Assignment on MANAGERIAL ECONOMICS

Subject : WHAT MANAGERS NEEDS TO KNOW AS AN ECONOMIST

Submitted to: Dr. Resham Chopra

Group Name – The One

GROUP MEMBERS: Roopa Shukla, Archita Garg, Rajan Singh Yadav

, Jitendra Kanade, Abhishek Suneri, Mohd. Musadeq peerzada

INTRODUCTION

MANAGERIAL ECONOMICS

Managerial economics may be defined as the study of economic

theories logics and methodology which are generally applied to
seek solution to the practical problems of business. Managerial
economics thus constitute of that part of economic knowledge
and economic theories which is used as a tools of analyzing
business problems for rational business decisions. The managerial
economics is defined by many great economists. Some definitions
are as follows which will make us more clearly about managerial
economics.
According to Mansfield, “Managerial economics is concerned with
the application of economic analysis and economic concepts to
the problems of formulating rational managerial decision”.
According to Spencer and Seigelman, “Managerial economics is
an integration of economic theories with business practice for the
purpose of facilitating decision making and forward planning by
management”. By Douglas, “Managerial economics is concerned
with the applications of economic principles and methodology to
the decision making process within the firm or organization. It
seeks to establish rules and principles to facilitate the attainment
of the desired economic goals of management.
So by above the definitions it is clear that managerial
economics is playing a great role in managerial functions because
manager has to take number of decisions in conformity with the
goals of the firm, in performing his functions.

HOW DOES ECONOMICS CONTRIBUTES TO MANAGERIAL

FUNCTIONS

Business decision making is essentially a process of selecting the

best out of alternative opportunities open to the firm. Many
business decisions are taken under the condition of uncertainty
and therefore involve risk. Uncertainty arise mainly due to the
uncertain behavior of the market forces i.e. demand and supply,
changing business environment, government policy , external
influences on the domestic market and social and political
changes in the country. The complexity of the modern business
world adds complexity to the business to decision making.
However the degree of uncertainty and risk can be greatly
reduced if market conditions could be predicted with a high
degree of reliability. The prediction of future course of business
environment alone is not sufficient.
What is equally important is to take appropriate business
decisions and to formulate business strategy conforming to the
goals of the firms. Taking appropriate business and to formulate
business strategy conforming to the goals of the firms. Taking
appropriate decision requires clear understanding of technical
and environmental condition under which business decision are
taken. Applications of economic theories to explain and analyze
the technical condition and the economic environment in which a
business undertaking operate, contributes a good deal to the
rational decision making process. Economic theories have,
therefore, gained a wide application in the analysis of practical
problems of business.

WHAT MANAGER NEEDS TO KNOW AS AN ECONOMIST

Most of the time managers have to face so many problems

so he takes some important decisions to come out from the
problems. To take appropriate decisions he must have a clear
understanding of problems. So given below are some topics which
a manager needs to know as an economist.
DEMANDANALYSIS

A managerial economist can serve management best only if he

know about the demand of the market as well as individual
demand. That’s why he needs to forecast the demand and
make an analysis.

Definition of demand analysis- Study of sales generated by a good

or service to determine the reasons for its success or failure, and
how its sales performance can be improved is known as demand
analysis.

The Demand Analysis Relationship

The Determinants

Economists approach the analysis of demand for a product

by considering the following determinants. These
determinants are

1. Price of the good

2. Taste or level of desire for the product by the buyer
3. Income of the buyer
4. Prices of related products:
substitute products (directly competes with the good in the
opinion of the buyer)
complementary products (used with the good in the
opinion of the buyer)
5. Future expectations:
expected income of the buyer
expected price of the good.
6. For the total market demand the number of buyers in the
market is also a determinant of the amount purchased.
To allow us to think about all of this logically and simply, we
imagine each determinant by turn changing while the others
do not change. We analyze, for example, a price change by
assuming that the other determinants are "given" or fixed.

The Role of Price

Economists give prices a special place in this analysis. The

DEMAND CURVE is defined as the relationship between the
price of the good and the amount or quantity the consumer
is willing and able to purchase in a specified time period,
given constant levels of the other determinants--tastes,
income, prices of related goods, expectations, and number
of buyers.

Demand Forecasting

The activity of estimating the quantity of a product or

service that consumers will purchase. Demand forecasting
involves techniques including both informal methods, such
as educated guesses, and quantitative methods, such as the
use of historical sales data or current data from test
markets. Demand forecasting may be used in making pricing
decisions, in assessing future capacity requirements, or in
making decisions on whether to enter a new market.

Forecasting in a logistics system include dozens of different

forecasting algorithms that the analyst can use to generate
alternative demand forecasts. While scores of different
forecasting techniques exist, almost any forecasting
procedure can be broadly classified into one of the following
four basic categories based on the fundamental approach
towards the forecasting problem that is employed by the
technique.

1. Judgmental Approaches. The essence of the judgmental

approach is to address the forecasting issue by assuming
that someone else knows and can tell you the right answer.
That is, in a judgment-based technique we gather the
knowledge and opinions of people who are in a position to
know what demand will be. For example, we might conduct a
survey of the customer base to estimate what our sales will
be next month.

2. Experimental Approaches. Another approach to demand

forecasting, which is appealing when an item is "new" and
when there is no other information upon which to base a
forecast, is to conduct a demand experiment on a small
group of customers and to extrapolate the results to a larger
population. For example, firms will often test a new
consumer product in a geographically isolated "test market"
to establish its probable market share. This experience is
then extrapolated to the national market to plan the new
product launch. An experimental approach are very useful
and necessary for new products, but for existing products
that have an accumulated historical demand record it seems
intuitive that demand forecasts should somehow be based
on this demand experience.

3. Relational/Causal Approaches. The assumption behind a

causal or relational forecast is that, simply put, there is a
reason why people buy our product. If we can understand
what that reason (or set of reasons) is, we can use that
understanding to develop a demand forecast. For example, if
we sell umbrellas at a sidewalk stand, we would probably
notice that daily demand is strongly correlated to the
weather – we sell more umbrellas when it rains. Once we
have established this relationship, a good weather forecast
will help us order enough umbrellas to meet the expected
demand.
 4. "Time Series" Approaches. A time series procedure is
fundamentally different than the first three approaches we
have discussed. In a pure time series technique, no
judgment or expertise or opinion is sought. We do not look
for "causes" or relationships or factors which somehow
"drive" demand. We do not test items or experiment with
customers. By their nature, time series procedures are
applied to demand data that are longitudinal rather than
cross-sectional. That is, the demand data represent
experience that is repeated over time rather than across
items or locations. The essence of the approach is to
recognize (or assume) that demand occurs over time in
patterns that repeat themselves, at least approximately. If
we can describe these general patterns or tendencies,
without regard to their "causes", we can use this description
to form the basis of a forecast.

Supply chain management

Supply chain management (SCM) is the oversight of materials,

information, and finances as they move in a process from
supplier to manufacturer to wholesaler to retailer to consumer.
Supply chain management involves coordinating and
integrating these flows both within and among companies. It is
said that the ultimate goal of any effective supply chain
management system is to reduce inventory (with the
assumption that products are available when needed).

Supply chain management flows can be divided into three main

flows:

• The product flow

• The information flow
• The finances flow

The product flow includes the movement of goods from a

supplier to a customer, as well as any customer returns or
service needs. The information flow involves transmitting
orders and updating the status of delivery. The financial flow
 consists of credit terms, payment schedules, and consignment
and title ownership arrangements.

The objective of supply chain management is to meet customer

demand for guaranteed delivery of high quality and low cost
with minimal leadtime.To achieve this objective, companies
need to have better visibility into the entire supply chain of
their own plans as well as those of their suppliers and
customers. Managers today should be agile enough to adjust
and rebuild plans in real time, to take care of unexpected
events in the supply chain.

Diagram showing supply chain management

Profit Maximization

Economic theory is based on the reasonable notion that people

attempt to do as well as they can for themselves, given the
constraints facing them. For example, consumers purchase things
that they believe will make them feel more satisfied, but their
purchases are limited (at least in the long run) by the amount of
income they earn. A consumer can borrow to finance current
purchases but must (if honest) repay the loans at a later date.
Business owners also attempt to manage their businesses so as to
improve their well being. Since the real world is a complicated
place, a business owner may improve his well being in a number
of ways. For example, if the business doesn't lack customers, the
owner could respond by reducing operating hours and enjoying
more leisure. Or, the business owner may seek satisfaction by
earning as much profit as possible. This is the alternative we will
focus on in class - for a very good reason. If a business faces
tough competition, the only way the business can survive is to
pay attention to revenues and costs. In many industries, profit
maximization is not simply a potential goal; it's the only feasible
goal, given the desire of other businesspeople to drive their
competitors out of business.

In economic terms, profit is the difference between a firm's total

revenue and its total opportunity cost. Total revenue is the
amount of income earned by selling products. In our simplified
examples, total revenue equals P x Q, the (single) price of the
product multiplied times the number of units sold. Total
opportunity cost includes both the costs of all inputs into the
production process plus the value of the highest-valued
alternatives to which owned resources could be put. For example,
a firm that has $100,000 in cash could invest in new, more
efficient, machines to reduce its unit production costs. But the
firm could just as well use the $100,000 to purchase bonds paying
a 7% rate of interest. If the firm uses the money to buy new
machinery, it must recognize that it is giving up $7000 per year in
forgone interest earnings. The $7000 represents the opportunity
cost of using the funds to buy the machinery.

We will assume that the overriding goal of the managers of firms

is to maximize profit:  = TR - TC. The managers do this by
increasing total revenue (TR) or reducing total opportunity cost
(TC) so that the difference rises to a maximum.

Foreign Trade
 The economy of a country is directly dependent on its
relations with other countries, hence, the economy of particular
company gets affected by its trade relations with other countries.
If a company establishes its foreign trade with other country, then
a manager should be able to know about the competitors which
are operating their business in the country. In such situations a
proper decision should be made by a manager that how to
operate the business in these conditions. Also, the manager will
have to focus on the range of brands in which it has greatest
competitive advantage. It enables the companies to sell a
narrower range of leading brands into more and more
geographical markets.
Secondly, economy of the host country plays a major role in
foreign trade. If the economy of the country is weak, then a
manager should be able to decide not to invest the capital in that
particular country and if the economy of the country is good, then
it is better to invest the capital in that country. Also, a manager
should be able to know about the Government support of the
country in which the company is investing its capital. A manager
should respect the laws of the country.
A manager should, therefore, know the fluctuations in the
international market, exchange rate, prices and prospects in the
international market. He should also think about various future
aspects of the company otherwise the situations like market
failure, incomplete markets, macroeconomic instabilities etc. may
arise.
Government Policies

Governments create the rules and frameworks in which

businesses are able to compete against each other. The
Government can change rules and frameworks from time to time
forcing business to change the way they operate. In this way, the
business gets affected by the Government policy. The firms work
in such a way that their attempt is to maximize their profits which
lead to social issues like environmental pollution, congestion in
the cities etc.. Social issues not only bring a firm’s interest in
conflict with those of the society, but also impose a social
responsibility on the firms. After that the Government may frame
certain laws so as these conflicts can be minimized. The manager
should, therefore, be able to know the ambitions or aspirations of
the people. After knowing the aspirations he should give a due
preference towards the decisions of the people about these
conflicts.
National Economy

A manager should be aware of the national economy of the

country sothat he may ascertain his customer group, demand in
the market, positive and negative movement of the economy etc.
Here are some important concepts about national economy that a
manger should acquaint him with

National Income:
National income is the money value of the end result of all the
economic activities from the nation. Economic activities generate
a large number of goods and services.
There are certain measures of national income of a country such
as…

Gross Domestic Product (GDP)

It is one of the measures of national income and output for a
given country's economy. GDP is defined as the total market
value of all final goods and services produced within the country
in a given period of time generally one year.

GDP = consumption + gross investment + government spending

+ (exports − imports),

Gross National Product (GNP):

GNP is defined as the value of all the final goods and services
produced during a specific period, (usually one year) plus the
difference between foreign receipt and payment.

Economic growth
It is the increase in the amount of the goods and services
produced by an economy over time. It is conventionally measured
as the percent rate of increase in real gross domestic product, or
real GDP. Growth is usually calculated in real terms, i.e. inflation-
adjusted terms, in order to net out the effect of inflation on the
price of the goods and services produced.

Per Capita Income:

Per capita income is often used as a measure of the wealth of the

population of a nation, particularly in comparison to other nations.
It is usually expressed in terms of a commonly-used international
currency such as US dollar. Per capita income gives no indication
of the distribution of that income within the country.

Inflation
It is a rise in the general level of prices of goods and services in
an economy over a period of time. The term "inflation" once
referred to increases in the money supply (monetary inflation);
however, economic debates about the relationship between
money supply and price levels have led to its primary use today in
describing price inflation.
Inflation can also be described as a decline in the real value of
money—a loss of purchasing power. When the general price level
rises, each unit of currency buys fewer goods and services.
Inflation can cause adverse effects on the economy. For example,
uncertainty about future inflation may discourage investment and
saving. Inflation may widen an income gap between those with
fixed incomes and those with variable incomes. High inflation may
lead to shortages of goods as consumers begin hoarding them out
of concern their prices will increase in the future.

So these were some topics which a manager needs to know as an

economist.

References:
1. www.wikipedia.com
Managerial economics by
1. D. N. Dwivedi
2. Varshney.