Introduction To Economics And Managerial Economics

Introduction to managerial economics What is economics? There is no universally accepted answer to the question. Root of the word ‘economics comes from Greek word ‘oikonomia’( management of household or household rules). Economist’s dictionary of economics defines it as “ the study of production, distribution and consumption of wealth in society’

• It is the study of how individuals and groups make decisions with limited resources as to best satisfy their wants, needs and desires. • In short ‘it is a social science that explains how people choose to use limited or scarce resources in attempting to satisfy unlimited wants’. • It solves the dilemma of what to produce, how to produce, and for whom to produce. • In short, economics helps to solve the main problems of allocation, production and distribution.

MANAGERIAL ECONOMICS

• Managerial economics is essentially applied economics in the field of business management. • It is the economics of business. • It pertains to all economics aspects of managerial decisions making. • It is the integration of economic principles with business management practices. • Managerial economics rests on the edifice of economics. • A fundamental knowledge of economics and economic theory is needed for a meaningful analysis of business situation

• Managerial economics is fundamentally concerned with the art of economizing i.e. making rational choices to yield maximum return out of minimum resources/ making the best selection among alternative courses of action.

Relationship with other areas/disciplines in economics Managerial economics provides a link between economic theory and the decision sciences in the analysis of managerial decision making

Problems faced by decision makers in management Econom ic theory

Managerial economics ,which applies and extents economics and the decision sciences to solve management problems

Solutions to decision problems faced by managers

Decision sciences

• Managerial economics provides a link between economic theory and decision sciences . • Traditional economic theory consists of microeconomics ( focusing on individual consumers, firms and industries ) and macroeconomics (focusing on aggregate output, income and employment) • Managerial economics draws heavily from economic theory, more so from microeconomics but yet it is quite different. • Microeconomics is largely descriptive i.e.explains how the economy works without indicating how it should operate.

• Whereas managerial economics is largely prescriptive (it attempts to establish rules and techniques to fulfill specific goals) • E.g. microeconomics is concerned with the way computer manufacturers like HCL price their product, while managerial economics is concerned with how they should price their products.

Basic process of decision-making Establish objectives Define the problem Identify possible solutions Consider input constraints

Select the best possible solution Implement the decision

Consider legal and other constraints

Managerial economics has two important roles

• It provides fundamental analytical tools that can and should be used in other areas of marketing, finance, production etc. • A course in managerial economics can serve an integrating role showing how other areas in business such as production, finance, marketing , HR, must be viewed as a whole in order to fulfill the goals of the firm.

Relationship to production management, marketing, finance, personnel and operational research  Production management: Production & Operation management ( POM ) is the management of a organizations production system. A production system takes inputs and converts them into outputs. In this area managerial economics help in making the strategic decisions , operating decisions and control decisions  Marketing management: As Peter Drucker said “ Marketing is the distinguishing, unique function of the business” Managerial economics helps in making marketing strategy decisions , pricing decisions, value chain analysis, cost analysis.

 Finance management: it is the management of the finances of a business / organizations in order to achieve its financial objectives. Managerial economics plays a role in helping make financial decisions, in financial control etc.  Personnel management: it is human resource management which includes other related areas of strategic human resource, planning models , HR-performance management etc. All these disciplines draw heavily from the theories of managerial economies.

 Operation research: it is a discipline of applying advanced analytical methods to make better economic and business decisions, here too managerial economics makes a significant contribution.

Salient features & significance of managerial economics

o It involves an application of economic theoryespecially, microeconomic analysis to practical problem-solving in real business life. It is essentially applied microeconomics. o It is an art as well as a science facilitating better managerial discipline. o It is concerned with the firms behavior in optimal allocation of resources. It provides tools to help in identifying the best course among the alternatives and competing activities in any productive sector whether private or public.

Role & responsibilities of managerial economist

 Nowadays managerial economist have become permanent fixtures in modern business enterprises. They are known by various names such as company economist, economic advisors, business economist etc.  By and large they are operation researchers and system analyst  Their main task is to apply intelligently certain quantitative and qualitative techniques to the practical aspects and problems encountered by a business firm. Some of the duties carried out are

• Demand estimation and forecasting • Analysis of market to determine nature and extent of competition • Analyzing the issues of the problems of the concerned industry • Directing economic research activity • Advising on pricing investment and budgeting policies. • Briefing the management on current domestic and global issues emerging challenges and threats • Interpretation, analysis and reporting of current economic issues.

• In conclusion it can be said that the managerial economist is a thinker and he plays the role of being both the friend and philosopher to the business man. References : Managerial economics -Dr. D.M Mithani Managerial economics - Dominick Salvatore