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Definitions

Managerial economics is a study of application of managerial skills in economics,more over it help to find problems or obstacles in the business and provide solution for those problems.problems may be relating to costs,prices,forecasting the future market,human resource management,profits etc. Managerial economics is a study of application of managerial skills in economics,more over it help to find problems or obstacles in the business and provide solution for those problems.problems may be relating to costs,prices,forecasting the future market,human resource management,profits etc.

Managerial economics (also called business economics), is a branch of economics that applies microeconomic analysis to specific business decisions. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis and correlation, Lagrangian calculus (linear). If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of operations research and programming. Nature of Managerial Economics:

Application of Economics to Business Management


The application of economics to business management or the integration of economic 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 actual 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 satisfactory explanation of that what the firms actually do. Hence the need to reconcile the theoretical principles based on simplified assumptions with actual business practice and develops appropriate extensions and reformulation of economic theory, if necessary.

2. Estimating economic relationships, viz., measurement of various types of elasticities of demand such as price elasticity, income elasticity, cross-elasticity, promotional elasticity, cost-output relationships, etc. The estimates of these economic relationships are to be used for purposes of forecasting. 3. Predicting relevant economic quantities, eg., profit, demand, production, costs, pricing, capital, etc., in numerical terms together with their probabilities. As the business manager 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 planning may be possible. 4. Using economic quantities in decision making and forward planning, that is, formulating business policies and, on that basis, establishing business plans for the future pertaining to profit, prices, costs, capital, etc. The nature of economic forecasting is such that it indicates the degree of probability of various possible outcomes, i.e. losses or gains as a result of following each one of the strategies available. Hence, before a business manager there exists a quantified picture indicating the number o courses open, their possible outcomes and the quantified probability of each outcome. Keeping this picture 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, fluctuations 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 business policies.

Characteristics of Managerial Economics

It would be useful to point out certain chief characteristics of Managerial Economics, in as much its they throw further light on the nature of the subject matter and help in a clearer understanding thereof. 1. Managerial Economics is micro-economic in character. 2. Managerial Economics largely uses 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 Economics.

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 appropriately 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 economics (also sometimes known as Descriptive Economics). In other words, it is prescriptive rather than descriptive. The main body of economic theory confines itself 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 this statement does not tell whether the outcome is good or bad. Managerial Economics, however, is concerned with what decisions ought to be made and hence involves 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 important aspects of supply analysis are supply schedule, curves and function, law of supply and its limitations. Elasticity of supply and Factors influencing supply.

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 prices decisions taken by it. The important aspects dealt with under this area are :- Price Determination in various Market Forms, Pricing methods, Differential Pricing, Product-line Pricing and Price Forecasting.

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 profits 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 measurement constitute the difficult are of Managerial Economics. The important acts covered under this area are :- Nature and Measurement of Profit, Profit Testing and 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 investments. 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 return and Selection of Project.

The various aspects outlined above represent the major uncertainties which a ness firm has to reckon with, viz., demand uncertainty, cost uncertainty, price certainty, profit uncertainty, and capital uncertainty. We can, therefore, conclude the subject matter of Managerial Economic consists of applying economic cripples and concepts towards adjusting with various uncertainties faced by a ness firm.

Managerial Economics and Other Subjects

Yet another useful method of throwing light upon the nature and scope of Managerial Economics is to examine its relationship with other subjects. In this connection, 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 pure economic theory and managerial practice. Economics has two main divisions :- (i) Microeconomics and (ii) Macroeconomics. Microeconomics has been defined as that branch of economics 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 main source of concepts and analytical tools for managerial economics. To illustrate various microeconomic concepts such as elasticity of demand, marginal cost, the short and the long runs, various market forms, etc., all are of great significance to managerial economics. The chief contribution of macroeconomics is in the area of forecasting. The modern theory of income and employment has direct implications for forecasting general business conditions. As the prospects of an individual firm often depend greatly on general business conditions, individual firm 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. Price elasticity of demand, 2. Income elasticity of demand, 3. Opportunity cost, 4. The multiplier, 5. Propensity to consume, 6. Marginal revenue product, 7. Speculative motive, 8. Production function, 9. Balanced growth, and 10. Liquidity preference. Business economics have also found the following main areas of economics as useful in their work :1. Demand theory, 2. Theory of the firm-price, output and investment decisions, 3. Business financing,

4. Public finance and fiscal policy, 5. Money and banking, 6. National income and social accounting, 7. Theory of international trade, and 8. Economics of developing countries. Managerial Economics and Management Accounting Managerial Economics is also closely related to accounting, which is concerned with recording the financial operations of a business firm. Indeed, accounting information is one of the principal sources of data required by a managerial economist for his decision making purpose. For instance, the profit and loss statement 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 call 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 managerial economics deserves special mention. The main task of management accounting 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 correctly; 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 aspects of traditional economics, which are relevant for business decision making it real life. For the purpose, it calls from economic theory the concepts, principles and techniques of analysis which have a bearing on the decision making process. These are, if necessary, adapted or modified with a view to enable the manager take better decisions. Thus, managerial economics accomplishes the objective of building suitable tool kit from traditional economics. Secondly, it also incorporates useful ideas from other disciplines such a psychology, sociology, etc., if they are found relevant for decision making. In fact managerial 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 implicit constraints subject to which resource allocation is to be optimized. Thirdly, managerial economics helps in reaching a variety of business decisions. 1. What products and services should be produced? 2. What inputs and production techniques should be used? 3. How much output should be produced and at what prices it should be sold? 4. What are the best sizes and locations of new plants? 5. How should the available capital be allocated? Fourthly, managerial economics makes a manager a more competent model builder. Thus he can capture the essential relationships which characterize a situation while 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 coordinating the different areas and bringing to bear on the decisions of each department or specialist the implications pertaining to other functional areas. It thus enables business decision making not in watertight compartments but in an integrated perspective, the significance of which lies in the fact that the functional departments or specialists often enjoy considerable autonomy and achieve conflicting coals. Finally, managerial economics takes cognizance of the interaction between the firm and society and accomplishes the key role of business as an agent in the attainment of social and economic welfare. It has come to be realized that business part from its obligations to shareholders has certain social obligations. Managerial economics focuses attention on these social obligations as constraints subject to which business decisions are to be taken. In so doing, it serves as an instrument in rehiring the economic welfare of the society through socially oriented business decisions.

Role and Responsibilities of Managerial Economist

A managerial economist can play a very important role by assisting the Management in using the increasingly specialized skills and sophisticated techniques which are required to solve the difficult problems of successful decision making and forward planning. That is why, in business concerns, his importance is being growingly recognized. In developed countries like the U.S.A., large companies employ one or more economists. In our country (India) too, big

industrial houses have come to recognize the need for managerial economists, and there are frequent advertisements for such positions. Tatas and Hindustan Lever employ economists. Indian 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 decision making in business. In this connection, two important questions need be considered :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?

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 pure economic theory and managerial practice. Economics has two main divisions :- (i) Microeconomics and (ii) Macroeconomics. Microeconomics has been defined as that branch of economics 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 main source of concepts and analytical tools for managerial economics. To illustrate various microeconomic concepts such as elasticity of demand, marginal cost, the short and the long runs, various market forms, etc., all are of great significance to managerial economics. The chief contribution of macroeconomics is in the area of forecasting. The modern theory of income and employment has direct implications for forecasting general business conditions. As the prospects of an individual firm often depend greatly on general business conditions, individual firm 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. Price elasticity of demand, 2. Income elasticity of demand, 3. Opportunity cost, 4. The multiplier, 5. Propensity to consume, 6. Marginal revenue product, 7. Speculative motive, 8. Production function, 9. Balanced growth, and 10. Liquidity preference. Business economics have also found the following main areas of economics as useful in their work :1. Demand theory, 2. Theory of the firm-price, output and investment decisions, 3. Business financing, 4. Public finance and fiscal policy, 5. Money and banking, 6. National income and social accounting, 7. Theory of international trade, and 8. Economics of developing countries.

Managerial Economics and Management Accounting Managerial Economics is also closely related to accounting, which is concerned with recording the financial operations of a business firm. Indeed, accounting information is one of the principal sources of data required by a managerial economist for his decision making purpose. For instance, the profit and loss statement 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 call 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 managerial economics deserves special mention. The main task of management accounting 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 correctly; the accounting data are also to be provided in a form so as to fit easily into the concepts and analysis of managerial economics.