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10 Introduction Managerial Economics is economics applied in Decision making. It is based on economic analysis for identifying problem, Organising information and alternative. Managerial economics is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis and correlation, Lagrangian calculus (linear).
According to McNair and Meriam “Managerial Economic is the use of economic mode of thought to analyses business situation.”
In the words of spencer and Siegelman “Managerial Economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward plan by management.” Watson defines it as “price theory in the service of business executive.” Managerial Economic is micro economic in character, where the unit of study is a firm. Managerial Economic is concerned with normative micro economics that says what he thinks should happen rather than what does happen to the firm.
On other hand Managerial Economic tell us what objective a business should pursue and how they should be set.
20 Role of A managerial economist in Business MANAGERIAL ECONOMICS
Role of managerial economist
Production scheduling Demand forecasting Market research Economic analysis Investment appraisal Security mgt. analysis Advice on foreign exchange mgt. Advice on tread Pricing decision Analyzing & forecasting factors
Economic Condition Production, sales, inventory schedu Demand for the product Provide pricing & profit policies Influencing the input costInvestment decision Market condition Firm’s share in market Economic policies
Making decision and processing information are two primary tasks of managers. While we separate these two tasks for analytical purposes, in reality they are practically inseparable. The task of organizing and processing information and then making an intelligent decision based upon this information and the basic theory can take two general forms: ✔ Task of making SPECIFIC DECISIONS by managers
✔ GENERAL TASK of managers to use readily available information to make a
decision or carry out a course of action that furthers the goals of the organization
2.1 SPECIFIC DECISION:
There are several specific decisions that managers might have to take, For Example Whether or not to close down a branch of a firm that has recently been unprofitable; Whether or not a store should stay open more hours a day or whether to pay for outside computing or copying services rather that install an in house computer or copier After conducting a survey of British industry, Alexander and Kemp came to the conclusion that the managerial economist undertakes the following specific functions:
1. Production scheduling, 2. Demand forecasting, 3. Market research, 4. Economic analysis of the industry, 5. Investment appraisal, 6. Security management analysis, 7. Advice on foreign exchange management, 8. Advice on trade, 9. Pricing and the related decision 10. Analysing and forecasting environmental factors.
Economic theory helps decision-maker to know what information is necessary to make an intelligent decision to find the correct solution to a problem and to learn how to process and use that information. Business is influenced by two sets of decision factors a) External Factors & b) Internal Factors
Business is influenced not only by what decisions are taken within the firm but also by the general business environment. While the internal factors are within control, the external factors lie outside its sphere of control. The role of the managerial economist is to understand these external factors and to suggest policies which the firm should follow to make the best use of these external and internal factors.
A. External Factors 1. The general economic condition of the economy MANAGERIAL ECONOMICS
The most important external factor is the general economic condition of the economy, such as the level and growth of national income, regional income distribution, influence of international factors on the domestic economy, the business cycle etc.managerial economist must obtain and process information with regard to these changes, Advice the management regarding there likely effects on the operation of the firm and suggest possible ways to further the organization’s goals
2. The prospects of demand for the product. The second important external factor for a firm is the prospect of demand for the product. Is there a change occurring in the purchasing power of the public in general or in some particular regions? Is this change in purchasing power a result of changes in population and migration or is it due to changes in real income of the people as a result of price level changes? Are fashion, tastes and preferences undergoing any change and thus affecting the demand for the product? A managerial economist tries to find their answer and advices the firm accordingly.
3. Find out if there is anything which is influencing the input cost of the firm. Thirdly, the managerial economist also tries to find out if there is anything which is influencing the input cost of the firm. For example, What about the cost of labour in different regions and for different operations? What about the credit condition in the market? Is there going to be some change in the government credit policy? How different input can be combined to minimize the cost of production? And so on. 4. Market condition of raw material and finished product.
Fourthly, the market condition of raw material and finished product is also a subject of study by the managerial economist. He has to understand the nature of the market from which the firm is buying its raw materials and of the market where it is selling MANAGERIAL ECONOMICS
its output. This understanding helps the managerial economist to recommend a pricing policy for successful management of the firm.
5. The expansion of the firm’s share in the market.
Next, managerial economist can also help in the expansion of the firm’s share in the market. He is to find out opportunities and the policies which help in the expansion of the firm’s share in the local and internal markets. This he can do by understanding the nature and trend of demand.
6. To keep in touch with the government’s economic policies. Lastly, managerial economist has also to keep in touch with the government’s economic policies and the center bank’s monetary policies, annual budgets of the government, etc.
A. Internal factors The role of managerial economist in internal management is as important as his contribution towards the management of external factors. He helps in deciding about the production, sales and inventory schedules of the firm. He not only provides information regarding their present level but also forecasts their future trend.
A managerial economist is used to provide the pricing and profit policies. as the present-day firms are often multi product firms, a successful managerial economist tries to find for the firm the most profitable output mix and the best prices for its various output, given the market conditions. The firm also needs the help of managerial economist for its investment decision. For this, He needs to forecast the return on investment and the cost that the firm incurs by taking up the investment. Managerial Economist has a very significant and vast role to play, He not only helps in internal management but also analyze external factor and advice the firm regarding their likely effect. In short the first role of a manager is to recognize a problem or to see a possible way to future goal of the organization, and then to obtain and process information in order to make a decision or reach a solution. His second task is to use readily available information to make a decision or carry out a course of action. Those futures the goals of the organizations Successful managers know how to pick out the useful information from the vast amount of information they receive. In all these roles of manager, the knowledge of managerial economics is extremely helpful. The managerial economist also undertakes the job of economic intelligent, which involves obtaining and processing information regarding the lightly effects of changes in government policies, tax rates structure, exchange and tariff rates, etc. Through the managerial economist in general performance the above mentioned functions, the degree to which they participate in overall management and the extent to which they pursue these functions differs from firm to firm.
RESPONSIBILITY OF A MANAGERIAL ECONOMIST A managerial economist can serve management best only if he always keeps in mind the main objective of his business, viz., to make a profit on its invested capital. His academic training and the critical comments from people outside the business may lead a MANAGERIAL ECONOMICS
managerial economist to adopt an apologetic or defensive attitude towards profits. Once management notices this, his effectiveness is almost sure to be lost. In fact, he cannot expect to succeed in serving management unless he has a strong personal conviction that profits are essential and that his chief obligation is to help enhance the ability of the firm to make profits. Most management decisions necessarily concern the future, which is rather uncertain. It is, therefore, absolutely essential that a managerial economist recognizes his responsibility to make successful forecasts. By making best possible forecasts and through constant efforts to improve upon them, he should aim at minimizing, if not completely eliminating, the risks involved in uncertainties, so that the management can follow a more orderly course of business planning. At times, he will have to reassure the management that an important trend will continue; in other cases, he may have to point out the probabilities of a turning point in some activity of importance to management. In any case, he must be willing to make considered but fairly positive statements about impending economic developments, based upon the best possible information and analysis and stake his reputation upon his judgment. Nothing will build management confidence in a managerial economist more quickly and thoroughly than a record of successful forecasts, well documented in advance and modestly evaluated when the actual results become available. A few corollaries to the above proposition need also be emphasized here. First, he has a major responsibility to alert ‘management at the earliest possible moment in case he discovers an error in his forecast. By promptly drawing attention to changes in forecasting conditions, he will not only assist management in making appropriate adjustment in policies and programs but will also be able to strengthen his own position as a member of the management team by keeping his fingers on the economic pulse of the business. Secondly, he must establish and maintain many contacts with individuals and data sources, which would not be immediately available to the other members of the management. Extensive familiarity with reference sources and material is essential, but it is still more important that he knows individuals who are specialists in particular fields having a bearing on his work. For this purpose, he should join professional associations and take active part in them. In fact, one of the best means of determining the caliber of a managerial economist is to evaluate his ability to obtain information quickly by personal contacts rather than by lengthy research from either readily available or obscure reference MANAGERIAL ECONOMICS
sources. Within any business, there may be a wealth of knowledge and experience but the managerial economist would be really useful if he can supplement the existing know-how with additional information and in the quickest possible manner. Again, if a managerial economist is to be really helpful to the management in successful decision-making and forward planning, he must be able to earn full status on the business team. He should be ready and even offer himself to take up special assignments, be that in study teams, committees or special projects. For, a managerial economist can only function effectively in an atmosphere where his success or failure can be traced not only to his basic ability, training and experience, but also to his personality and capacity to win continuing support for himself and his professional ideas. Of course, he should be able to express himself clearly and simply and must always try to minimize the use of technical terminology in communicating with his management executives. For, it is well known that hat management does not understand, it will almost automatically reject. Further, while intellectually he must be in tune with industry’s thinking the wider national perspective should not be absents from his advice to top management.
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Managerial Economics ( P. L. Mehta ) 7th Revised Edition Page no. :- 1, 8, 9, 10