Assignment 1

MANAGERIAL ECONOMICS

Submitted By;

Pushpit Khare

MBA 1st SEMESTER

Question 1:

Distinguish between Micro economics, Macro economics and Managerial

economics?

Answer:

Micro economics focuses on the actions or behavior of individual consumers,

industry, producers, firms and their interaction in markets; Micro economics
focuses on supply and demand and other forces that determine the price levels in
the economy. It takes what referred to as a bottom-up approach to analyzing the
economy. Managerial economics is an applied specialty of this branch. Macro
economics deals with the performance, structure, and behavior of an economy as a
whole. Managerial economics applies Micro economics theories and techniques
to management decisions. It is more limited in scope as compared to micro
economics. The economic way of thinking about business decision making
provides all managers with a powerful set of tools and insights for furthering the
goals of their organization. Successful managers take good decisions, and one of
their most useful tools is the methodology of Managerial economics.

Macro economists study aggregate indicators such as GDP, savings, investment,

tax collection, government expenditure, foreign trade, money supply, to understand
the functions of the whole economy. Macro economics examines economy-wide
phenomena such as gross domestic product (GDP) and how it is affected by
changes in unemployment, national income, rate of growth, and price levels.

Micro economics and Managerial economics both encourage the use of

quantitative methods to analyze economic data. Businesses have finite human and
financial resources; Managerial economic principles can aid management
decisions in allocating these resources efficiently. Macro economics models and
their estimates are used by the government to assist in the development of
economic policy.
Question 2:

What is Managerial economics? Why does study Managerial economics?

Answers:

Managerial economics is the study of how scarce resources are directed most
efficiently to achieve managerial goals. It is a valuable tool for analyzing business
situations to take better decisions.

OR

Managerial economics is economics applied in decision making. It is a special

branch of economics bridging the gap between abstract theory and managerial
practice.

A good grasp of economics is vital for managerial decision making, for designing
and understanding public policy, and to appreciate how an economy functions. The
students need to know how economics can help us to understand what goes on in
the world and how it can be used as a practical tool for decision making. Managers
and CEO’s of large corporate bodies, managers of small companies, nonprofit
organizations, service centers etc., cannot succeed in business without a clear
understanding of how market forces create both opportunities and constraints for
business enterprises.

Reasons for Studying Economics:

 It is a study of society and as such is extremely important.

 It trains the mind and enables one to think systematically about the
problems of business and wealth.
 From a study of the subject it is possible to predict economic trends with
some precision.
 It helps one to choose from various economic alternatives.
Question 3:

Describe the circular flow of economic activity of India?

Answer:

The circular flow of economic activity:

The individuals own or control resources which are necessary inputs for the firms
in the production process. These resources (factors of production) are classified
into four types;

 Land
 Labour
 Capital
 Entrepreneurship

 Land: It includes all natural resources on the earth and below the earth. Non
renewable resources such as oil, coal etc once used will never be replaced. It
will not be available for our children. Renewable resources can be used and
replaced and is not depleted with use.
 Labour: It is the work force of an economy. The value of the worker is
called as human capital.
 Capital: It is classified as working capital and fixed capital (not transformed
into final products )
 Entrepreneurship: It refers to the individuals who organize production and
take risks.

All these resources are allocated in an effective manner to achieve the objectives of
consumers (to maximize satisfaction), workers (to maximize wages), firms (to
maximize the output and profit) and government (to maximize the welfare of the
society).

The fundamental economic activities between households and firms are shown in
the diagram. The circular flows of economic activities are explained in a
clockwise and counter-clockwise flow of goods and services. The four sectors
namely households, business, government and the rest of the world can also be
considered to see the flow of economic activities. The circular flow of activity is
a chain in which production creates income, income generates spending and
spending in turn induces production.

The major four sectors of the economy are engaged in three economic activities of
production, consumption and exchange of goods and services. These sectors are as
follows:

 Households: Households fulfill their needs and wants through purchase of

goods and services from the firms. They are owners and suppliers of factors
of production and in turn they receive income in the form of rent, wages and
interests.
 Firms: Firms employ the input factors to produce various goods and
services and make payments to the households.
 Government: The government purchases goods and services from firms
and also factors of production from households by making payments.
 Foreign sector: Households, firms and government of India purchase goods
and services (import) from abroad and make payments. On the other hand
all these sectors sell goods and services to various countries (export) and in
turn receive payments from abroad.
The above said four agents take economic decisions to produce goods and services
and to exchange them and to consume them for satisfying the wants of the
economy as a whole. Understanding the opportunities and constraints in the
exchange is essential to take better decision in business. This is discussed in the
forthcoming chapters in detail.

The economy comprises of the interaction of households, firms, government and

other nations. Households own resources and supply factor services like land, raw
material, labour and capital to the firms which helps them to produce goods and
services. In turn, firms pay rent for land, wages for their labour and interest against
the capital invested by the households. The earnings of the household are used to
purchase goods and services from the firms to fulfill their needs and wants, the
remaining is saved and it goes to the capital market and is converted as
investments in various businesses.

The household and business firms have to pay taxes to the government for
enjoying the services provided. On the other hand firms and households purchase
goods and services (import) from various countries of the world. Firms tend to sell
their products to the foreign customers (export) who earn income for the firm and
foreign exchange for the country. Therefore, it is clear that households supply
input factors, which flow to firms. Goods and services produced by firms flow to
households. Payment flows in the opposite direction.
Question 4:

Describe the nature of the Firm?

Answer:

A firm is an association of individuals who have organized themselves for the

purpose of turning inputs into output. The firm organizes the factors of production
to produce goods and services to fulfill the needs of the households. Each firm lays
down its own objectives which is fundamental to the existence of a firm.

Firms are established to earn profit, to keep the shareholders happy. To increase
their market share, they try to maximize their sales. In the present business world
firms try to produce goods and services without harming the environment. Firms
are not always able to operate at a profit. They may be facing the operating loss
also. Economists believe that firms maximize their long run rather than their short
run profit. So managers have to make enough profit to satisfy the demands of their
shareholders and to maximize their wealth through the company.

 The primary function of management executive in a business organization is

decision making and forward planning.
 Decision making and forward planning go hand in hand with each other.
Decision making means the process of selecting one action from two or
more alternative courses of action. Forward planning means establishing
plans for the future to carry out the decision so taken.
 The problem of choice arises because resources at the disposal of a business
unit (land, labour, capital, and managerial capacity) are limited and the firm
has to make the most profitable use of these resources.
 The decision making function is that of the business executive, he takes the
decision which will ensure the most efficient means of attaining a desired
objective, say profit maximisation. After taking the decision about the
particular output, pricing, capital, raw-materials and power etc., are
prepared. Forward planning and decision-making thus go on at the same
time.
 A business manager’s task is made difficult by the uncertainty which
surrounds business decision-making. Nobody can predict the future course
of business conditions. He prepares the best possible plans for the future
depending on past experience and future outlook and yet he has to go on
 revising his plans in the light of new experience to minimise the failure.
Managers are thus engaged in a continuous process of decision-making
through an uncertain future and the overall problem confronting them is one
of adjusting to uncertainty.
 In fulfilling the function of decision-making in an uncertainty framework,
economic theory can be, pressed into service with considerable advantage as
it deals with a number of concepts and principles which can be used to solve
or at least throw some light upon the problems of business management.
Examples are profit, demand, cost, pricing, production, competition,
business cycles, national income etc. The way economic analysis can be
used towards solving business problems, constitutes the subject-matter of
Managerial Economics.
Question 5:

List out the major objectives of the firm?

Answers:

The major objectives of the firm are:

 To achieve the Organizational Goal

 To maximize the Output
 To maximize the Sales
 To maximize Shareholder’s Return on Investment
 To maximize the Profit of the Organization
 To maximize the Customer and Stakeholders Satisfaction
 To maximize the Growth of the Organization
Question 6:

How does managerial economics relate with other disciplines for propounding
its theories?

Answer:

Managerial economics has its relationship with other disciplines for propounding
its theories and concepts for managerial decision making. Essentially it is a branch
of economics. Managerial economics is closely related to certain subjects like
statistics, mathematics, accounting and operations research.

Managerial economics helps in estimating the product demand, planning of

production schedule, deciding the input combinations, estimation of cost of
production, achieving economies of scale and increasing the returns to scale. It also
includes determining price of the product, analyzing market structure to determine
the price of the product for profit maximization, which helps them to control and
plan capital in an effective manner.

Successful mangers make good decisions, and one of their most useful tools is the
methodology of managerial economics. Warren E Buffett, the renowned chairman
and CEO of Berkshire Hathaway Inc., invested $100 and went on to accumulate a
personal net worth of $30 billion. Buffett credits his success to a basic
understanding of managerial economics. Buffett’s success is a powerful testimony
to the practical usefulness of managerial economics.

Nature of Managerial Economics:

 Managerial economics is concerned with the analysis of finding optimal

solutions to decision making problems of businesses/ firms (micro economic
in nature).
 Managerial economics is a practical subject therefore it is pragmatic.
 Managerial economics describes, what is the observed economic
phenomenon (positive economics) and prescribes what ought to be
(normative economics)
 Managerial economics is based on strong economic concepts. (conceptual in
nature)
  Managerial economics analyses the problems of the firms in the perspective
of the economy as a whole ( macro in nature)
 It helps to find optimal solution to the business problems (problem solving)

Managerial economics has a very important role to play by helping managements

in successful decision making and forward planning. To discharge his role
successfully, a manager must recognize his responsibilities and obligations. There
is a growing realization that the managers contribute significantly to the profitable
growth of the firms.

We can conclude that managerial economics consists of applying economic

principles and concepts towards adjusting with various uncertainties faced by a
business firm.
Question 7:

Identify the areas of decision making where managerial economics prescribes

specific solutions to business problems?

Answer:

The first and most important problem faced by a business firm is the choice of a
product to be produced or service to be provided. The second important problem
dealt with in managerial economics is to decide by a firm about price and output of
the product so as to maximize profits or to attain some other desired goal.

The decisions regarding these require careful analysis of the demand for its product
and costs of its production. The other important decision-making problems facing
business firms relate to what methods or techniques of production are to be used in
the production of commodities, and how much advertisement expenditure is to be
incurred for promoting the sales of their products. In deciding about all these
problems, a firm has to decide how it can use its limited resources to achieve its
objective most efficiently.

The science of economics is concerned with the allocation of scarce resources to

alternative uses so as to achieve maximum possible satisfaction of the people.
Thus, Lord Robins defines economics as a “Science which studies human
behaviour as a relationship between ends and scarce means which have alternative
uses”. The type of decision-making by managers of business firms also usually
involves question of resource allocation within a firm or organization.

The resources at the disposal of a firm are scarce or limited. What product to be
produced, what price should be fixed, how much quantity of it should be produced,
and what factor combination or production technique be used for the production of
goods involve resource allocation by a firm. It is the task of a manager of a firm
that it should take decisions regarding these resource allocation problems in a way
that ensure most efficient use of resources. Only this will enable the firm to
achieve the goal of maximization of profits.

Thus, management science is concerned with the allocation of scarce resources at

the disposable of the firm. While economics is primarily concerned with the
allocation of scarce resources so as to achieve maximum social welfare
management science deals particularly with organizing and allocating a firm’s
scarce resources so as to achieve the objective of the individual firm which
generally happens to be maximization of its profits. Therefore, management
science’s is intimately related to economics.

Further statistical tools of the decision sciences are used to estimate the
relationship between important variables which help in decision making. Besides,
forecasting techniques of decision sciences are also widely used in business
economics. Since most of business decisions require forecasting of future demand,
and yield from capital investment, forecasting techniques play an important role in
managerial decision-making.
Question 8:

Discuss the role and responsibilities of a managerial economist?

Answer:

Managerial economists play an important role in managing management in

the following areas.
The operation and organization of any Business firm depend on two types of
element.

1. Internal factors
2. External factors

1. Analysis of business operation:

 Determining the budget of profit and sales volume in the coming years.
 For the Future Purpose, the quantity of production quantity should be
determined by the goods schedules and stock policy.
 In the next years, what changes should be made in the price policy and wage
policy?
 What is the firm’s credit policy in the future, and what are the changes in it?
 In the upcoming years, business should be expanded and contracted, if yes,
how much?
 How many installed capacity should be used in the future and how much of
the instruments should be applied, that the tools can be used?
 What steps should be taken to cut costs?
 How much cash will be available in the quarter of the coming year, half-
yearly and suggest how to reduce the deficiency and how to use excessive etc

2. Analysis of external factors:

 In what markets, what are the demands and how the market of the firm’s
products is likely to be?
 What are the trends of the national economy and the international economy?
And what are the chances of change soon?
 What is the state of the business cycle and what will be its appearance and
speed soon?
  What is the probability of the supply of raw materials and the price? And
what are the possibilities they have soon?
 Determination of future demand and price related possibilities of the built
route.
 What is the cost and availability of creditworthiness in the future?
 What are the prospects of changes in future economic policies and controls?
 How is the competition event or the possibility of growth in business in the
future?
 What are the prospects of the availability and cost of fuel or power?
 What will be the prospects and speed of change in the future of national
income and what will be the change in the production and demand of the
firm?

Responsibilities of Managerial economist

 To make a reasonable profit on capital employed:

He must have a strong conviction that profits are essential and his main
obligation is to assist the management in earning reasonable profits on capital
employed in the firm.

 He must make successful forecasts by making in depth study of the

internal and external factors:
This will have influence over the profitability or the working of the firm. He
must aim at lessening if not fully eliminating the risks involved in uncertainties.
He has a major responsibility to alert management at the earliest possible time
in case he discovers any error in his forecast, so that the management can make
necessary changes and adjustments in the policies and programmes of the firm.

 He must inform the management of all the economic trends:

A managerial economist should keep himself in touch with the latest
developments of national economy and business environment so that he can
keep the management informed with these developments and expected trends of
the economy.
 He must establish and maintain contacts with individuals and data
sources:
(a) To establish and maintain contacts:
A managerial economist should establish and maintain contacts
with individuals and data sources in order to collect relevant and
valuable information in the field.

(b) To develop personal relations:

To collect information he should develop personal relations with
those having specialized knowledge of the field.

(c) To join professional associations and should take active part in

their activities:
The success of this lies in how quickly he gathers additional
information in the best interest of the firm.

 He must earn full status in the business and only then he can be helpful
to the management in good and successful decision-making:
(a) He must receive continuous support for himself and his professional
ideas by performing his function effectively.

(b) He should express his ideas in simple and understandable language

with the minimum use of technical words, while communicating with
his management executives.