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Economics can be broadly divided into 2 Categories:
Micro Economics- Studies the Behaviour of an individual and Decision making Economic unit
like a Firm, a Consumer or the Individual Supplier of some factor of Production.
Macro Economics-Studies the economic system in aggregate and it relates to issues such as
determination of national income, savings, investment, employment at aggregate levels, tax
collection, government expenditure, foreign trade, money supply, price Level etc
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In Simple terms Managerial Economics is applied Micro Economics which involves application of that
part of Micro Economics which is directly related to decision making by a Manager.
Thus Managerial Economics analyses the process through which a manager uses economic Theories
to address to complex problems of Business world and also take rational decisions to meet the goals
set by his or her firm.
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Characteristics/ Nature of Managerial Economics:
The basic characteristics of managerial economics can now be enumerated as
It is "micro-economic" in character.
known as "theory of
Demand Analysis: Law of Demand, Elasticity of Demand, Factors affecting demand etc
Market Analysis- Different types of market conditions, pricing policies in different form of
markets.
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Like and Economy, the manager of a firm also faces five basic issues:
1. Choice of Product- which product to produce, avail and allocation of raw material to
maximise profits of the firm
2. Choice of Inputs- Decide on the input Mix which would produce the profit maximizing level
of output at minimum costs.
3. Distribution of the Firms Revenue- Here workers, owners of building, bankers, all those
contributed their material and services in the process of production, storage and
transportation, have to be paid according to the fixations previously decided as per terms
and conditions agreed upon. Now after all commitments are met the reminder amount is
the profit which has to be distributed among the owners of the firm after the payment of
any taxes.
4. Rationing of Resources for various Operations
5. Maintenance and Expansion-Managers need to plan strategies to ensure that the level of
output is maintained and also the efficiency of the firm be kept as well. Now Expansion of
Firm involves:
Mobilization of Funds
Now expansion is done with an intension of increasing scale of profits...But also associating Risk
Factors which has to be handled tactfully so that we meet our goals effectively.
Optimization of Resources
Relationship Building
Co-ordination Building
Scope of ME:
Profit Management
Capital Management
Allied Disciplines
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There are four groups of problem in both decision making and forward planning.
Resource allocation
Inventory and queuing problem
Pricing problems
Investment problems
Study of managerial economics essentially involves the analysis of certain major subjects like
Demand Elasticity
Cost analysis
Linear Programming
Game Theory
Competition.
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Uses of ME:
Used for other objectives- attaining industry leadership, expansion of market share etc
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He is a thinker and like a friend to business man. He will have a good knowledge of the
working of the individual firm, Industrial functioning and also the economy at large.
Their job lies in designing the course of Operations to maintain and improve the systems of
the firm in terms of productivity, market share etc and also to prepare report to cope with
current and future problems.
Todays Business alternative choice of production is a major hurdle in decision making and
we need take rational decisions based on the suitability of the business operations and this
is where the economists comes into picture.
A managerial Economist is an Economic adviser and also plays a major role in various
decisions making of a firm which will decide on the survival, profitability and also future
growth of the firm in the long run.
The decisions may involve to nature of product to be produced, the quantity in which it is to
be produced, its quality, costing, price and also its distribution in the market, planning,
diversification of business, renewal of worn out equipments and machinery modernisation
etc. The Business economist helps management take right decision in these views.
They apply Quantitative and Quantitative Techniques and also consider to the practical
aspects and problems encountered by a business firms in its productive activity.
They measure a number of micro and macro variables in the decision making process. Now
forecasting is a fundamental activity. He deals with business problems in a deep analytical
way.
Managerial Economist also does the role or operation researcher and system analyst in the
large business operations.
A managerial Economist in a Business Firm carries on wide variety of duty in a business firm such as:
Discovering new and possible fields of business endeavour and its cost benefit analysis as
well as feasibility studies
They also play a crucial role in Building micro and macro-economic models for particular
aspects of the firms activities that are useful in solving specific business problem. Most
models may be prediction oriented.
Briefing the management on current domestic and global economic issues and emerging
challenges. Interpretation, analysis and reporting of current economic matters, upcoming
developments in business, government and foreign or global sectors
The business economists need to understand and acquire full knowledge about the
behaviour of the economy and the impact of macro-economic policies such as monetary,
fiscal and industry, national and international affairs adopted by the government from time
to time in the growth of the business. This is because all business concerns are a part of the
economy and no business is outside is framework of the rules and regulations set by the
government.
Knowledge of balance of Payments position, exchange rates, import and export policies of
the government are also essential for a business economist. He also needs to understand
changes in the Technological innovations and tastes and preferences and guide business firm
accordingly where in costs can be still minimal.
He needs to co-ordinate in business planning, decision making and guide the organisation in
selecting the right plan of action.
He needs to guide the management in the procurement of funds which will not burden the
organisation heavily...ie selection the best source of fund procurement among all
alternatives. Capital budgeting and Budget control and project co-ordination is also role of
economists.
Business analyst also analyses cost benefit analysis on varies forms of investments helps in
making right future investments.
A business analyst role in a financial firm can be listed as:
Portfolio selection
In modern business he needs to analyse, generalize and make suitable recommendations. He must
be given freedom of giving judgements with regards to working and if any changes if found needed
be taken then and there. He must have right to criticise, discuss and make suggestions.
Hence we can know and understand the role, Importance and responsibilities of a Managerial
Economist very clearly.
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It is used in collection, processing and analysis of the data which will be mostly quantitative
expression of things.
Most Business Decisions are based on Economic event happenings. Example: Theory of
Probability, Forecasting Techniques etc.
The data is collected and using statistical tools analysis is made systematically.
It is used in Analysis of Decisions making, Risk Analysis, viability of the project, profitability
analysis and also taking the economic view point into account.
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Managerial Economics and Operation Research:
OR is the use of advanced mathematical techniques to improve decision making.
OR is useful in selection of best alternatives and right decisions can be taken at suitable time.
Example: Linear Programming is a good Example
It helps in taking sound decisions in real time business relevance.
Some
of
the
aspects
of
OR
used
in
real
time
business
operations
are:
Facility Planning
Scheduling
Yield Management
Credit Scoring- which is the best prospect of credit financing and also in deciding which
customer the best prospect for credit companies
Computer simulation: Allows you to try out which approach is ideal given certain given
conditions are there in that given situations
Optimization
Problem Structuring
Decision Maker
Goals to be achieved
Course of Action
States of Nature-Make of list of possible future events which might come into picture as a
result of the present decision...This will help us be better prepared for future uncertainty if
any
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Basic Process of Decision Making:
1.
2.
3.
4.
5.
Making a choice
6. Collect feedback make necessary changes if any required for effective business performance.
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Role of ME in Business Decision Making:
Production Decisions
Inventory Decisions
Cost Decisions
Marketing Decisions
Investment Decisions
Personnel Decisions
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Types of Decision Making Situations:
These are following decision making situations:
Decision making under Conflict-Here we anticipate the action of the opponent and we make
our own moves. This is found in Game Theory
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