Managerial Economicsùmeaning,nature,scope

Managerial Economics Module -1 Meaning, nature and scope. Introduction *What is Management ? Duties ,functions and role of manager *

*What

is Economics? *Definition of Managerial Economics * Relationship to Economic Theory *Relationship to decision science *Business environment and managerial economics *Scope of Managerial economics

Introduction 

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business world –is characterized by dynamism ,computerization, Awareness about environment ,caring for consumer satisfaction, worried about cost effectiveness etc. Economies are no longer self-sufficient, inward-looking; added is the pressure of severe competition due to globalization. Darwin’s principle applies even today nay more strongly. Big corporates follow military strategies involving surprise, security and unity of command. Business units aim at a variety of goals / objectives. Problem of economizing and choice are most imp. for firms. Modern

Introduction continued---------- 

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Decision-making is a must at every stage. Survival amidst uncertainties is no doubt challenging. Managerial Economics helps them to plan and implement decisions in such a complex and dynamic atmosphere. ME or Business Economics or Economics of firms –provides managers with different tools. techniques and principles enabling them make optimum use of resources within constraints.

The term Managerial Economics involves 2 terms; former refers to acts and decisions of manager later to a subject –matter.  

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What is management ?Answer to this question takes us to jobs ,duties and functions of manager. Manager as an organizer has to take decisions involving various parties (Owners, shareholders, employees, rivals customers, suppliers , creditors , distributors ,society and government.) Moreover their interests are separate and at times even conflicting. This means the manager has to co-ordinate various goals in a fruitful manner; justice to everybody warrants balanced approach and rational behavior. Management is an art as well as a science. Careful decisions and foresight are pre-requisites of a good manager.

What is Economics ? 

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It is a science of earning and spending wealth as defined by the Father of Economics Adam Smith in his classic work ‘An enquiry into nature and causes of the Wealth of Nations.’ In the opinion of Alfred Marshall it was study of mankind in ordinary business of life. Lionel Robbins gave us the most accepted scarcityoriented definition of Economics. He says Economics is a social science which studies human behavior as a relationship between unlimited wants and scarce means which have alternative uses.

Economic problem & choice-Choice becomes necessary because :1)wants are unlimited 2)means are scarce Choice is possible because 1)All wants are not of same importance. 2)Means have alternative uses In what way does economic problem become applicable to firms ? A firm too has to allocate limited resources which are available among its various activities .

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Definition of M E --- 

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According to Mansfield ,managerial economics is applied microeconomics. Whether profit or non-profit making organisations and whatever may be their goals , they have all to face constraints which may be internal & /or external. THE BASIC DECISION-MAKING PROCESS IS SAME FOR ALL FIRMS. All managerial decision problems are solved with the help of tools ,concepts and principles in….a) Economic theory; b) Managerial economics c) Mathematical economics. Role of economic theory---In any business, the businessman has to decide what , how ,when ,how much , whom , where etc.

There arises question of choice at every stage of production. eg. Choice regarding selection of project, location of plant ,inputs , funds etc.  

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The manager has to study environment at Micro as well as Macro levels. Micro economics here the subject-matter is individual consumer ,firm market , industry etc. Theories under micro-economics are :Theory of value, theory of distribution, theory of economic welfare etc. Macro-economic environment is general eco-pol-social condition of the larger system which may be at domestic & /or international level.

What is Macroeconomics 

It analyses behavior of entire system as a whole. It deals with aggregates such as GNP , TOTAL EMPLOYMENT ,General level of prices , GDS , GDCF etc .Following theories are part of Macroeconomics— Theory of income and employment , Theory of income distribution, theory of general level of prices , theory of growth etc.

Both these branches are relevant for a manager.

Off course one should not forget that just adding /aggregation would not lead to solution of problems at macroeconomic level what is true at micro level may not be so at macro level and vice-versa. Both approaches are supplementary to each other. Decisions of an individual firm can be solved by applying micro-economic concepts tools and principles `yet it is also true that no firm functions in isolation ; aggregates necessarily influence its performance.

Role of mathematical economics and econometrics---

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Mathematical economics is used to formalize economic laws. Eg. Law of demand can be expressed mathematically as Q =25 -3 (p) here demand is dependent variable and price independent variable ;moreover demand is inversely related to price. Econometrics is application of statistics to real world. Empirically collected data can be applied to equations to find solution. eg. Q= f (Y, Px , Py , W , U , T ,E ----- ) Trends revealed by forecasting help a firm take optimal decisions.

An entrepreneur has to face real world which is uncertain and he is not well –equipped with information about reality. 

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Because of uncertainty in future decisionmaking becomes complicated. His plans require revision. Various disciplines such as Business administration, mathematics, statistics accounts , finance , marketing ,human relations management form the core background in his decision-making.

Business environment and managerial economics- 

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Business environment refers to all those forces which influence functioning of business. Two types of factors are relevant here-1)Internal factors :these are controllable; either altered or modified. 2) External factors- these are beyond control Example of internal factors: corporate philosophy, physical assets , management structure, human resources , R &D , FINANCE , technology etc. Example of external factors :Customers , suppliers , competitors , natural factors ,demographic changes , political situation , eco-social condition , government policies etc.

Porter’s model : According to Porter M .of Harvard University environment is determined by 5 forces.

Environment

BARGAINING POWER OF CONSUMER

POWER OF INPUT SUPPLIERS

Rivalry amongst firms Threat from potential entrants

Threat from substitutes

Scope of managerial economics---- Studies 8 different areas.(1) Demand Demand analysis and demand forecasting— Before production starts accurate estimation of demand is necessary .This facilitates the firm employ proper number and size of resources so that right quantity is produced and supplied at a right price and right time.

(2) Cost Analysis Estimation of costs is important of mobilization of resources and pricing of final goods .Accurate estimation is however made difficult because of uncertainties (3)Pricing policies ---Success of a firm largely depends on correctness of pricing. Pricing decision depends on market structure ,price-leadership non-price competition etc. (4)Profit management- this ensures sustainability, helps attract shareholders, reduces dependence on external finance. In this connection Study of Break-EVEN Analysis is essential .Realized profit may be different from expected profit. both from viewpoint

(5) Capital Management Being a top level decision it becomes crucial. Cost of capital , ROR on capital ,proper selection of projects , are of great importance. Capital is scarce and has a cost therefore its optimum use ,planning, budgeting , control are important. (6)Inventory management- Inventory refers to stock of raw-materials and finished products. This has to be optimal ;both under stocking and overstocking should be avoided .

(7) Whether it is setting of new machinery/plant or recruiting /laying off labor---s There necessarily occurs ‘queuing problem.’ (8)Marketing and advertising— Estimate costs ,allocate resources ,select media, and measure its economic effects. Sales promotion and distribution are imp. activities. Right selection of consumer segment market territory are areas where focus is demanded in modern business world of keen competition.

List of References----         

Managerial Economics by Dr.Maheshwari and Varshney Managerial economics by Dr D.M .Mithani. Managerial Economics by Prof . A N. Oza an. Bakul Dholakia. Managerial Economics by Dr. Dwivedi. Microeconomics by Salvatore. Managerial economics by Joel Dean Managerial economics by Peterson and Lewis Economics by Paul Samuelson and Nordhas Economics by Dornbush ,Fischer and Begg. Indian Economy by Ruder Dutt and K.P.M.Sundaram .