Economics For Manager
Managerial Economics
Managerial Economics is a science which deals with the application of economics theory in managerial practice.
It is the study of allocation of resources available to a firm among its activities.
To be very precise, Managerial Economics is ‘Economics applied in decision-making’.
It fills the gap between economic theory and managerial practice.
Managerial Economics – Definition
“Managerial Economics is the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management.”– Spencer & Siegelman
“The purpose of Managerial Economics is to show how economic analysis can be used in formulating business policies.”– Joel Dean
Managerial Economics
MICRO ECONOMICS & MACRO ECONOMICS
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the entire economy.
This includes a national, regional, or global economy. Macroeconomics study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions.
Macroeconomics develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance.
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the entire economy.
This includes a national, regional, or global economy. Macroeconomics study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions.
Macroeconomics develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance.
Characteristics of Managerial Economics
It involves an application of Economic theory – especially, micro economic analysis to practical problem solving in real business life.
It is essentially applied micro economics.
It is a science as well as art facilitating better managerial discipline.
It explores and enhances economic mindfulness and awareness of business problems and managerial decisions.
It is concerned with firm’s behaviour in optimum 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.
Scope of Managerial Economics
1.Demand Analysis and Forecasting
2.Cost Analysis
3.Production and Supply Analysis
4.Pricing Decisions, Policies and Practices
5.Profit Management, and
6.Capital Management
1. Demand Analysis & Forecasting
A business firm is an economic organism which transforms productive resources into goods that are to be sold in a market.
A major part of managerial decision-making depends on accurate estimates of demand.
Before production schedules can be prepared and resources employed, a forecast of future sales is essential.
This forecast can also serve as a guide to management for maintaining or strengthening market position and enlarging profits.
2. Cost Analysis
A study of economic costs, combined with the data drawn from the firm’s accounting records, can yield significant cost estimates that are useful for management decisions.
The factors causing variations in costs must be recognized and allowed for if management is to arrive at cost estimates which are significant for planning purposes.
An element of cost uncertainty exists because all the factors determining costs are not always known or controllable.
3. Production & Supply Analysis
Production analysis is narrower in scope than cost analysis. Production analysis frequently proceeds in physical terms while cost analysis proceeds in monetary terms.
Production analysis mainly deals which different production functions and their managerial uses.
Supply analysis deals with various aspects of supply of a commodity.
Certain important aspects of supply analysis are:
Supply schedule, curves and function, Law of supply and its limitations, Elasticity of supply and Factors influencing supply.
4. Pricing Decisions, Policies and Practices
Pricing is a very important area of Managerial Economics.
In fact, price is the genesis of the revenue of a firm and as such the success of a business firm largely depends on the correctness of the price decisions taken by it.
The important aspects dealt with under this area are: Price Determination in various Market Forms
Pricing Methods Differential Pricing Product-line Pricing and Price Forecasting.
5. Profit Management
Business firms are generally organized for the purpose of making profits and, in the long run, profits provide the chief measure of success.
In this connection, an important point worth considering is the element of uncertainty existing about profits because of variations in costs and revenues which, in turn, are caused by factors both internal and external to the firm.
If knowledge about the future were perfect, profit analysis would have been a very easy task.
6. Capital Management
the various types and classes of business problems, the most complex and troublesome for the business manager are likely to be those relating to the firm’s capital investments.
Relatively large sums are involved, and the problems are so complex that their disposal not only requires considerable time and labour but is a matter for top-level decision.
Briefly, capital management implies planning and control of capital expenditure.
Decision-making
Decision-making is the process of selecting a particular course of action from among the various alternatives.
Every business manager has to work on uncertainties and the future cannot be precisely predicted by anyone.
If everything could be predicted accurately, then decision-making would become a very simple process.
Decision-making
Basic Economic Tools in Managerial Economics
1. Opportunity Cost Principle
The opportunity cost of the funds employed in one’s own business is the interest that could be earned on those funds had they been employed in other ventures.
The opportunity cost of the time an entrepreneur devotes to his own business is the salary he could earn by seeking employment.
The opportunity cost of using a machine to produce one product is the earnings forgone which would have been possible from other products.
2. Incremental Principle
Incremental concept is closely related to the marginal costs and marginal revenues, for of economic theory.
In actual business situations, it often becomes difficult to apply the concept of marginalism which has to be replaced by incrementalism, for in real world business, one is concerned with not ‘unit change’ but ‘chunk change’
For instance, in a construction project, the labour which a contractor may change is not by one but by tens.
3. Principle of Time Perspective
The economic concepts of the long run and the short run have become part of everyday language.
Managerial economists are also concerned with the short-run and long-run effects of decisions on revenues as well as costs.
The really important problem in decision-making is to maintain the right balance between the long-run and the short-run considerations.
4. Discounting Principle
One of the fundamental ideas in economics is that a rupee tomorrow is worth less than a rupee today.
This seems similar to saying that a bird in hand is worth two in the bush.
A simple example would make this point clear.
5. Equi-marginal Principle
This principle deals with the allocation of the available resources among the alternative activities.
It should be clear that if the value of the marginal product is higher in one activity than another, an optimum allocation has not been attained.
It would, therefore, be profitable to shift labour from low marginal value activity to high marginal value activity, thus increasing the total value of all products taken together.
Circular Flow of Economic Activities
Basic Economic activities
Production: The use of economic resources in the creation of goods and services for the satisfaction of human wants.
Consumption: The using up of goods and services purchasing or in the production of other goods.
Employment: The use of economic resources in production; engagement in activity.
Income Generation: The production of maximum amount an individuals.
Circular Flow of Production
Circular Flow of Income
Forms of Organization
Sole proprietorship / Single ownership Partnership
Joint Stock Companies Cooperative organization
State and central Government owned
1. Sole proprietorship
A sole proprietorship is a business with one owner who operates the business on his or her own or employ employees. It is the simplest and the most numerous form of business organization in the United States, however it is dangerous as the sole proprietor has total and unlimited liability.
Self-contractor is one example of a sole proprietorship.
In this type, the single ownership where an individual exercises and enjoys\ these rights in his own interest.
It does well for those enterprises which require little capital and lend themselves readily to control by one person.
2. Partnership
A single owner becomes inadequate as the size of the business enterprise grows.
He may not be in a position to do away with all the duties and responsibilities of the grown business.
Such a combination of individual traders is called Partnership.
Partnership may be defined as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Individuals with common purposes join as partners and they put together their property ability, skill, knowledge, etc., for the purpose of making profits.
3. Corporation
It is a form of private ownership which contains features of large partnership as well as some features of the corporation.
A corporation is a limited liability entity doing business owned by multiple shareholders and is overseen by a board of directors elected by the shareholders.
It is distinct from its owners and can borrow money, enter into contracts, pay taxes and be sued.
The shareholders gain from the profit through dividend or appreciation of the stocks but are not responsible for the company’s debts.
4. Public Limited Company
A public enterprise is one that is (1) Owned by the state,
(2) Managed by the state or (3) Owned and managed by the state.
Public enterprises are controlled and operated by the Government either solely or in association with private enterprises.
It is controlled and operated by the Government to produce and supply goods and services required by the society.
Limited companies which can sell share on the stock exchange are Public Limited companies.
These companies usually write PLC after their names.
5. Private Limited Companies
These are closely held businesses usually by family, friends and relatives.
Private companies may issue stock and have shareholders.
However, their shares do not trade on public exchanges and are not issued through an initial public offering.
Shareholders may not be able to sell their shares without the agreement of the other shareholders.
NATURE OF THE FIRM
Since modern firms can only emerge when an entrepreneur of some sort begins to hire people, Coase’s analysis proceeds by considering the conditions under which it makes sense for an entrepreneur to seek hired help instead of contracting out for some particular task.
The traditional economic theory of the time suggested that, because the market is “efficient” (that is, those who are best at providing each good or service most cheaply are already doing so), it should always be cheaper to contract out than to hire.
Objectives of Firm
Maximization of the sales revenue Maximization of firm’s growth rate Maximization of Managers utility function Making satisfactory rate of Profit
Long run Survival of the firm
Entry-prevention and risk-avoidance