Managerial Economics

Introduction

Managerial Economics as a subject gained popularity in USA after the publication of the
book Managerial Economics by Joel Dean in 1951.

Managerial Economics refers to the firms decision making process. It could be also
interpreted as Economics of Management or Economics of Management. Managerial
Economics is also called as Industrial Economics or Business Economics.

Meaning & Definition:

In the words of E. F. Brigham and J. L. Pappas Managerial Economics is the
applications of economics theory and methodology to business administration practice.

M. H. Spencer and Louis Siegel man explain the Managerial Economics is the
integration of economic theory with business practice for the purpose of facilitating
decision making and forward planning by management.

Managerial Economics, therefore, focuses on those tools and techniques, which are
useful in decision-making.


























Scope of Managerial Economics
Demand Analysis and Forecasting: A major part of the managerial decision
making depends on accurate estimates of demand. Demand analysis helps to
identify the various factors influencing the demand for a firms product and thus
provides guidelines, therefore, is essential for business planning and occupies a
strategic place in managerial economics. It mainly consists of discovering the
forces determining sales and their measurement. it also covers the chief topic of
Demand forecasting.
Cost and Production Analysis: Cost estimates are significant for planning. The
factors causing variations in costs have to be identified. Planning for cost
minimization is necessary for increasing profit. Production analysis is narrower in
scope than cost analysis. The topics like cost concepts and classifications, cost-
output relationships, production functions and cost controls.
Pricing strategies, policies and practices: Pricing is a very important area of
managerial economics. The success of a business firm largely depends on the
correctness of the price decisions taken by it. The concepts lie price discrimination
in various market forms, pricing methods and price forecasting are covered .
Profit Management: Business firms are organized for the purpose of making
profit. It is the chief measure of success. If the knowledge about the future is not
perfect, than profit analysis is very difficult task. The important aspects like nature
and measurement of profit, profit policies and techniques of profit planning like
Break-even analysis are covered.
Capital Management: The most complex problems for the business manager are
firms capital investments. Capital management implies planning and control of
capital expenditure. The topics dealt with are cost, rate of capital return and
selection of projects.








SIGNIFICANCE OF ELASTICITY OF DEMAND
The concept of elasticity of demand is of much practical importance.
1. Price fixation: Each seller under monopoly and imperfect competition has to take into
account elasticity of demand while fixing the price for his product. If the demand for the product
is inelastic, he can fix a higher price.
2. Production: Producers generally decide their production level on the basis of demand for the
product. Hence elasticity of demand helps the producers to take correct decision regarding the
level of cut put to be produced.
3. Distribution: Elasticity of demand also helps in the determination of rewards for factors of
production. For example, if the demand for labour is inelastic, trade unions will be successful in
raising wages. It is applicable to other factors of production.
4. International Trade: Elasticity of demand helps in finding out the terms of trade between
two countries. Terms of trade refers to the rate at which domestic commodity is exchanged for
foreign commodities. Terms of trade depends upon the elasticity of demand of the two countries
for each other goods.
5. Public Finance: Elasticity of demand helps the government in formulating tax policies. For
example, for imposing tax on a commodity, the Finance Minister has to take into account the
elasticity of demand.
6. Nationalization: The concept of elasticity of demand enables the government to decide about
nationalization of industries.

FACTORS GOVERNING DEMAND FORECASTING

1. Functional nature of demand: Market demand for a particular product or
service is not a single number, but it is a function of number of factors. A
change in any one factor will change the demand forecasting.
2. Type of forecast: Based on the period the demand forecast can be of two
types.

a. Short run forecast: Short run forecast covers a period of one year. A
short run forecast of the total demand for a particular product helps to
provide a basis for ordering the raw materials, to plan & schedule
production activities and to seek short term finance.

b. Long run forecast: A long run forecast provides information for major
decisions that result in expansion or reducing the limited resources.
3. Forecasting level: The forecasting can be at
a. Firm level
b. Industry level
c. National level
d. Global level.

4. Degree of orientation: Demand forecasting can be worked out on the basis
of Total sales or product by service wise sales for a given type.
When the demand forecasting is for the total sales it
is known as General forecasting. When the demand forecasting is for
product by service wise it is called as Specific forecast.

5. For established and new product: For established products we can have
the past data, industry demand and market share of competitors.
For a new product:
a. Evolutionary Approach: The demand for the new product may be
considered as an outgrowth of an existing product.
b. Substitute Approach: if the new product developed serves as substitute
for the existing product, the demand for the new product may be
worked out on the basis of a market share.
c. Growth curve Approach: The rate of growth and the ultimate level of
the demand for the new product are estimated on the basis of the
pattern of growth of established product.
d. Opinion poll Approach: The potential buyers are directly contacted, or
through the use of samples of the new product and their responses are
found out. These are finally blown up to forecast the demand for the
new product.
e. Sales experience Approach: offer the new product for sale in a sample
market and estimate of sales obtained may be blown up to arrive at
estimated demand for the product.
f. Vicarious Approach: A firm will survey consumers reactions to a new
product indirectly through getting in touch with dealers. The
information given by the dealers will help in estimation of future
demand.



6. Nature of Goods: The goods are classified into
a. Producer goods
b. Consumers goods
c. Durables goods
d. Perishable goods.


METHODS OF DEMAND FORECASTING
Several methods are employed for forecasting demand. All these
methods can be grouped under survey method and statistical
method. Survey methods, statistical methods and other methods
are further subdivided in to different categories.
1. Survey Method:
Under this method, information about the desires of the consumer and
opinion of experts are collected by interviewing them.

a. Census method: When opinions of the entire buyer are taken into
consideration for demand forecasting it called as Census method.

b. Sample method: When the opinions are taken from a selected group who
can represent the whole population, this is known as Sample method.


c. Sales force opinion method: . Under this method, the company asks its
salesman to submit estimate of future sales in their respective territories.
Since the forecasts of the salesmen are biased due to their optimistic or
pessimistic attitude ignorance about economic developments etc. these
estimates are consolidated, reviewed and adjusted by the top executives.

2. Statistical Methods:

Statistical method is used for long run forecasting. In this method, statistical
and mathematical techniques are used to forecast demand. This method
relies on post data.

a. Time series analysis or trend projection methods:
A well-established firm would have accumulated data. These data are
analyzed to determine the nature of existing trend. Then, this trend is
projected in to the future and the results are used as the basis for forecast.
This is called as time series analysis. This data can be presented either in a
tabular form or a graph. In the time series post data of sales are used to
forecast future.

b. Economic Indicators: Under this method a few economic indicators
become the basis for forecasting the sales of a company. It gives the signal
about the direction of change in an economic variable.
a. Construction contracts santioncted for demand towards
building materials.
b. Personal income towards demand for consumer goods.
3. Other methods
a. Experts opinion or Delphi Method : A variant of the survey
method is Delphi method. It is a sophisticated method to arrive at a
consensus. Under this method, a panel is selected to give suggestions to
solve the problems in hand. Both internal and external experts can be the
members of the panel. Panel members one kept apart from each other and
expresses their views in an anonymous manner.
b. Controlled Experiments: it refers to such exercise where some of
the major determinants of demand are manipulated to suite to the consumer
with different tastes and preferences, income. It is further assumed that all
other factors remain the same.
c. judgmental approach: when the management has no alternatives other
than using its own judgment than it is known as judgmental approach.