Iper

iper INSTITUTE OF PROFESSIONAL EDUCATION AND RESEARCH

Assignment on: MANAGERIAL ECONOMICS

Topic :

WHAT A MANAGER NEEDS TO KNOW AS AN ECONOMIST

Name of The Group – The One

GROUP MEMBERS:

Peerzada Mohammad Musaddiq Archita Garg Rajan Singh Yadav Jitendra Kanade Abhishek Suneri Roopa Shukla

INTRODUCTION MANAGERIAL ECONOMICS

Managerial economics may be defined as the study of economic theories logics and methodology which are generally applied to seek solution to the practical problems of business. Managerial economics thus constitute of that part of economic knowledge and economic theories which is used as a tools of analyzing business problems for rational business decisions. The managerial economics is defined by many great economists. Some definitions are as follows which will make us more clearly about managerial economics. According to Mansfield, “Managerial economics is concerned with the application of economic analysis and economic concepts to the problems of formulating rational managerial decision”. According to Spencer and Seigelman, “Managerial economics is an integration of economic theories with business practice for the purpose of facilitating decision making and forward planning by management”. By Douglas, “Managerial

economics is concerned with the applications of economic principles and methodology to the decision making process within the firm or organization. It seeks to establish rules and principles to facilitate the attainment of the desired economic goals of management. So by above the definitions it is clear that managerial economics is playing a great role in managerial functions because manager has to take number of decisions in conformity with the goals of the firm, in performing his functions.

HOW DOES ECONOMICS CONTRIBUTES TO MANAGERIAL FUNCTIONS

Business decision making is essentially a process of selecting the best out of alternative opportunities open to the firm. Many business decisions are taken under the condition of uncertainty and therefore involve risk. Uncertainty arise mainly due to the uncertain behavior of the market forces i.e. demand and supply, changing business environment, government policy , external influences on the domestic market and social and political changes in the country. The complexity of the modern business world adds complexity to the business to decision making. However the degree of uncertainty and risk can be greatly reduced if market conditions could be predicted with a high degree of reliability. The prediction of future course of business environment alone is not sufficient. What is equally important is to take appropriate business decisions and to formulate business strategy conforming to the goals of the firms. Taking appropriate business and to formulate business strategy conforming to the goals of the firms. Taking appropriate decision requires clear understanding of technical and environmental condition under which business decision are taken. Applications of economic theories to explain and analyze the technical condition and the economic environment in which a business undertaking operate, contributes a good deal to the rational decision making process. Economic theories have, therefore, gained a wide application in the analysis of practical problems of business.

WHAT MANAGER NEEDS TO KNOW AS AN ECONOMIST

Most of the time managers have to face so many problems so he takes some important decisions to come out from the problems. To take appropriate decisions he must have a clear understanding of problems. So given below are some topics which a manager needs to know as an economist.

DEMANDANALYSIS A managerial economist can serve management best only if he know about the demand of the market as well as individual demand. That’s why he needs to forecast the demand and make an analysis. Definition of demand analysis- Study of sales generated by a good or service to determine the reasons for its success or failure, and how its sales performance can be improved is known as demand analysis.

The Demand Analysis Relationship The Determinants Economists approach the analysis of demand for a product by considering the following determinants. These determinants are 1. Price of the good 2. Taste or level of desire for the product by the buyer 3. Income of the buyer 4. Prices of related products: substitute products (directly competes with the good in the opinion of the buyer) complementary products (used with the good in the opinion of the buyer) 5. Future expectations: expected income of the buyer expected price of the good. 6. For the total market demand the number of buyers in the market is also a determinant of the amount purchased. To allow us to think about all of this logically and simply, we imagine each determinant by turn changing while the others do not change. We analyze, for example, a price change by assuming that the other determinants are "given" or fixed.

The Role of Price Economists give prices a special place in this analysis. The DEMAND CURVE is defined as the relationship between the price of the good and the amount or quantity the consumer is willing and able to purchase in a specified time period, given constant levels of the other determinants--tastes, income, prices of related goods, expectations, and number of buyers.

Demand Forecasting The activity of estimating the quantity of a product or service that consumers will purchase. Demand forecasting involves techniques including both informal methods, such as educated guesses, and quantitative methods, such as the use of historical sales data or current data from test markets. Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market. Forecasting in a logistics system include dozens of different forecasting algorithms that the analyst can use to generate alternative demand forecasts. While scores of different forecasting techniques exist, almost any forecasting procedure can be broadly classified into one of the following four basic categories based on the fundamental approach towards the forecasting problem that is employed by the technique. 1. Judgmental Approaches. The essence of the judgmental approach is to address the forecasting issue by assuming that someone else knows and can tell you the right answer. That is, in a judgment-based technique we gather the knowledge and opinions of people who are in a position to know what demand will be. For example, we might conduct a survey of the customer base to estimate what our sales will be next month. 2. Experimental Approaches. Another approach to demand forecasting, which is appealing when an item is "new" and when there is no other information upon which to base a forecast, is to conduct a demand experiment on a small group of customers and to extrapolate the results to a larger population. For example,

firms will often test a new consumer product in a geographically isolated "test market" to establish its probable market share. This experience is then extrapolated to the national market to plan the new product launch. An experimental approach are very useful and necessary for new products, but for existing products that have an accumulated historical demand record it seems intuitive that demand forecasts should somehow be based on this demand experience. 3. Relational/Causal Approaches. The assumption behind a causal or relational forecast is that, simply put, there is a reason why people buy our product. If we can understand what that reason (or set of reasons) is, we can use that understanding to develop a demand forecast. For example, if we sell umbrellas at a sidewalk stand, we would probably notice that daily demand is strongly correlated to the weather – we sell more umbrellas when it rains. Once we have established this relationship, a good weather forecast will help us order enough umbrellas to meet the expected demand. 4. "Time Series" Approaches. A time series procedure is fundamentally different than the first three approaches we have discussed. In a pure time series technique, no judgment or expertise or opinion is sought. We do not look for "causes" or relationships or factors which somehow "drive" demand. We do not test items or experiment with customers. By their nature, time series procedures are applied to demand data that are longitudinal rather than cross-sectional. That is, the demand data represent experience that is repeated over time rather than across items or locations. The essence of the approach is to recognize (or assume) that demand occurs over time in patterns that repeat themselves, at least approximately. If we can describe these general patterns or tendencies, without regard to their "causes", we can use this description to form the basis of a forecast. Supply chain management

Supply chain management (SCM) is the oversight of materials, information, and finances as they move in a process from supplier to manufacturer to wholesaler to retailer to consumer. Supply chain management involves coordinating and

integrating these flows both within and among companies. It is said that the ultimate goal of any effective supply chain management system is to reduce inventory (with the assumption that products are available when needed).

Supply chain management flows can be divided into three main flows: •

The product flow

•

The information flow

•

The finances flow

The product flow includes the movement of goods from a supplier to a customer, as well as any customer returns or service needs. The information flow involves transmitting orders and updating the status of delivery. The financial flow consists of credit

terms,

payment

schedules,

and

consignment

and

title

ownership

arrangements.

The objective of supply chain management is to meet customer demand for guaranteed delivery of high quality and low cost with minimal leadtime.To achieve this objective, companies need to have better visibility into the entire supply chain of their own plans as well as those of their suppliers and customers. Managers today should be agile enough to adjust and rebuild plans in real time, to take care of unexpected events in the supply chain.

Diagram showing supply chain management

Profit Maximization Economic theory is based on the reasonable notion that people attempt to do as well as they can for themselves, given the constraints facing them. For example, consumers purchase things that they believe will make them feel more satisfied, but their purchases are limited (at least in the long run) by the amount of income they earn. A consumer can borrow to finance current purchases but must (if honest) repay the loans at a later date. Business owners also attempt to manage their businesses so as to improve their well being. Since the real world is a complicated place, a business owner may improve his well being in a number of ways. For example, if the business doesn't lack customers, the owner could respond by reducing operating hours and enjoying more leisure. Or, the business owner may seek satisfaction by earning as much profit as possible. This is the alternative we will focus on in class - for a very good reason. If a business faces tough competition, the only way the business can survive is to pay attention to revenues and costs. In many industries, profit maximization is not simply a potential goal; it's the only feasible goal, given the desire of other businesspeople to drive their competitors out of business.

In economic terms, profit is the difference between a firm's total revenue and its total opportunity cost. Total revenue is the amount of income earned by selling products. In our simplified examples, total revenue equals P x Q, the (single) price of the product multiplied times the number of units sold. Total opportunity cost includes both the costs of all inputs into the production process plus the value of the highest-valued alternatives to which owned resources could be put. For example, a firm that has $100,000 in cash could invest in new, more efficient, machines to reduce its unit production costs. But the firm could just as well use the $100,000 to purchase bonds paying a 7% rate of interest. If the firm uses the money to buy new machinery, it must recognize that it is giving up $7000 per year in forgone interest earnings. The $7000 represents the opportunity cost of using the funds to buy the machinery. We will assume that the overriding goal of the managers of firms is to maximize profit: = TR - TC. The managers do this by increasing total revenue (TR) or reducing total opportunity cost (TC) so that the difference rises to a maximum. Foreign Trade

The economy of a country is directly dependent on its relations with other countries, hence, the economy of particular company gets affected by its trade relations with other countries. If a company establishes its foreign trade with other country, then a manager should be able to know about the competitors which are operating their business in the country. In such situations a proper decision should be made by a manager that how to operate the business in these conditions. Also, the manager will have to focus on the range of brands in which it has greatest competitive advantage. It enables the companies to sell a narrower range of leading brands into more and more geographical markets. Secondly, economy of the host country plays a major role in foreign trade. If the economy of the country is weak, then a manager should be able to decide not to invest the capital in that particular country and if the economy of the country is good, then it is better to invest the capital in that country. Also, a manager should be able to know about

the Government support of the country in which the company is investing its capital. A manager should respect the laws of the country. A manager should, therefore, know the fluctuations in the international market, exchange rate, prices and prospects in the international market. He should also think about various future aspects of the company otherwise the situations like market failure, incomplete markets, macroeconomic instabilities etc. may arise.

Government Policies

Governments create the rules and frameworks in which businesses are able to compete against each other. The Government can change rules and frameworks from time to time forcing business to change the way they operate. In this way, the business gets affected by the Government policy. The firms work in such a way that their attempt is to maximize their profits which lead to social issues like environmental pollution, congestion in the cities etc.. Social issues not only bring a firm’s interest in conflict with those of the society, but also impose a social responsibility on the firms. After that the Government may frame certain laws so as these conflicts can be minimized. The manager should, therefore, be able to know the ambitions or aspirations of the people. After knowing the aspirations he should give a due preference towards the decisions of the people about these conflicts. National Economy

A manager should be aware of the national economy of the country sothat he may ascertain his customer group, demand in the market, positive and negative movement of the economy etc. Here are some important concepts about national economy that a manger should acquaint him with.

National Income:

National income is the money value of the end result of all the economic activities from the nation. Economic activities generate a large number of goods and services.

Gross Domestic Product (GDP)

It is one of the measures of national income and output for a given country's economy. GDP is defined as the total market value of all final goods and services produced within the country in a given period of time generally one year.

GDP = consumption + gross investment + government spending + (exports − imports),

Gross National Product (GNP):

GNP is defined as the value of all the final goods and services produced during a specific period, (usually one year) plus the difference between foreign receipt and payment.

Economic growth

It is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is usually calculated in real terms, i.e. inflationadjusted terms, in order to net out the effect of inflation on the price of the goods and services produced.

Per Capita Income: Per capita income is often used as a measure of the wealth of the population of a nation, particularly in comparison to other nations. It is usually expressed in terms of a

commonly-used international currency such as US dollar. Per capita income gives no indication of the distribution of that income within the country. Inflation

It is a rise in the general level of prices of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply (monetary inflation); however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflation. Inflation can also be described as a decline in the real value of money—a loss of purchasing power. When the general price level rises, each unit of currency buys fewer goods and services. Inflation can cause adverse effects on the economy. For example, uncertainty about future inflation may discourage investment and saving. Inflation may widen an income gap between those with fixed incomes and those with variable incomes. High inflation may lead to shortages of goods as consumers begin hoarding them out of concern their prices will increase in the future.

So these were some topics which a manager needs to know as an economist.

References: 1. www.wikipedia.com

Managerial economics by 1. D. N. Dwivedi 2. Varshney.