MeaningAndImportanceOfManagerialEconomics

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Unit1
Structure
1.1 Introduction Objectives 1.2 Meaning

MeaningAndImportanceOfManagerialEconomics

1.3 ScopeofBusinesseconomics 1.4 Importanceofthestudyofmanagerialeconomics 1.5 Twomajorfunctionsofamanagerialeconomist 1.6 Summary TerminalQuestions AnswertoSAQsandTQs

1.1 Introduction
Economicsisagrowingsubject.Manynewbrancheshavebeendevelopedbyvariouseconomists from time to time to meet the requirements of the Time. One such new addition is Managerial Economics.Itisinterestingtostudythereasonsfortheemergenceofthisnewbranchofeconomics. In the last few decades all over the world business has expanded and diversified at a fast rate. Varietyofgoodsandservicesunheardofsofarhavebeendeveloped.Widerangingchangeshave taken place both in the scope and the modes of business operation. Government interference in business has become very common in all nations. Side by side, the business world has become increasingly complex, challenging and competitive in recent years. Business uncertainties and fluctuationshavebecometheorderoftheday.Thetraditionalmicroeconomictheorieshavefailedto offer solutions to the problems faced by business units today. In order to help the business executives to solve their business and managerial problems, a new branch of economics now popularlyknownasmanagerialeconomicshasbeendevelopedbymoderneconomists. LearningObjectives: Afterstudyingthisunit,youshouldbeabletounderstandthefollowing 1. Tounderstandthebackgroundoftheemergenceofmanagerialeconomics. 2. Tounderstandthemeaningandspecialfeaturesofthesubject. 3. Toknowthevarioustopicscoveredunderthissubject.

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MeaningAndImportanceOfManagerialEconomics

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4. Toknowhowtheconceptsofdecisionmakingandforwardplanningareappliedindaytodaybusiness. 5. Toknowtheimportanceofmanagerialeconomicsintodayscomplicatedbusinessmanagement.

1.2 Meaning
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 theoryandmethodologytodecisionmakingproblemsfacedbyprivate,publicandnonprofit makingorganizations. ThesameideahasbeenexpressedbySpencerandSeigelmaninthefollowingwords.Managerial Economicsistheintegrationofeconomictheorywithbusinesspracticeforthepurposeoffacilitating decision making and forward planning by the management.According to Mc Nair and Meriam, Managerial economics is the use of economic modes of thought to analyze business situation. Brighman and Pappas define managerial economics as, the application of economic theory and methodology to business administration practice.Joel dean is of the opinion that use of economic analysisinformulatingbusinessandmanagementpoliciesisknownasmanagerialeconomics. Managerial economics is a highly specialized and new branch of economics developed in recent years. Ithighlights onpracticalapplicationof principles and concepts ofeconomics in tobusiness decisionmakingprocessinordertofindoutoptimalsolutionstomanagerialproblems.Itfillsupthe gapbetweenabstracteconomictheoryandmanagerialpractice.Itliesmidwaybetweeneconomic theoryandbusinesspracticeandservesasaconnectinglinkbetweenthetwo. FeaturesofmanagerialEconomics 1. Itisanewdisciplineandofrecentorigin 2. Itisahighlyspecializedandseparatebranchbyitself. 3. Itisbasicallyabranchofmicroeconomicsandassuchitstudiestheproblemsofonlyone firmindetail. 4. Itismainlyanormativescienceandassuchitisagoalorientedandprescriptivescience. 5. Itismorerealistic,pragmaticandhighlightsonpracticalapplicationofvariouseconomic theoriestosolvebusinessandmanagementproblems.

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MeaningAndImportanceOfManagerialEconomics

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6. Itisascienceofdecisionmaking.Itconcentratesondecisionmakingprocess,decision modelsanddecisionvariablesandtheirrelationships. 7. Itisbothconceptualandmetricalandithelpsthedecisionmakerbyprovidingmeasurement ofvariouseconomicvariablesandtheirinterrelationships. 8. Itusesvariousmacroeconomicconceptslikenationalincome,inflation,deflation,trade cyclesetctounderstandandadjustitspoliciestotheenvironmentinwhichthefirmoperates. 9. Italsogivesimportancetothestudyofnoneconomicvariableshavingimplicationsofeconomic performanceofthefirm.Forexample,impactoftechnology,environmentalforces,sociopolitical andculturalfactorsetc. 10. It uses the services of many other sister sciences like mathematics, statistics, engineering, accounting, operation research and psychology etc to find solutions to business and managementproblems. ItshouldbeclearlyrememberedthatManagerialEconomicsdoesnotprovidereadymadesolutions to all kinds of problems faced by a firm. It provides only the logic and methodology to find out answers and not the answers themselves. It all depends on the managers ability, experience, expertiseandintelligencetousedifferenttoolsofeconomicanalysistofindoutthecorrectanswers tobusinessproblems.

1.3 SCOPEOFMangerialECONOMICS
The term scope indicates the area of study, boundaries, subject matter and width of a subject. Business economics is comparatively a new and upcoming subject. Consequently, there is no unanimity among different economists with respect to the exact scope of business economics. However,thefollowingtopicsarecoveredinthissubject.

1. OBJECTIVESOFAFIRM
Profitmaximizationhasbeenconsideredasthemainobjectiveofabusinessunitinoldendays.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 in nature. Some of them are competitivewhileothersaresupplementaryinnature.Afewothersareinterconnectedandafew others are opposing in nature. There are economic, social, organizational, human, and national goals.Therearemanagerialandbehavioraltheories.Alltheobjectivesaredeterminedbyvarious

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MeaningAndImportanceOfManagerialEconomics

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factorsandforceslikecorporateenvironment,socioeconomicconditions,andnatureofpowerinthe organizationandexternalconstraintsunderwhichafirmoperates.Inthemidstofseveralobjectives, thetraditionalprofitmaximizationobjectiveeventodayhasaveryhighplace.Allotherpoliciesand programmesofafirmrevolveroundthisobjective.However,afirmaimsatprofitoptimizationrather thanprofitmaximizationtoday.

2.DEMANDANALYSISANDFORECASTING
Afirmisbasicallyaproducingunit.Itproducesdifferentkindsofgoodsandservices.Ithastomeet the requirements of consumers in the market. The basic problems of what to produce, where to produce,forwhomtoproduce,howtoproduce,howmuchtoproduceandhowtodistributethemin themarketaretobeansweredbyafirm.Hence,ithastostudyindetailthevariousdeterminantsof demand, nature, composition and characteristics of demand, elasticity of demand, demand distinctions,demandforecastingandsoon.Theproductionplanpreparedbyafirmshouldtakeall thesepointsintoaccount.

3.PRODUCTIONANDCOSTANALYSIS
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 differentfactor inputs in proper proportions. Maximization ofoutput is one of the basic goals of a firm.Productionanalysisdealswithproductionfunction,lawsofreturns,returnstoscale,economies ofscale,etc.Productioncostisconcernedwithestimationofcoststoproduceagivenquantityof output.Costcontrols,costreduction,costcuttingandcostminimizationreceivetopmostpriorityin productionandcostanalysis.Maximizationofoutputwithminimumcostisthebasicsloganofany firm. Cost analysis deals with the study of various cost concepts, their classification, costoutput relationshipintheshortrunandlongrun.

4.PRICINGDECISIONS,POLICIESANDPRACTICES
Pricing decision is related to fixing the prices of goods and services.This depends on the pricing policyandpracticesadoptedbyafirm.Pricesettingisoneofthemostimportantpoliciesofafirm. The amount of revenue, the level of income and above all the volume of profits earned by a firm directlydependonitspricingdecisions.Hence,wehavetostudypriceoutputdeterminationunder

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MeaningAndImportanceOfManagerialEconomics

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different market conditions, objectives and considerations of pricing policies, pricing methods, practices,policiesetc.wealsostudypriceforecasting,marketingchannel,distributionchannel,sales promotionpoliciesetc.

5.PROFITMANAGEMENT
A firm is basically a commercial or business unit. Consequently, the success or failure of it is measuredintermsoftheamountofprofititisabletoearninacompetitivemarket.Themanagement givestopmostprioritytothisaspect.Underprofitmanagement,onehastostudyvarioustheoriesof profit,emergenceofprofit,functionsofprofit,anditsmeasurement,profitpolicies,techniques,profit planning,profitforecastingandBreakEvenPoint etc.

6.CAPITALMANAGEMENT
It is another crucial area of business.Success of any business depends on adequate capital investmentanditspropermanagement.Basicallyonehastostudythecostofemployingcapitaland the rate of return expectedfromeachand every project. It is costbenefit analysis. Under capital management, one has to study capital requirement, methods of capital mobilization, capital budgeting,optimalallocationofcapital,selectionofhighlyprofitableprojects,costofcapital,return oncapital,planningandcontrolofcapitalexpenditureetc.

7.LINEARPROGRAMMINGANDTHETHEORYOFGAMES
Thetermlinearmeansthattherelationshipshandledarethesameasthoserepresentedbystraight lines and programming implies systematic planning or decisionmaking. It implies maximizationor minimization of a linear function of variables subject to a constraint of linear inequalities. It offers actualnumericalsolutiontotheproblemsofmakingoptimumchoices.Itinvolveseithermaximization ofprofitsorminimizationofcosts. The theory of games basically attempts to explain what is the rational course of action for an individual firm or an entrepreneur who is confronted with the a situation where in the outcome dependsnotonlyonhisownactions,butalsoontheactionsofotherswhoarealsoconfrontedwith thesameproblemofselectingarationalcourseofaction.Inshort,undertheconditionsofconflicts anduncertainty,afirmoranindividualfacesproblemsimilartothatoftheplayerofanygame.Both

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MeaningAndImportanceOfManagerialEconomics

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these techniques are extensively used in business economics to solve various business and managerialproblems.

8.MARKETSTRUCTUREANDCONDITIONS
Theknowledgeofmarketstructureandconditionsexistinginvariouskindsofmarketsareofgreat importance in any business. The number of sellers and buyers, the nature, extent and degree of competitionetcdeterminesthenatureofpoliciestobeadoptedbyafirminthemarket.

9.STRATEGICPLANNING
It provides a framework on which long term decisions can be made which have an impact on the behaviorofthefirm.Thefirmsetscertainlongtermgoalsandobjectivesandselectsthestrategyto achievethesame.Itisnowanewadditiontothescopeofbusinesseconomicswiththeemergence of MNCs. The perspective of strategic planning is global. In fact, the integration of business economicsandstrategicplanninghasgivenrisetoanewareaofstudycalledcorporateeconomics.

10.OTHERAREAS
1. Macroeconomicmanagementofthecountryrelatingtoeconomicsystem,nationalincome,trade cyclesSavingsandinvestmentsanditsimpactontheworkingofafirm. 2. Budgetaryoperationsofthegovernmentanditsimplicationsonthefirm 3. Knowledge and information about various government policies like monetary, fiscal, physical, industrial,labor,foreigntrade,foreigncapitalandtechnology,MNCsetcandtheirimpactonthe workingofafirm. 4. Impactofliberalization,globalization,privatizationandmarketizationontheoperationsoffirm. 5. Impactofinternationalchanges,roleofinternationalfinancialandtradeinstitutionsinformulating domesticpolicesofafirm. 6. Problemsofenvironmentaldegradationandpollutionanditsimpactonthepoliciesofafirm. 7. Improvementsinthefieldofscienceandtechnologyanditsimpactonafirmetc 8. Sociopolitical,culturalandotherexternalforcesandtheirinfluenceofbusinessoperations. Thusitisclearthatthescopeofmanagerialeconomicsisexpandingwiththegrowthofmodern businessandbusinessenvironment.

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1.4ImportanceofthestudyofManagerialEconomics
ManagerialEconomicsdoesnotgiveimportancetothestudyoftheoreticaleconomicconcepts.Its mainconcernistoapplytheoriestofindsolutionstodaytodaypracticalproblemsfacedbyafirm. Thefollowingpointsindicatethesignificanceofthestudyofthissubjectinitsrightperspective. 1. Itgivesguidanceforidentificationofkeyvariablesindecisionmakingprocess. 2. Ithelpsthebusinessexecutivestounderstandthevariousintricaciesofbusinessandmanagerial problemsandtotakerightdecisionattherighttime. 3. It provides the necessary conceptual, technical skills, toolbox of analysis and techniques of thinkingandothersuchmostmoderntoolsandinstrumentslikeelasticityofdemandandsupply, costandrevenue,incomeandexpenditure,profitandvolumeofproductionetctosolvevarious businessproblems. 4. It is both a science and an art. In the context of globalization, privatization, liberalization and marketizationandahighlycompetitivedynamiceconomy,ithelpsinidentifyingvariousbusiness and managerial problems, their causes and consequence, and suggests various policies and programstoovercomethem. 5. It helps the business executives to become much more responsive, realistic and competent to facetheeverchangingchallengesinthemodernbusinessworld. 6. Ithelpsintheoptimumuseofscarceresourcesofafirmtomaximizeitsprofits. 7. Italsohelpsinachievingotherobjectivesafirmlikeattainingindustryleadership,marketshare expansionandsocialresponsibilitiesetc. 8. It helps afirm in forecasting the most importanteconomic variables like demand, supply, cost, revenue,price,salesandprofitetcandformulatesoundbusinesspolices 9. Italsohelpsinunderstandingthevariousexternalfactorsandforceswhichaffectthedecision makingofafirm. Thus,ithasbecomeahighlyusefulandpracticaldisciplineinrecentyearstoanalyzeandfind solutionstovariouskindsofproblemsinasystematicandrationalmanner.

1.5.TwomajorfunctionsofaManagerialEconomist.
A Managerial Economist is a specialist and an expert in analyzing and finding answers to businessandmanagerialproblems.Hehasindepthknowledgeofthesubject.Heisanauthorityand hastotalcommandoverhissubject.

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MeaningAndImportanceOfManagerialEconomics

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AManagerialEconomisthastoperformseveralfunctionsinanorganization.Amongthem,decision making and forward planning are described as the two major functions and all other functions are derivedfromthesetwobasicfunctions.Adetaileddescriptionofthetwofunctionsisgivenbelowfor aunderstanding. 1.Decisionmaking The word decision suggests a deliberate choice made out of several possible alternative courses of action after carefully considering them. The act of choice signifying solution to an economic problem is economic decision making. It involves choices among a set of alternative coursesofaction. Decisionmaking is essentially a process of selecting the best out of many alternative opportunitiesorcoursesofactionthatareopentoamanagement. Decisionmakingisamanagementfunction.Decisionmakingisaroutineaffairinanybusinessunit. Hence,itisapartofbusinessactivity.Itisabasicfunctionofamanagerialeconomist.Intheday todaybusiness,hehastotakeinnumerabledecisions. Sometimesthemanagertakesthedecision himself,sometimesincollaborationandconsultationswithothers.Somedecisionsaretakenonthe spotandsomeothersaretakenaftercarefulthinking.Somedecisionsaremajorandcomplexwhile othersareminorandsimple.Somedecisionsaretakenintheabsenceofanyinformation.Some decisions are taken in the background of certainty, known factors and information. Some other decisionsaretakeninthemidstofuncertainties. The choice made by the business executives are difficult, crucial and have farreaching consequences. The basic aim of taking a decision is to select the best course of action which maximizestheeconomicbenefitsandminimizestheuseofscarceresourcesofafirm.Hence,each decision involves costbenefit analysis. Any slight error or delay in decision making may cause considerableeconomicandfinancialdamagetoafirm.Itisforthisreason,managementexpertsare oftheopinionthatrightdecisionmakingattherighttimeisthesecretofasuccessfulmanager. 2.Forwardplanning Thetermplanning impliesaconsciouslydirectedactivity withcertainpredeterminedgoals and means to carry them out. It is a deliberate activity. It is a programmed action. Basically planningisconcernedwithtacklingfuturesituationsinasystematicmanner.

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Forwardplanningimpliesplanninginadvanceforthefuture. It is associated with deciding the futurecourseofactionofafirm.Itispreparedonthebasisofpastandcurrentexperienceofafirm. Itispreparedinthebackgroundofuncertainandunpredictableenvironmentandguesswork.Future events and happenings cannot be predicted accurately. The success or failure of the future plan dependsonanumberoffactorsandforceswhichareunknowninnature.Muchofeconomicactivity isforwardlooking.Everytimewebuildanewfactory,addtothestocksofinputs,trucks,computers or improvements in R&D, our intension is to enhance the future productivity of the firm. Growing firms devote a significant share of their current output to net capital formation to bolster future economicoutput.Abusinessexecutivemustbesufficientlyintelligentenoughtothinkinadvance, prepareasoundplanandtakeallpossibleprecautionarymeasurestomeetalltypesofchallengesof thefuturebusiness.Hence,forwardplanninghasacquiredgreatersignificanceinbusinesscircles.

1.6Summary
Managerial economics is a new and a highly specialized branch of economics. It brings together economic theory and business practice. It assists in applying various economic theories and principlestofindsolutionstobusinessandmanagementproblems. Itisappliedeconomicsandmakesanattempttoexplainhowvariouseconomicconceptsareusefully employed in business management. It is apractical subject. It opens up the mind ofa managerial economist to the complex and highly challenging business world. The features of managerial economicsthrowlightonthenatureoftheemergingsubjectandthescopegivesinformationabout thewidecoverageofthesubject.Theconceptsofdecisionmakingandforwardplanningarethetwo basic functions of a managerial economist. In a way the entire subject matter of managerial economicsistobeunderstoodinthebackgroundofthesetwofunctions

SelfAssessmentQuestions1
1. ManagerialEconomicsistheintegrationof________with____forsolvingbusinessand managementproblems. 2. ManagerialEconomicsfillsupthegapbetween_______and_______. 3. ManagerialEconomicsismainlya______science. 4. Basicobjectiveafirmtodayis________.
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5. ManagerialEconomicisbasicallyabranchof__economics. 6. TwomajorfunctionofaManagerialEconomicare______and______. TerminalQuestions 1. DefineManagerialEconomicandexplainitsmaincharacteristics. 2. DiscussthescopeofManagerialEconomics 3. ExplaintheimportanceofManagerialEconomics 4. DiscussthefunctionsofaManagerialEconomist AnswertoSAQsandTQs AnswerforSelfAssessmentQuestions1 1. Economictheory,BusinessPractice 2. EconomictheoryPractice. 3. Prescriptive 4. Profitoptimization 5. Micro 6. DecisionmakingForwardPlanning AnswertoTerminalQuestions 1. Refertounit1.2 2. Refertounit1.3 3. Refertounit1.4 4. Refertounit1.5

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