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MANAGERIAL ECONOMICS Managerial economics (sometimes referred to as business eco nomics) is a branch of economics that appliesmicroeconomic analysis to decision

methods of businesses or other management units. As such, it bridges economic th eory and economics in practice. It draws heavily from quantitative techniques su ch as regression analysis andcorrelation, Lagrangian calculus (linear). If there is a unifying theme that runs through most of managerial economics it is the at tempt to optimize business decisions given the firm's objectives and given const raints imposed by scarcity, for example through the use of operations research a nd programming. Almost any business decision can be analyzed with managerial eco nomics techniques, but it is most commonly applied to: Risk analysis - various m odels are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk. Production analysis - microeconomic techniques are used to analyze production ef ficiency, optimum factor allocation, costs, economies of scale and to estimate t he firm's cost function. Pricing analysis - microeconomic techniques are used to analyze various pricing decisions including transfer pricing,joint product pricing, price discrimination , price elasticity estimations, and choosing the optimum pricing method. Capital budgeting - Investment theory is used to examine a firm's capital purcha sing decisions. At universities, the subject is taught primarily to advanced undergraduates and graduate business schools. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses. In many countries it is possible to read for a degree in Business Economics which often covers managerial economics,financial economics, game theory, business forecast ing and industrial economics. MANAGERIAL ECONOMICS Managerial Economics can be defined as amalgamation of econ omic theory with business practices so as to ease decision-making and future pla nning by management. Managerial Economics assists the managers of a firm in a ra tional solution of obstacles faced in the firms activities. It makes use of econo mic theory and concepts. It helps in formulating logical managerial decisions. T he key of Managerial Economics is the micro-economic theory of the firm. It less ens the gap between economics in theory and economics in practice. Managerial Ec onomics is a science dealing with effective use of scarce resources. It guides t he managers in taking decisions relating to the firms customers, competitors, sup pliers as well as relating to the internal functioning of a firm. It makes use o f statistical and analytical tools to assess economic theories in solving practi cal business problems. Study of Managerial Economics helps in enhancement of ana lytical skills, assists in rational configuration as well as solution of problem s. While microeconomics is the study of decisions made regarding the allocation of resources and prices of goods and services, macroeconomics is the field of ec onomics that studies the behavior of the economy as a whole (i.e. entire industr ies and economies). Managerial Economics applies micro-economic tools to make bu siness decisions. It deals with a firm. The use of Managerial Economics is not l imited to profit-making firms and organizations. But it can also be used to help in decision-making process of non-profit organizations (hospitals, educational institutions, etc). It enables optimum utilization of scarce resources in such o rganizations as well as

helps in achieving the goals in most efficient manner. Managerial Economics is o f great help in price analysis, production analysis, capital budgeting, risk ana lysis and determination of demand. Managerial economics uses both Economic theor y as well as Econometrics for rational managerial decision making. Econometrics is defined as use of statistical tools for assessing economic theories by empiri cally measuring relationship between economic variables. It uses factual data fo r solution of economic problems. Managerial Economics is associated with the eco nomic theory which constitutes Theory of Firm. Theory of firm states that the prim ary aim of the firm is to maximize wealth. Decision making in managerial economi cs generally involves establishment of firms objectives, identification of proble ms involved in achievement of those objectives, development of various alternati ve solutions, selection of best alternative and finally implementation of the de cision. The following figure tells the primary ways in which Managerial Economic s correlates to managerial decision-making. Scope of Managerial Economics Managerial Economics deals with allocating the scarce resources in a manner that minimizes the cost. As we have already discussed, Managerial Economics is diffe rent from microeconomics and macro-economics. Managerial Economics has a more na rrow scope - it is actually solving managerial issues using micro-economics. Whe rever there are scarce resources, managerial economics ensures that managers mak e effective and efficient decisions concerning customers, suppliers, competitors as well as within an organization. The fact of scarcity of resources gives rise to three fundamental questionsa. What to produce? b. How to produce? c. For who m to produce? To answer these questions, a firm makes use of managerial economic s principles. The first question relates to what goods and services should be pr oduced and in what amount/quantities. The managers use demand theory for decidin g this. The demand theory examines consumer behaviour with respect to the kind o f purchases they would like to make currently and in future; the factors influen cing purchase and consumption of a specific good or service; the impact of chang e in these factors on the demand of that specific good or service; and the goods or services which consumers might not purchase and consume in future. In order to decide the amount of goods and services to be produced, the managers use meth ods of demand forecasting. The second question relates to how to produce goods a nd services. The firm has now to choose among different alternative techniques o f production. It has to make decision regarding purchase of raw materials, capit al equipments, manpower, etc. The managers can use various managerial

economics tools such as production and cost analysis (for hiring and acquiring o f inputs), project appraisal methods( for long term investment decisions),etc fo r making these crucial decisions. The third question is regarding who should con sume and claim the goods and services produced by the firm. The firm, for instan ce, must decide which is its niche marketdomestic or foreign? It must segment the market. It must conduct a thorough analysis of market structure and thus take p rice and output decisions depending upon the type of market. Managerial economic s helps in decision-making as it involves logical thinking. Moreover, by studyin g simple models, managers can deal with more complex and practical situations. A lso, a general approach is implemented. Managerial Economics take a wider pictur e of firm, i.e., it deals with questions such as what is a firm, what are the fi rms objectives, and what forces push the firm towards profit and away from profit . In short, managerial economics emphasizes upon the firm, the decisions relatin g to individual firms and the environment in which the firm operates. It deals w ith key issues such as what conditions favour entry and exit of firms in market, why are people paid well in some jobs and not so well in other jobs, etc. Manag erial Economics is a great rational and analytical tool. Managerial Economics is not only applicable to profit-making business organizations, but also to non- p rofit organizations such as hospitals, schools, government agencies, etc. Principles of Managerial Economics Economic principles assist in rational reasoning and defined thinking. They deve lop logical ability and strength of a manager. Some important principles of mana gerial economics are: Marginal and Incremental Principle This principle states that a decision is said to be rational and sound if given the firms objective of profit maximization, it leads to increase in profit, which is in either of two scenarios If total revenue increases more than total cost. If total revenue declines less than total cost. Marginal analysis implies judging the impact of a unit change in one variable on the other. Marginal generally refers to small changes. Marginal revenue is chan ge in total revenue per unit change in output sold. Marginal cost refers to chan ge in total costs per unit change in output produced (While incremental cost ref ers to change in total costs due to change in total output).The decision of a fi rm to change the price would depend upon the resulting impact/change in marginal revenue and marginal cost. If the marginal revenue is greater than the marginal cost, then the firm should bring about the change in price. Incremental analysi s differs from marginal analysis only in that it analysis the change in the firm 's performance for a given managerial decision, whereas marginal analysis often is generated by a change in outputs or inputs. Incremental analysis is generaliz ation of marginal concept. It refers to changes in cost and revenue due to a pol icy change. For example - adding a new business, buying new inputs, processing p roducts, etc. Change in output due to change in process, product or investment i s considered as incremental change. Incremental principle states that a decision is profitable if revenue increases more than costs; if costs reduce more than r evenues; if increase in some revenues is more than decrease in others; and if de crease in some costs is greater than increase in others. Equi-marginal Principle Marginal Utility is the utility derived from the additional unit of a commodity consumed. The laws of equi-marginal utility states that a consumer will reach th e stage of equilibrium when the marginal utilities of various commodities he con sumes are equal. According to the modern economists, this law has been formulate d in form of law of proportional marginal utility. It states that the consumer w

ill spend his money-income on different goods in such a way that the marginal ut ility of each good is proportional to its price, i.e., MUx / Px = MUy / Py = MUz / Pz Where, MU represents marginal utility and P is the price of good. Similarl y, a producer who wants to maximize profit (or reach equilibrium) will use the t echnique of production which satisfies the following condition: MRP1 / MC1 = MRP 2 / MC2 = MRP3 / MC3 Where, MRP is marginal revenue product of inputs and MC rep resents marginal cost.

Thus, a manger can make rational decision by allocating/hiring resources in a ma nner which equalizes the ratio of marginal returns and marginal costs of various use of resources in a specific use. Opportunity Cost Principle By opportunity cost of a decision is meant the sacrifice of alternatives require d by that decision. If there are no sacrifices, there is no cost. According to O pportunity cost principle, a firm can hire a factor of production if and only if that factor earns a reward in that occupation/job equal or greater than its oppo rtunity cost. Opportunity cost is the minimum price that would be necessary to r etain a factor-service in its given use. It is also defined as the cost of sacrif iced alternatives. For instance, a person chooses to forgo his present lucrative job which offers him Rs.50000 per month, and organizes his own business. The op portunity lost (earning Rs. 50,000) will be the opportunity cost of running his own business. Time Perspective Principle According to this principle, a manger/decision maker should give due emphasis, b oth to short-term and long-term impact of his decisions, giving apt significance to the different time periods before reaching any decision. Shortrun refers to a time period in which some factors are fixed while others are variable. The pro duction can be increased by increasing the quantity of variable factors. While l ong-run is a time period in which all factors of production can become variable. Entry and exit of seller firms can take place easily. From consumers point of v iew, short-run refers to a period in which they respond to the changes in price, given the taste and preferences of the consumers, while long-run is a time peri od in which the consumers have enough time to respond to price changes by varyin g their tastes and preferences. Discounting Principle According to this principle, if a decision affects costs and revenues in long-ru n, all those costs and revenues must be discounted to present values before vali d comparison of alternatives is possible. This is essential because a rupee wort h of money at a future date is not worth a rupee today. Money actually has time value. Discounting can be defined as a process used to transform future dollars into an equivalent number of present dollars. For instance, $1 invested today at 10% interest is equivalent to $1.10 next year. FV = PV*(1+r)t Where, FV is the future value (time at some future time), PV is the present value (value at t0, r is the discount (interest) rate, and t is the time between the future value and present value. Role of a Managerial Economist A managerial economist helps the management by using his analytical skills and h ighly developed techniques in solving complex issues of successful decision-maki ng and future advanced planning. The role of managerial economist can be summari zed as follows: 1. 2. 3. 4. 5. He studies the economic patterns at macro-level a nd analysis its significance to the specific firm he is working in. He has to con sistently examine the probabilities of transforming an ever-changing economic en vironment into profitable business avenues. He assists the business planning pro cess of a firm. He also carries cost-benefit analysis. He assists the management in the decisions pertaining to internal functioning of a firm such as changes i n price, investment plans, type of goods /services to be produced, inputs to be used, techniques of production to be employed, expansion/ contraction of firm, a llocation of capital, location of new plants, quantity of output to be produced, replacement of plant equipment, sales forecasting, inventory forecasting, etc. In addition, a managerial economist has to analyze changes in macro- economic in dicators such as national income, population, business cycles, and their possibl e effect on the firms functioning. He is also involved in advicing the management on public relations, foreign exchange, and trade. He guides the firm on the lik ely impact of changes in monetary and fiscal policy on the firms functioning. He

also makes an economic analysis of the firms in competition. He has to collect e conomic data and examine all crucial information about the environment in which the firm operates. The most significant function of a managerial economist is to conduct a detailed research on industrial market. In order to perform all these roles, a managerial economist has to conduct an elaborate statistical analysis. He must be vigilant and must have ability to cope up with the pressures. He als o provides management with economic information such as tax rates, competitors pr ice and product, etc. They give their valuable advice to government authorities as well. At times, a managerial economist has to prepare speeches for top manage ment. 6. 7. 8. 9. 10. 11. 12. 13. Consumer Demand - Demand Curve, Demand Function & Law of Demand

What is Demand? Demand for a commodity refers to the quantity of the commodity that people are w illing to purchase at a specific price per unit of time, other factors (such as price of related goods, income, tastes and preferences, advertising, etc) being constant. Demand includes the desire to buy the commodity accompanied by the wil lingness to buy it and sufficient purchasing power to purchase it. For instanceEveryone might have willingness to buy Mercedes-S class but only a few have the ab ility to pay for it. Thus, everyone cannot be said to have a demand for the car M ercedes-s Class. Demand may arise from individuals, household and market. When go ods are demanded by individuals (for instance-clothes, shoes), it is called as i ndividual demand. Goods demanded by household constitute household demand (for i nstance-demand for house, washing machine). Demand for a commodity by all indivi duals/households in the market in total constitute market demand. Demand Function Demand function is a mathematical function showing relationship between the quan tity demanded of a commodity and the factors influencing demand. Dx = f (Px, Py, T, Y, A, Pp, Ep, U) In the above equation, Dx = Quantity demanded of a commodit y Px = Price of the commodity Py = Price of related goods T = Tastes and prefere nces of consumer Y = Income level A = Advertising and promotional activities Pp = Population (Size of the market) Ep = Consumers expectations about future prices U = Specific factors affecting demand for a commodity such as seasonal changes, taxation policy, availability of credit facilities, etc. Law of Demand The law of demand states that there is an inverse relationship between quantity demanded of a commodity and its price, other factors being constant. In other wor ds, higher the price, lower the demand and vice versa, other things remaining co nstant. Demand Schedule Demand schedule is a tabular representation of the quantity demanded of a commod ity at various prices. For instance, there are four buyers of apples in the mark et, namely A, B, C and D. Demand schedule for apples PRICE (Rs. per dozen) Buyer A (demand in dozen) Buyer B (demand in dozen) Buyer C (demand in dozen) Buyer D (demand in dozen) Market Demand (dozens) 10 1 0 3 0 4 9 3 1 6 4 14

8 7 2 9 7 25 7 11 4 12 10 37 6 13 6 14 12 45 The demand by Buyers A, B, C and D are individual demands. Total demand by the f our buyers is market demand. Therefore, the total market demand is derived by su mming up the quantity demanded of a commodity by all buyers at each price. Demand Curve Demand curve is a diagrammatic representation of demand schedule. It is a graphi cal representation of price- quantity relationship. Individual demand curve show s the highest price which an individual is willing to pay for different quantiti es of the commodity. While, each point on the market demand curve depicts the ma ximum quantity of the commodity which all consumers taken together would be will ing to buy at each level of price, under given demand conditions.

Demand curve has a negative slope, i.e, it slopes downwards from left to right d epicting that with increase in price, quantity demanded falls and vice versa. Th e reasons for a downward sloping demand curve can be explained as follows1. Income effect- With the fall in price of a commodity, the purchasing power of co nsumer increases. Thus, he can buy same quantity of commodity with less money or he can purchase greater quantities of same commodity with same money. Similarly , if the price of a commodity rises, it is equivalent to decrease in income of t he consumer as now he has to spend more for buying the same quantity as before. This change in purchasing power due to price change is known as income effect. S ubstitution effect- When price of a commodity falls, it becomes relatively cheap er compared to other commodities whose price have not changed. Thus, the consume r tend to consume more of the commodity whose price has fallen, i.e, they tend t o substitute that commodity for other commodities which have not become relative ly dear. Law of diminishing marginal utility- It is the basic cause of the law o f demand. The law of diminishing marginal utility states that as an individual c onsumes more and more units of a commodity, the utility derived from it goes on decreasing. So as to get maximum satisfaction, an individual purchases in such a manner that the marginal utility of the commodity is equal to the price of the commodity. When the price of commodity falls, a rational consumer purchases more so as to equate the marginal utility and the price level. Thus, if a consumer w ants to purchase larger quantities, then the price must be lowered. This is what the law of demand also states. 2. 3. Exceptions to Law of Demand The instances where law of demand is not applicable are as follows1. 2. There are certain goods which are purchased mainly for their snob appeal, such a s, diamonds, air conditioners, luxury cars, antique paintings, etc. These goods are used as status symbols to display ones wealth. The more expensive these goods become, more valuable will be they as status symbols and more will be there dem and. Thus, such goods are purchased more at higher price and are purchased less at lower prices. Such goods are called as conspicuous goods. The law of demand i s also not applicable in case of giffen goods. Giffen goods are those inferior g oods, whose income effect is stronger than substitution effect. These are consum ed by poor households as a necessity. For instance, potatoes, animal fat oil, lo w quality rice, etc. An increase in price of such good increases its demand and a decrease in price of such good decreases its demand. The law of demand does no t apply in case of expectations of change in price of the commodity, i.e, in cas e ofspeculation. Consumers tend to purchase less or tend to postpone the purchas e if they expect a fall in price of commodity in future. Similarly, they tend to purchase more at high price expecting the prices to increase in future. 3. Nature Of Managerial Economics Managerial Economics and Business economics are the two terms, which, at times h ave been used interchangeably. Of late, however, the term Managerial Economics h as become more popular and seems to displace progressively the term Business Eco nomics. The prime function of a management executive in a business organization is decis ion-making and forward planning. Decision-making means the process of selecting one action from two or more alternative courses of action whereas forward planni

ng means establishing plans for the future. The question of choice arises becaus e resources such as capital, land, labour and management are limited and can be employed in alternative uses. The decision-making function thus becomes one of m aking choices or decisions that will provide the most efficient means of attaini ng a desired end, say, profit maximization. Once decision is made about the part icular goal to be achieved, plans as

to production, pricing, capital, raw materials, labour, etc., are prepared. Forw ard planning thus goes hand in hand with decision-making. A significant characte ristic of the conditions, in which business organizations work and take decision s, is uncertainty. And this fact of uncertainty not only makes the function of d ecision-making and forward planning complicated but adds a different dimension t o it. If knowledge of the future were perfect, plans could be formulated without error and hence without any need for subsequent revision. In the real world, ho wever, the business manager rarely has complete information and the estimates ab out future predicted as best as possible. As plans are implemented over time, mo re facts become known so that in their light, plans may have to be revised, and a different course of action adopted. Managers are thus engaged in a continuous process of decision-making through an uncertain future and the overall problem c onfronting them is one of adjusting to uncertainty. In fulfilling the function o f decision-making in an uncertainty framework, economic theory can be pressed in to service with considerable advantage. Economic theory deals with a number of c oncepts and principles relating, for example, to profit, demand, cost, pricing p roduction, competition, business cycles, national income, etc., which aided by a llied disciplines like Accounting. Statistics and Mathematics can be used to sol ve or at least throw some light upon the problems of business management. The wa y economic analysis can be used towards solving business problems. Constitutes t he subject-matte of Managerial Economics. Definition Of Managerial Economics According to McNair and Meriam, Managerial Economics consists of the use of econ omic modes of thought to analyse business situation Spencer and Siegelman have d efined Managerial Economics as the integration of economic theory with business p ractice for the purpose of facilitating decisionmaking and forward planning by m anagement. We may, therefore define Managerial Economics as the discipline which deals with the application of economic theory to business management. Managerial Economics thus lies on the borderline between economics and business management and serves as abridge between economics and business management and serves as a bridge between the two disciplines.See Chart1 Chart 1 Economics, Business Management and Managerial Economics. Aspects of Application Of Economics The application of economics to business management or the integration of econom ic theory with business practice, as Spencer and Siegelman have put it, has the following aspects: 1. Reconciling traditional theoretical concepts of economics in relation to the act ual business behavior and conditions. In economic theory, the technique of analysis is one of model building whereby certain assumptions are made and on that basis, conclusions as to the behavior of the firms are drown. The assumptions, however , make the theory of the firm unrealistic since it fails to provide a satisfacto ry explanation of that what the firms actually do. Hence the need to reconcile t he theoretical principles based on simplified assumptions with actual business p ractice and develops appropriate extensions and reformulation of economic theory , if necessary.

2. Estimating economic relationships, viz., measurement of various types of elastic ities of demand such as price elasticity, income elasticity, cross-elasticity, promoti onal elasticity, cost-output relationships, etc. the estimates of these economic relation-ships are to be used for purposes of forecasting. 3. Predicting releva nt economic quantities, eg., profit, demand, production, costs, pricing, capital , etc., in numerical terms together with their probabilities. As the business ma nager has to work in an environment of uncertainty, future is to be predicted so that in the light of the predicted estimates, decision-making and forward plann ing may be possible. 4. Using economic quantities in decision-making and forward planning, that is, formulating business policies and, on that basis, establishi ng business plans for the future pertaining to profit, prices, costs, capital, e tc. The nature of economic forecasting is such that it indicates the degree of p robability of various possible outcomes, i.e. losses or gains as a result of fol lowing each one of the strategies available. Hence, before a business manager th ere exists a quantified picture indicating the number o courses open, their poss ible outcomes and the quantified probability of each outcome. Keeping this pictu re in view, he decides about the strategy to be chosen. 5. Understanding significant external forces constituting the environment in which the business is operating and to which it must adjust, e.g., business cycles, fluctu ations in national income and government policies pertaining to public finance, fiscal policy and taxation, international economics and foreign trade, monetary economics, labour relations, anti-monopoly measures, industrial licensing, price controls, etc. The business manager has to appraise the relevance and impact of these external forces in relation to the particular business unit and its busin ess policies. Chief Characteristics Of Managerial Economics It would be useful to point out certain chief characteristics of Managerial Econ omics, inasmuch its they throw further light on the nature of the subject matter and help in a clearer understanding thereof. 1. 2. Managerial Economics micro-economic in character. Managerial Economics largely u ses that body of economic concepts and principles, which is known as Theory of the firm or Economics of the firm. In addition, it also seeks to apply Profit Theory, which forms part of Distribution Theories in Econo mics. 3. Managerial Economics is pragmatic. It avoids difficult abstract issues of economic theory but involves complications ignored in economic theory to face the overall situation in which decisions are made. Economic theory appropriatel y ignores the variety of backgrounds and training found in individual firms but Managerial Economics considers the particular environment of decision-making. 4. Managerial Economics belongs to normative economics rather than positive econom ics (also sometimes known as descriptive economics). In other words, it is presc riptive rather than descriptive. The main body of economic theory confines itsel f to descriptive hypothesis, attempting to generalize about the relations among different variables without judgment about what is desirable or undesirable. For instance, the law

of demand states that as price increases. Demand goes down or vice-versa but thi s statement does not tell whether the outcome is good or bad. Managerial Economi cs, however, is concerned with what decisions ought to be made and hence involve s value judgments. Production and Supply Production analysis is narrower in scope than cost analysis. Production analysis frequently proceeds in physical terms while cost analysis proceeds in monetary terms. Production analysis mainly deals with different production functions and their managerial uses. Supply analysis deals with various aspects of supply of a commodity. Certain imp ortant aspects of supply analysis are supply schedule, curves and function, law of supply and its limitations. Elasticity of supply and Factors influencing supp ly. Pricing Decisions, Policies and Practices Pricing is a very important area of Managerial Economics. In fact, price is the ness of the revenue of a firm and as such the success of a business firm largely depends on the correctness of the pries decisions taken by it. The important as pects alt with under this area is: Price Determination in various Market Forms, Pricing methods, Differential Pricing, Product-line Pricing and Price Forecastin g. Profit Management Business firms are generally organized for the purpose of making profits and, in long run, profits provide the chief measure of success. In this connection, an important point worth considering is the element of uncertainty exiting about pr ofits because of variations in costs and revenues which, in turn, are caused by torso both internal and external to the firm. If knowledge about the future were fact, profit analysis would have been a very easy task. However, in a world of certainty, expectations are not always realized so that profit planning and meas urement constitute the difficult are of Managerial Economics. The important acts covered under this area are: Nature and Measurement of Profit. Profit iciest an d Techniques of Profit Planning like Break-Even Analysis. Capital Management Of the various types and classes of business problems, the most complex and able some for the business manager are likely to be those relating to the firms inves tments. Relatively large sums are involved, and the problems are so complex that their disposal not only requires considerable time and labour but is a term for top-level decision. Briefly, capital management implies planning and trolls of capital expenditure. The main topics dealt with are: Cost of Capital. Rate retur n and Selection of Project. The various aspects outlined above represent the major uncertainties which a nes s firm has to reckon with, viz., demand uncertainty, cost uncertainty, price cer tainty, profit uncertainty, and capital

uncertainty. We can, therefore, conclude the subject-matter of Managerial Econom ic consists of applying economic cripples and concepts towards adjusting with va rious uncertainties faced by a ness firm. Managerial Economics And Other Subjects Yet another useful method of throwing light upon the nature and scope of manager ial Economics is to examine is relationship with other subjects. In this connect ion, Economics, statistics, Mathematics and Accounting deserve special mention. Managerial Economics and Economics Managerial Economics has been described as economics applied to decision- making . It may be viewed as a special branch of economics bridging the gulf between pu re economic theory and managerial practice. Economics has two main divisions: microeconomics and macroeconomics. Microeconom ics has been defined as that branch where the unit of study is an individual or a firm. Macroeconomics, on the other hand, is aggregate in character and has the entire economy as a unit of study. Microeconomics, also known as price theory (or Marshallian economics.) Is the ma in source of concepts and analytical tools for managerial economics. To illustra te various micro-economic concepts such as elasticity of demand, marginal cost, the short and the long runs, various market forms, etc. are all of great signifi cance to managerial economics. The chief contribution of macroeconomics is in th e area of forecasting. The modern theory of income and employment has direct imp lications for forecasting general business conditions. As the prospects of an in dividual firm often depend greatly on general business conditions, individual fi rm forecasts depend on general business forecasts. A survey in the U.K. has shown that business economists have found the following economic concepts quite useful and of frequent application: 1. 2. 3. 4. 5. 6. 7. 8. 9. Price elasticity of demand Income elasticity of demand Opportunity cost The mult iplier Propensity to consume Marginal revenue product Speculative motive Product ion function Balanced growth 10. Liquidity preference.

Business economics have also found the following main areas of economi9cs as use ful in their work 1. 2. 3. 4. 5. 6. 7. 8. Demand theory Theory of the firm-price, output and investment decisions Business financing Public finance and fiscal policy Money and banking National income an d social accounting Theory of international trade Economics of developing countr ies. Managerial Economics and Accounting Managerial Economics is also closely related to accounting, which is concerned w ith recording the financial operations of a business firm. Indeed, accounting in formation is one of the principal sources of data required by a managerial econo mist for his decision-making purpose. For instance, the profit and loss statemen t of a firm tells how well the firm has done and the information it contains can be used by managerial economist to throw significant light on the future course of action-whether it should improve or close down. Of course, accounting data c all for careful interpretation. Recasting and adjustment before they can be used safely and effectively. It is in this context that the growing link between management accounting and ma nagerial economics deserves special mention. The main task of management account ing is now seen as being to provide the sort of data which managers need if they are to apply the ideas of managerial economics to solve business problems corre ctly; the accounting data are also to be provided in a form so as to fit easily into the concepts and analysis of managerial economics. Uses Of Managerial Economics Managerial economics accomplishes several objectives. First, it presents those a spects of traditional economics, which are relevant for business decision making it real life. For the purpose, it culls from economic theory the concepts, prin ciples and techniques of analysis which have a bearing on the decision making pr ocess. These are, if necessary, adapted or modified with a view to enable the ma nager take better decisions. Thus, managerial economics accomplishes the objecti ve of building suitable tool kit from traditional economics. Secondly, it also incorporates useful ideas from other disciplines such a psycho logy, sociology, etc., if they are found relevant for decision making. In face m anagerial economics takes the aid of other academic disciplines having a bearing upon the business decisions of a manager in view of the carious explicit and im plicit constraints subject to which resource allocation is to be optimized. Thirdly, managerial economics helps in reaching a variety of business decisions. (i) What products and services should be produced?

(ii) What inputs and production techniques should be used? (iii) How much output should be produced and at what prices it should be sold? (iv) What are the best sizes and locations of new plants? (v) How should the available capital be allo cated? Fourthly, managerial economics makes a manager a more competent model guilder. T hus he can capture the essential relationships which characterize a situation wh ile leaving out the cluttering details and peripheral relationships. Fifthly, at the level of the firm, where for various functional areas functional specialists or functional departments exist, e.g., finance, marketing, personal production, etc., managerial economics serves as an integrating agent by co-coo rdinating the different areas and bringing to bear on the decisions of each depa rtment or specialist the implications pertaining to other functional areas. It t hus enables business decision- making not in watertight compartments but in an i ntegrated perspective, the significance of which lies in the fact that the funct ional departments or specialists often enjoy considerable autonomy and achieve c onflicting coals. Finally, managerial economics takes cognizance of the interaction between the fi rm and society and accomplishes the key role of business as an agent in the atta inment of social and economic welfare. It has come to be realized that business part from its obligations to shareholders has certain social obligations. Manage rial economics focuses attention on these social obligations as constraints subj ect to which business decisions are to be taken. In so doing, it serves as an in strument in rehiring the economic welfare of the society through socially orient ed business decisions. Managerial Economist Role And Responsibilities A managerial economist can play a very important role by assisting the Managemen t in using the increasingly specialized skills and sophisticated techniques whic h are required to solve the difficult problems of successful decision-making and forward planning. That is why, in business concerns, his importance is being gr owingly recognized. In advanced countries like the U.S.A., large companies emplo y one or more economists. In our country too, big industrial houses have come to recognize the need for managerial economists, and there are frequent advertisem ents for such positions. Tatas, DCM and Hindustan Lever employ economists. India n Petrochemicals Corporation Ltd., a Government of India undertaking, also keeps an economist. Let us examine in specific terms how a managerial economist can contribute to de cision-making in business. In this connection, two important questions need be c onsidered: 1. What role does he play in business, that is, what particular management problems lend themselves to solution through economic analysis?

2. How can the managerial economist best serve management, that is, what are the responsibilities of a successful managerial economist? Role Of Managerial Economist One of the principal objectives of any management in its decision-making process is to determine the key factors which will influence the business over the peri od ahead. In general, these factors can be divided into two-category (i) externa l and (ii) internal. The external factors lie outside the control management bec ause they are external to the firm and are said to constitute business environme nt. The internal factors he within the scope and operations of a firm and hence within the control of management, and they are known as business operations. To illustrate, a business firm is free to take decisions about what to invest, w here to invest, how much labour to employ and what to pay for it, how to price i ts products and so on but all these decisions are taken within the framework of a particular business environment and the firms degree of freedom depends on such factors as the governments economic policy, the actions of its competitors and t he like. Environmental Studies An analysis and forecast of external factors constituting general business condi tions, e.g., prices, national income and output, volume of trade, etc., are of g reat significance since every business from is affected by them. Certain importa nt relevant questions in this connection are as follows: 1. What is the outlook for the national economy? What are the most important local, regional or worldwide economic trends? What phase of the business cycle lies imm ediately ahead? 2. 3. What about population shifts and the resultant ups and dow ns in regional purchasing What are the demands prospects in new as well as estab lished markets? Will power? changes in social behavior and fashions tend to expa nd or limit the sales of a companys products, or possibly make the products obsol ete? 4. 5. 6. 7. 8. 9. Where are the market and customer opportunities likely to expand or contract most Will overseas markets expand or contract, and how will new foreign government Will the availability and cost of credit tend to increase or decrease buying? Are What the prices of raw materials and finished products are likely to be? Is competition likely to increase or decrease? What are the ma in components of the five-year plan? What are the areas where rapidly? legislati ons affect operation of the overseas plants? money or credit conditions ahead lik ely to be easy or tight? outlays have been increased? What are the segments, which have suffered a cut in their outlay? 10. What is the outlook regarding governments economic policies an d regulations? 11. What about changes in defense expenditure, tax rates, tariffs and import restrictions?

12. Will Reserve Banks decisions stimulate or depress industrial production and c onsumer spending? How will these decisions affect the companys cost, credit, sale s and profits? Reasonably accurate answers to these and similar questions can... Enable managements to chalk out more wisely the scope and direction of their own business plans and to determine the timing of their specific actions. And it is these questions which present some of the areas where a managerial economist can make effective contribution. The managerial economist has not only to study the economic trends at the macrolevel but must also interpret their relevance to the particular industry/firm wh ere he works. He has to digest the ever-growing economic literature and advise t op management by means of short, business-like practical notes. In a mixed economy like India, the managerial economist pragmatically interprets the intentions of controls and evaluates their impact. He acts as a bridge betw een the government and the industry, translating the governments intentions and t ransmitting the reactions of the industry. In fact, government policies charge o ut of the performance of industry, the expectations of the people and political expediency. Business Operations A managerial relating to ice, rate of questions in 1. 2. 3. 4. What will be a reasonable sales and profit budget for the next year? What will b e the most appropriate production Schedules and inventory policies for What chan ges in wage and price policies should be made now? How much cash will be availab le next month and how should it be invested? the next six months? Specific Functions A further idea of the role managerial economists can play, can be had from the f ollowing specific functions performed by them as revealed by a survey pertaining to Britain conducted by K.J.W. Alexander and Alexander G. Kemp: 1. 2. 3. 4. 5. Sales forecasting Industrial market research. Economic analysis of competing com panies. Pricing problems of industry. Capital projects. economist can also be helpful to the management in making decisions the internal operations of a firm in respect of such problems as pr operations, investment, expansion or contraction. Certain relevant this context would be as follows:

6. 7. 8. 9. Production programs. Security/investment analysis and forecasts. Advice on trade and public relations. Advice on primary commodities. 10. Advice on foreign exchange. 11. Economic analysis of agriculture. 12. Analys is of underdeveloped economics. 13. Environmental forecasting. The managerial economist has to gather economic data, analyze all pertinent info rmation about the business environment and prepare position papers on issues fac ing the firm and the industry. In the case of industries prone to rapid technolo gical advances, he may have to make a continuous assessment of the impact of cha nging technology. He may have to evaluate the capital budget in the light of sho rt and long-range financial, profit and market potentialities. Very often, he ma y have to prepare speeches for the corporate executives. It is thus clear that in practice managerial economists perform many and varied functions. However, of these, marketing functions, i.e., sales forecasting and i ndustrial market research, has been the most important. For this purpose, they m ay compile statistical records of the sales performance of their own business an d those relating to their rivals, carry our analysis of these records and report on trends in demand, their market shares, and the relative efficiency of their retail outlets. Thus while carrying out their functions; they may have to undert ake detailed statistical analysis. There are, of course, differences in the rela tive importance of the various functions performed from firm to firm and in the degree of sophistication of the methods used in carrying them out. But there is no doubt that the job of a managerial economist requires alertness and the abili ty to work under pressure. Economic Intelligence Besides these functions involving sophisticated analysis, managerial economist m ay also provide general intelligence service supplying management with economic information of general interest such as competitors prices and products, tax rat es, tariff rates, etc. In fact, a good deal of published material is already ava ilable and it would be useful for a firm to have someone who understands it. The managerial economist can do the job with competence. Participating in Public De bates May well-known business economists participate in public debates. Their advice a nd views are being sought by the government and society alike. Their practical e xperience in business and industry ads stature to their views. Their public reco gnition enhances their stature in the organization itself. Indian Context In the Indian context, a managerial economist is expected to perform the followi ng functions:

1. 2. 3. 4. 5. 6. 7. Macro-forecasting for demand and supply. Production planning at macro and micro levels. Capacity planning and product-mix determination. Economics of various pr oductions lines. Economic feasibility of new production lines/processes and proj ects. Assistance in preparation of overall development plans. Preparation of per iodical economic reports bearing on various matters such as the companys product-lines, future growth opportunities, market pricing situation, ge neral business, and various national/international factors affecting industry an d business. 8. 9. Preparing briefs, speeches, articles and papers for top manage ment for various Keeping management informed o various national and internationa l developments on Chambers, Committees, Seminars, Conferences, etc. economic/ind ustrial matters. With the adoption of the New Economic Policy, the macro-economic Environment is changing fast at a pace that has been rarely witnessed before. And these changes have tremendous implications for business. The managerial economist has to play a much more significant role. He has to constantly gauge the possibilities of t ranslating the rapidly changing economic scenario into viable business opportuni ties. As India marches towards globalization, he will have to interpret the glob al economic events and find out how his firm can avail itself of the carious exp ort opportunities or of establishing plants abroad either wholly owned or in ass ociation with local partners. Responsibilities Of Managerial Economist Having examined the significant opportunities before a managerial economist to c ontribute to managerial decision-making, let us next examine how he can best ser ve the management. For this, he must thoroughly recognize his responsibilities a nd obligations. A managerial economist can serve management best only if he always keeps in mind the main objective of his business, viz., to make a profit on its invested capi tal. His academic training and the critical comments from people outside the bus iness may lead a managerial economist to adopt an apologetic or defensive attitu de towards profits. Once management notices this, his effectiveness is almost su re to be lost. In fact, he cannot expect to succeed in serving management unless he has a strong personal conviction that profits are essential and that his chi ef obligation is to help enhance the ability of the firm to make profits. Most management decisions necessarily concern the future, which is rather uncert ain. It is, therefore, absolutely essential that a managerial economist recogniz es his responsibility to make successful forecasts. By making best possible fore casts and through constant efforts to improve upon them, he should aim at minimi zing, if not completely eliminating, the risks involved in uncertainties, so tha t the management can follow a more orderly course of business planning. At times , he will have to reassure the management that an important trend will continue; in other

cases, he may have to point out the probabilities of a turning point in some act ivity of importance to management. In any case, he must be willing to make consi dered but fairly positive statements about impending economic developments, base d upon the best possible information and analysis and stake his reputation upon his judgment. Nothing will build management confidence in a managerial economist more quickly and thoroughly than a record of successful forecasts, well documen ted in advance and modestly evaluated when the actual results become available. A few corollaries to the above proposition need also be emphasized here. First, he has a major responsibility to alert management at the earliest possible moment in case he discovers an error in his forecast. By promptly drawing atten tion to changes in forecasting conditions, he will not only assist management in making appropriate adjustment in policies and programs but will also be able to strengthen his own position as a member of the management team by keeping his f ingers on the economic pulse of the business. Secondly, he must establish and maintain many contacts with individuals and data sources, which would not be immediately available to the other members of the m anagement. Extensive familiarity with reference sources and material is essentia l, but it is still more important that he knows individuals who are specialists in particular fields having a bearing on his work. For this purpose, he should j oin professional associations and take active part in them. In fact, one of the best means of determining the caliber of a managerial economist is to evaluate h is ability to obtain information quickly by personal contacts rather than by len gthy research from either readily available or obscure reference sources. Within any business, there may be a wealth of knowledge and experience but the manager ial economist would be really useful if he can supplement the existing know-how with additional information and in the quickest possible manner. Again, if a managerial economist is to be really helpful to the management in su ccessful decisionmaking and forward planning, he must be able to earn full statu s on the business team. He should be ready and even offer himself to take up spe cial assignments, be that in study teams, committees or special projects. For, a managerial economist can only function effectively in an atmosphere where his s uccess or failure can be traced not only to his basic ability, training and expe rience, but also to his personality and capacity to win continuing support for h imself and his professional ideas. Of course, he should be able to express himse lf clearly and simply and must always try to minimize the use of technical termi nology in communicating with his management executives. For, it is well known th at hat management does not understand, it will almost automatically reject. Furt her, while intellectually he must be in tune with industrys thinking the wider na tional perspective should not be absents from his advice to top management. Question Bank 1. 2. 3. 4. Define managerial economics with definition How does managerial econ omics differ from economics? Write a short note on managerial economist. Explain the scope of managerial economics.