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managerial economics

managerial economics

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Published by: mymadhava on Oct 02, 2011
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08/20/2014

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 What is the basic objectives of a firm? Explain the role and responsibility onManagerial Economics?Conventional theory of firm assumes profit maximization is the sole objective of  business firms. But recent researches on this issue reveal that the objectives thefirms pursue are more than one. Some important objectives, other than profitmaximization are:(a) Maximization of thesales revenue(b) Maximization of firm’s growth rate(c) Maximization of Managers utility function(d) Making satisfactory rate of Profit(e) Long run Survival of the firm(f) Entry-prevention and risk-avoidance
Profit Business Objectives:
Profit means different things to different people. To an accountant “Profit” meansthe excess of revenue over all paid out costs including both manufacturing andoverhead expenses. For all practical purpose, profit or business income meansprofit in accounting sense plus non-allowable expenses.Economist’s concept of profit is of “Pure Profit” called ‘economic profit’ or “Justprofit”. Pure profit is a return over and above opportunity cost, i. e. the incomethat a businessman might expect from the second best alternatives use of hisresources.
Sales Revenue Maximisation:
 
The reason behind sales revenue maximisationobjectives is the Dichotomy between ownership & management in large businesscorporations. This Dichotomy gives managers an opportunity to set their goalother than profits maximisation goal, which most-owner businessman pursue.Given the opportunity, managers choose to maximize their own utility function.The most plausible factor in manager’s utility functions is maximisation of thesales revenue.The factors, which explain the pursuance of this goal by the managers arefollowing:.
 First:
Salary and others earnings of managers are more closely related tosales revenue than to profits
 
 Second:
Banks and financial corporations look at sales revenue whilefinancing the corporation.
Third:
Trend in sales revenue is a readily available indicator of theperformance of the firm.
Maximisation of Firms Growth rate:
Managers maximize firm’s balancegrowth rate subject to managerial & financial constrains balance growth ratedefined as:G = G
D
 
– G
C
 Where G
D
 
= Growth rate of demand of firm’s product & G
C
= growth rate of capitalsupply of capital to the firm.In simple words, A firm growth rate is balanced when demand for its product &supply of capital to the firm increase at the same time.
Maximisation of Managerial Utility function
: The manager seek tomaximize their own utility function subject to the minimum level of profit.Managers utility function is express as:U= f(S, M, I
D
) Where S = additional expenditure of the staff M= Managerial emolumentsI
D
= Discretionary InvestmentsThe utility functions which manager seek to maximize include both quantifiable variables like salary and slack earnings; non- quantifiable variables such asprestige, power, status,Job security professional excellence etc.
Long run survival & market share:
according to some economist, theprimary goal of the firm is long run survival. Some other economists havesuggested that attainment &retentionof constant market share is an additionalobjective of the firm’s. the firm may seek to maximize their profit in the longrunthroughit is not certain.Entry-prevention and risk-avoidance, yet another alternative objectives of thefirms suggested by some economists is to prevent entry-prevention can be:1.Profit maximisation in the long run2.Securing a constant market share
 
3.Avoidance of risk caused by the unpredictable behavior of the new firmsMicroeconomisthas a vital role to play in running of any business. Microeconomistsare concern with all the operational problems, which arise with in the businessorganizationand fall in with inthe preview and control of the management. Some basic internal issues with which micro-economist areconcerns:i.Choice of business and nature of product i.e. what to produceii.Choice of size of the firm i. e how much to produceiii.Choice of technology i.e. choosing the factor-combination
iv.
Choose of pricei.e. how to price the commodity  v.How to promote sales vi.How to face price competition vii.How to decide on new investments viii.How to manage profit and capitalix.How to manage inventory i.e. stock to both finished & raw materialThese problems may also figure in forward planning. Micro economist deals withthese questions and like confronted by managers of the enterprises.
Nature of Managerial Economics
Managerial Economics and Business economics are the two terms, which, at times have been usedinterchangeably. Of late, however, the term Managerial Economics has become more popular and seems todisplace progressively the term Business Economics.The prime function of a management executive in a business organization isdecision making and forward planning. Decision Making means the process of selecting one action from two or more alternative coursesof action whereas forward planning means establishing plans for the future. The question of choice arisesbecause resources such as capital, land, labour andmanagement are limited and can be employed in alternative uses. The decision making function thus becomes one of making choices or decisions that willprovide the most efficient means of attaining a desired end, say, profit maximization. Once decision is madeabout the particular 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, isuncertainty. And this fact of uncertainty not only makes the function of decision making and forward planningcomplicated but adds a different dimension to it. If knowledge of the future were perfect, plans could beformulated without error and hence without any need for subsequent revision. In the real world, however, the

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