and their relationship

Macro economics
It is the study of aggregates

It covers the entire economy such as total

employment, national income, total investment , savings aggregates consumption, aggregate demand, general price level etc.

Relationship between micro and macro

Product market

Payment for goods

Receipt of goods Households Payment for factor

receipt of income Supply of goods firm supply of factor services receipt of income

services Receipt of factor services Factor market

Nature of ME
Deals with human behavior

In relation to his unlimited wants and scarce

resources to satisfy such wants Study of allocation of resources ME is concerned with the problem of decision making common to all. ME is deals with the application of economic theory to actual business situations

Contd
Special branch of economics bridging the gap

between abstract theory and managerial practice. Stresses on the tool of economic analysis Integration of business theories with practice Economics is the solution of scarce problems Central problem is the problem of making choices

Scope of Managerial Economics

Demand Analysis and forecasting

Production management
Cost Analysis Pricing Policies and practices Profit Management Capital budgeting and Investment decisions Decision theory under uncertainty

ME and other subjects

ME and statistics-empirical testing, probability

and forecasting of demand cost ME and mathematics-mathematical tool/formula ME and accounting-a/c data logical analysis and decision making ME and Operation research-model building

ManagerialEconomist Managerial Economist is an expert who counsels business management in economic matters and problems faced by a business organization.

Taking business decision and formulating forward plans are two important jobs of business management. Specialized skills are needed to perform these jobs efficiently. The managerial economist can assist the management in using the specialized skill to solve the problems of business to formulate business policies.

 Role

of Managerial Economist One of the main functions of any management is to determine the key factor which influences the business over a period of time. This function is performed by a Managerial Economist. In general, the factors which influence the business over a period to come fall under two categories: External Factors: The external factors are beyond the control of management. Internal Factors: The internal factors are well within the control of management.

The external factors operate outside the firm and firm has no control over these. Such factors constitute business environment and include prices, national income and output, business cycle, government policies, international trends, etc. Managerial economists by studying and analyzing these factors can contribute effectively in determining business policies. Certain relevant question relating to these factors are: (i) What are the present trends in nations and international economics? (ii) What phase of business cycle lies immediately ahead? (iii) Where are the market and customer opportunities likely to expand or contract most rapidly? (iv) What are the possibilities of demand and prices of finished products? (v) Is competition likely to increase or decrease? (vi) What changes are expected in government policies and control? (vii) What are the demand prospects in new and the established markets?

Internal factors are known as business operations. In other words internal activities of a firm are called business operations. A managerial economists can also help the management to solve problems relating the business operation such as price determination, use of installed capacity, investment decision, expansion and diversification of business etc. Relevant questions in this context are as follows:(i) What will be the reasonable sales and profit targets for the next year? (ii) What will be the most appropriate production schedules and the inventory policy for the next five or six months? (iii) What changes in wage and price policies should be made now? (iv) How much cash will be available in the coming months and how it should be invested?

 These

Specific functions are as under:(i) Sales Forecasting (ii) Market Research (iii) Economic Analysis of competing firms. (iv) Pricing problem of the industry (v) Evaluation of Capital Projects. (vi) Advice on foreign exchange. (vii) Advice on trade and public relations (viii) Environmental forecasting. (ix) Investment analysis and forecasts (x) Production and inventory schedule (xi) Marketing function. (xii) Analysis of underdeveloped economics

1. To make reasonable profits on capital employed: He must have strong conviction that profits are essential and his main obligation is to assist the management in earning reasonable profits on capital invested by the firm. He should always help the management to enhance the capacity of the firm to earn profits. If he fails to discharge this responsibility then his academic knowledge, experience and business skill will be of no use to the firm. 2. Successful Forecasts: It is necessary for the managerial economist to make successful forecasts by making in depth study of internal and external factors that may have influence over the profitability or the working of the firm. A managerial economist is supposed to forecast the trends in the activities of importance to the firm such as sales, profit, demand, costs etc. 3. Knowledge of Sources of Economic Informations: A managerial economist should establish and maintain close contacts with specialists and data sources in order to collect quickly the relevant and valuable information in the field. For this purpose he should develop personal relation with those having specialized knowledge of the field. He should also join professional associations and take active part in their activities. 4. His Status in the Firm: A managerial economist must earn full