a 1 Definition, Nature and Scope of Managerial Economics ee a ee ee ee Introduction - What Managerial Economics is about vs Definition of Managerial Economics vw Managerial Economics and Economic Theory tx Managerial Economics and Decision Sciences Decision Making and Forward Planning us The Nature and Types of Business Decisions tw Managerial Decision Making Process Nature & Scope of Managerial Economics Chief Characteristics of Managerial Economics Significance of Managerial Economics Fundamental Concepts in Managerial Economics Role & Responsibilities of a Managerial Economist in Business. [1] Introduction [2] Definition of Managerial Economics. [3] Subject - matter and Scope of Managerial Economics. [4] Managerial Economics and General Economic Theory Compared. [5] Decision - Making and Forward Planning. [6] Role and Responsibilities of a Managerial Economist. [1] Introduction : Managerial Economics is 2 special branch of Economics which is of recent origin and therefore attempts to define it are even more ecent, In modern times with the rapid development of industry . trade and commerce. the importance of business economics has ly increased and as a result this discipline has come to ignificant place in the busi occupy a noted here that the term Managerial Economics has been used in2 Economics for Managers Decisions ‘or’ Economics for Bu: while others have pre! of Enterprise’ or the most co: accepted term is “Managerial Es shall use this term. [2] Definition of Managerial Peoormiee : y be defined as the stud methodology practical probl It, thus, constitutes that part economic knowledg: is used asa wool for analysing business problems onal business decisions. We give-below some of the important definitions of managerial economics. {i} According to MC Nair and Meriam “Managerial economics consists of the use of economic modes of thought to analyse business situations.” (ii) In the words of Spencer and Siegelman “Managerial economics is the integration of economic theory with business practice Jor the purpose of facilitating decision - making and forward planning by the management.” (iii) According to Mansfield “Managerial economics is concermed with the application of economic concepts and economic analysis to the problems of formulating rational managerial decision .” (iv) Brigham and Pappas define Managerial economics “as the application of economic theory and methodology to business administration practice .” (v} According to Hailstones and Rothwell, "Managerial economics is the application of economic theory and analysis to practices of business firms and other institutions . such as health care facilities and government agencies (vi) Hague : "Managerial economics is a fundamental academic subject which seeks to understand and to analyse the problems of business decision making. Thus, managerial economics is essentially applied economies in the field of business management. It is the economics of business or managerial decisions. It pertains to all economic aspects of managerial decision-making. Managerial economics, in particular, is the study of allocation of resources available to a business firm or organisation. It is fundamentally concerned with the “art of economising' that is. making rational choices to yield maximumEo fanagement Decision Problems| Decision Sciences ; {Tools & Techniques of Analysis) {) | Optimisation Techniques (i) Statistical Estimation (ii) Linear Programming (iv) Game Theory. Traditional Economics : (i) Micro Economics (i) Macro Economics Managerial Economics : Application of Economic Theory, Methodology and Tools to solve Managerial Decision Problems. | Optimum Solution to Managerial Decision Problems. [2.1] Main Characteristics of Managerial Economics : The following are some of the main characteristics of managerial economics : (i) Managerial Economics is a branch and discipline of General Economics : As said earlier Managerial Economics is the application | of economic tools to practices. of busine the agricultural aspects of economic sci economies study of industrial aspe‘ Economies for Managers gf motelarY aspects as monetary economics, 80 also a study of the ecmerie aspects of (he Taadjenent of the fm ts known ay managenal eeonomgey, Thus, manayertal economies ts but a branch, of RHA Coohomte theary. (4) Managerial Economics is mainly micro in character st. {tL Concentrates only on the study of the fm. It is the problem of a business firm which (FATA PAT OT ThE study of managerial economics: tt does not deal with the working of the economy as a whol mae {ili The contents of Managerial Economics are mainly based on the theory of firm. It analyses the problems of a firm and offers solution for the sa {iv) Managerial Economics also studies macro economics to understand and adjust to the economic environment under which the firm operates, !n other words, althougly managerial economics draws heavily on micry e some aspects of macro economics are also relevant making and forward planning. Som of employment, general pride Wstudy of Fade evees, international trade and ance of payment etc, has great relevance in managerial economics for Certain types Of decision - making problems (v) Managerial Economics is normative rather than positive in character; that is, it is prescriptive rather than descriptive. It _deals with what should be done and how it should be done. Tt shows the way as fo how to achieve the Ser abye ) get the optimal results, Managerial Economics is, 1 med with the function mics is, thus, ¢ of an_advisory nature in decision - making. It is normative in character dealing with decision-making problems - how to take business decisions in order to achieve the set objectives. It advises: what ought to be done and how it should be done. (vi) Managerial Economics is both conceptual and metrical. It makes use of the various concepts in order to understand and analyse the decision - making problems. Likewise, it also uses the various quantitative techniques to measure the impact of aiferant factors and policies: _ (vii) Managerial Economics helps business executives in taking rational decisions, since resources with the firm are limited. they have to be allocated in the most optimum manner to achieve the set objectives. This is, then, essentially a problem of choice. Managerial Economics _helps_in_analysing the various alternat and selecting the one which would give the optimal results,oe: Definition, Nature and (vill) Managerial Economic highlights on the practical appl lve Tr ope of Managerial Economics 5 matic and ie th more realistic, oti of vari siness and manayement problems (ix) sas on making}it concentrates on ds making process, decision models and decision v Tate tonships, fence of dels rel (x) Managerial econosnics also ¢ udy of non-economic variables ne formance of tie hit, Thus, for instanc ironmental forces, socio-political and cu ial economic_uses. the services of mat ciplines like mathematics, statistics, engineer accounting, operation research and p: (0 busines fient problems It should be noted here that Managerial Economics does not)” provide ready-made solutions to all kinds of problems faced by f firm. it provides only the logic and methodology to find out answer and not the themselves. It also depends on the manager's ability, experience, expertise and intelligence to use different tools of economic analysis to find out the correct answers to business problems, i [3] Subject-matter and Scope of Managerial Economies : We have seen above that decision - making and forward planning are the (wo major functions involved in Managerial Economics. They / are related to the following aspects + na {a) Allocation of resourses : The resourses with a firm are scarce and have alternative uses. Accordingly, these have to be utilised in a most efficient and optimum manner to attain set objectives, (b) Problems of inventory control : Problems of inventory control relate to decisions about maintaining optimum levels of stock of raw materials and finished goods over a period of time. Decisions pertaining to these have to be taken in the context of demand and supply conditions, {c) Pricing problems : Another decision- making problem is the fixation of the prices of the products ‘of the firm. These involve decisions regarding various methods of pricing to be adopted. ‘The choice is whether prices should be realated to demand or cost or. both; whether to adopt “product - line pricing’ or “marginal pricing’ ) or mark-up pricing in the fixation of prices. . (d) Investment problems : Forward planning obviously involves investment problems. These relate to thé problems of allocation of scarce resources, the quantum and mode of investment, sources ofpynnmnte FOE ULE tq th produel pattern me eoncerned with qy he og nasly J planitin probe, ‘ ut forall lal HUET My hough Here iw “in i will pv us one of i en, the (OLOWIE oy wari lwed i MATAR Coonan af gtusctiea ARES in ¢ forecasting, 5 { analyo® ig) ven Managet four catesor es of Eeonoml various type? geonomnl tory problems, Capital budgellng, (io) Labout cot studies a) mergers and acqusttiong (12) Govern peonomlcs i ainly €0) (4) Demand Profit anal Hireake - even Marginal analy 43.1] Scope of Managerial “The scope of busitiess economnles 1 ent regulations, vers {WO ATCA of aes sion making (2) Operational Issues or Internal Issue 8 (2) Environmental Issues OF External 18st (1) Operational Issues ¢ perational issues ? those issues which arise within the busin organisation and are under the contral of the management. The can be eategor ed as follows to demarcate the scope of mana rial economics jal economics like the (a) Resource Alloction + Manager! concerned wilh the problem of alysis is applied traditional economic theory is optimum alloction of searce resources. Busine: to the problem of determining the Jevel of output W profit, In this resp ar prog to solve optimisation problems of the most practical and powerful busine currently available. (b) Demand analysis and Demand forecasting : Demand sa crucial role in business decision = making. A study eri a helpful guide to mana} sions. In deciding programming 1s one {ecision - making tool analysis pa Sidemand analysis is certainly cereutives while taking production and pricing Satine tal produce’? and pertathting to te nature and quant seer es a. kes the dei anges in Seen a its price, price of its substitutes °F jearndel foods consumer's income, his tastes and eee ie eee a are known as demand determinants a study wells the pr ae for forecasting the demand for the product as sales. Thus, the main topics covered in den id ent prices |Definition, Nature and Scope of Manogerlal Leonomles 7 one denind determinants, demand distigntions, varlous an types af clantienly of denuand, demand farecanting, ete, Cost analysts : A study of cost analysts te very unefal for management decisions Estinites of cost ts an essential part of business decision and helps inthe efficlent and optinurn sdlocatio of resources. ‘The objective of 0 finn iv to produce a given output @ least cont by having the option combination of the factors of production. Cost analysis helps in deciding about the alze of the firm, the volume of output and factor proportions, ‘The tn covered here are various typ Te 1 topies sities. action c, ee (d) Pricing Policies and Practices + Pricing policy 1s an {important sphere of Managerial Economies. The objective of a firm fs to carn maximum profits and pricing poliey 1s an important determinant affecting profits. In fact, the success or failure of the firm toa very large extent, depends on the correctness of tts pricing, decision price policy affects the revenug oFtfe firm and consequently its profits, The main topics covered here are price determination under various mark ructares, pricing ethods, differential pricing, ete: - " (c) Profit Planning and Break - Even Analysis : A business firm works for profits and in the long run profits are an important criteria £0 measure the success or failure of a firm. But we also know that in modern times the firm works under_conditions of linly because of changes in d id ¢ conditions, in the prices of inputs and pro changes in technology ‘apart Front politica and soctat conditions and changes in goverment nomic policies, Profit planning, therefore, is very essential under nditionsof uncertainty. The topics dealt with in this are nature: and measurement of profit, break- even analysis, profit policies, ét ; () Capital Budgeting and Investment decisions : Capital is a scarce factor of produciton and is obtained at a cost. It is, therefore, necessary that decisions pertaining to capital investments are taken with great care and caution. Capital budgeting, among other things, involve estimate of capital requirements for the project, that is, the “demand for capital based on its marginal productivity. cost of capital and the various sources from which it is sought to be raised, profitability oF capital, that is, rate of return, choice of capital “investments, selection of projects and optimal n of capital “as between dilferent projects, etc. Tq ¢< Covewd- CoB. A ek —~ (g) Strategic Planning : Strategic plat OAL GBB ae with a framework on which long term decisions can be made which have an impact on the behaviour of the firm. The firm sets certain { cost concept lien, cost - output relationship in the ehort and lon, function, Cost control, economies and diseconomies HT cost ¢8 Heonomies for Managers 2 TeNIt hale and ubjeetives and weleets the slratexy {0 achieve Vis sane, Sthateie planntiyy ts now a ew addition fo the scope af managetial economies with the emergenes of alla tional callous, The perspective atrateyic planning ts global, 11 jy diferent fiom project planning whieh focines on a specific project SF ACHINLY, Lakewiso, tL ts alse different from operational planning which examines the details required for the implementation of PATUICHIAE ltateyy witht a certain Une period. Portfolio mo idl cotperate sitiulalion models come in the area of slriategie Planning. Infaet Jo new area af study called “Corporate Eeononiioy has come into 1¢¢ a8 a resull of the integration af DUSINes. ceonoinics and strategic planning. » v0) (2) Environmental or External Issues : Environmental Issue or external isaties in bustiess economics refer to general bustttes, environment in which the tin operates. These pertain to general onomie, social ayd political almospliere within which the frm has to tunction. The environmental factors have a far reaching earthy upon the functioning and performance of the firms. The business decision makers, therefore, have to fake into aecount the han; economic, political and sockal conditions in the county and give due consideration to environmental factors in tie process of decision maldng, This js essential because business decision taken {n tsolaion of environmental factors may not only prove infructurous but may also lead to heavy losses, To sum up, environmental or external issues relate managerial econoinies to macro economic theory, while operational issues relate i to micro economic theory. ‘The scope of managerial economies. thus, his considerably widened in modern times. [4] Managerial Economics and General Economic Theory Compared : Although managerial economies is a branch of general economics, however it differs from the traditional economic theory in certain respects. (i) In the first place, managerial decisions are not merely influenced by economic considerations alone, they are greatly influenced by other considerations also like human and behavioural factors, environmental forces, technical considerations, ete. Thus, for example, an expansionist policy for a firm may be an economically sound proposition during the period of rising demand for the firm's prgduct, but for fear of losing control ‘over the management, the firm may not decide to expand. Likewise, there are political and social considerations which may compel managers to modify their decisions based on purely economiceS -»S-~—-—-—_——s—s—'sm—>m—’~——~—™SFM Definition, Nature and Scope of Managerial Economics 9 J combs, an inereast put sockal yrounds, For example, In thie euntext of events in price may be fur Hled on economic couside and political pressures may not pernatt the fen to fake puch decision (ii) Managerial economic ‘economic theory with regard maximisation. The assumption tn the t fs that the objective of the firm Is to masts 1 lived that this assumption by some other assumptions, ‘The modern view is that the firm may be intersted in a reasonable profit rather than in maxtrateinys {ts profits. There ar legal, moral, public and soclal obligations, which have to be taken into account rather than the mere aim of profit rations ns differs from the tradition! 1 to itn assumption of profit itlonal economic theory 2 {ts profits However, it 1s ta be supplemented now been re maximisation. [ssues like water pollution or air pollution are & n due consideration along with profit maxi ation, Likewise, the firm may undertake a number of wellare measures for its employ OF gious and ott er charitable give donations to © ducational, relly ts and the additional expenses: incurred “don to the consumers in ty and the firm may be satisfied with a reasonable ret inverstment. In short, apart from the goal of profit nraximt the firm has to discharge Its social responsibility too. (ii) Managerial economics involves the application of economic theory and methodology to analyse busine aituiation, while general economics deals with the body of economic principles itself. (iv) Managerial economics jig mainly micro in character, yeneral economics ts both micro as well as macro in character (v) Managerial economics, though micro in character , deals only with the problems of a firm, it is not concemed with the economic problems of an individual. ‘Thus, for example , topics like consumer's surplus, indifference curves, theory of revealed pr nce etc, are not studied in business econo However, micro-economic: Is with both economics of a firm as well as an individual. (vi) Again, micro economic’ deals with all the theories of distribution, nal interest and profit, However, in manag ial economics we d with profit theory ; other theories of distribution do not form a of the study of managerial economics. [5] Decision - Making and Forward - Planning : ‘The concepts of decision - making and forward planning occupy avery significant place in managerial economics and therefore it 1s Worthwhile discussing them in briel. itm: tru may not be prs ‘on these activities « formn of price-ris rn on its ation, ‘as a branch of economic theory de economics of sag a branch of general economics mely, rent, wages. only10 Economics for Manage, [5.1] Decision - Making Process Decision making proc managerial economies and is ¢ : enterprise which requires a large number of di Thus, for example, what produet is to be produced, when and hoy itis to produced, at what price il is to marketed, how much. pital is to be invested, how much is to spent on advertisement ete, are about which the manager of a firm has to make 11 making process for each of these problenis involves for running a bus ness ions to be taken some of the iss decision. Decis five main pha (i) Establising the Objective : The first phi process {s to establish in clear - cut terms the objective of the business enterprise. Obviously, the prime objective of the private enterprise is profit maximisation, although it may have some other objectives too, say like sales maximisation, increasing the market share, maximising managerial utility, job-security growth etc. However, for the public enterprise, profit maximisation is not the sole objective; more important than that is the social good, social welfare and public interest. A public sector enterprise has to take into consideration all the social costs and socigl benefits while making decisions pertaining to say setting up of a power plant or a steel mill, building an airport or construction of a railway line ete, (ii) To Define the Problem : The second step Is to define the problem, that is, to find out as to why and how the problem has arisen, Thus, for example, a plastic unit may find that there is fall in its sales and consequently fall in profil. It becomes ne ry for the firm, therefore, to find out the causes of decline in sales and Profits. Whether this is due to improper pricing policies or due to defective maketing strategy, or due to strained labour management relations or due to the use of outdated technology, Once the causes of the decline in sales and profits are diagonised, we say that the problem is defined and identified. of decision makin, (iil) To Identify All Possible Alternative Solutions : The next step is to search out all possible alternative solutions to the problem. This means that we have to consider the various variables that ifit have an impact on the problem. Thus, in the cases cited above 4s found that the fall in sales and profit is due to defective marke! strategy or strained labour management relations, appropria measures have to be initiated to bring about necessary changes in the marketing strategy and work for more harmonious and cordial labour - management relations. And if it is found that fall in profit is because of the use of old and outdated technology, the firm has. to go for installing updated machinery, equipment and production techniques a very important part jybenefit analysis, diff Definition, Nature and Scope of Managerial Economics Bi iv) To Evaluate Alternative Courses of Action : ‘There may be various alternative solutions to the problem. The firm has to evaluate each of the alternative course of action and adopt the one which ts the best. This would require the collection and analysis of the various types of data, facts and figures. Here, the firm can make use of such methods like linear programming, regression analysis, cost ‘ential calculus etc. to arrive at an optimal course of action, (v) To Implement the Decision : The final step is to implement the decision and this would require constant monitoring achieve desired results from the optimal cow example, if itis found that because of faulty, defective and inefficient implementation, the firm fails to get th once a set of measures are implemented to attain the given objective it is necessary to constantly review the same in the light of the nged economic conditions and economic environment. These live stages of dec through a chart ——_—_—_—_—$ DECISION - MAKING PROCESS sion - making process may be illustrated st Step | [To Establish the objective] t Second Step |— | To Define the Problem + Third Step _ |r [To Identify All Possible Alternative Solution: v [Fourth Step ]-+ [To Evaluate Alternative Courses of Action} t+ [ruth step — [To Implement the Decision-making, thus, plays a very important part in managerial economics. We know that the manager of a firm has to take a number of decisions from time to time. In fact managers face decision - making problems every day. Decision - making means ling one course-of action from two or more tions open to a firm, Whenever the manage: sion 5 matives open to him from which he © one Course of action, Accordingly he would consider various alternatives from different angles’and select that alternative which is the best under given circumstances. «Socem umes, decisions are undertaken in an sr iainty and therefore to meet with this, there is eXensne use on aaa dean BS€ Of the tools of mathematical and statistical Gecison - making &8€ tool of analysis, Boo; heories state the functional ic variables. Application of business facilitates Se pon : {a} Roders canty of various econemic concepts like cost. price, Gemand etc. used in business analysis. {B} Hthelpsin ascertaining the relevant variable and specifying ‘elevant data. fc) It provides consistency in analysis which helps in arriving at right conclusions. 'S, application of economic theories to the problem of business not only guides, assists and streamlines the process of decision - making but also contributes a great deal to the validity of decisions. SSDefinition, Nature and Scope of Managerial Economics 13 Nature of Business Decisions : ecision-making and forewar managerial economics jace what is the r time. In fact, a manager face decision p sion-making we mean th out of two or [5 A-1] Types of Business Decisions : The manager of frm nile performing ! ness decisions which he has to take follows (i) Price-output Decision is case, a manager has to make a decision regaring the price of the produced. While taking this decesion, he has to take into consideration several factors such as cost of production. profit rate, prices prevailing in the market, na- ture of market etc. He has to the into account relationship between price and output also. (ii) Selection of Technique of Production : A particular prod- uct may be produced using different types of production technig which may entail different uses (in terms of quality and quantity) of various inputs or factors of production. Manager has to decide which production technique will suit his firm the best, given the firm's capacity and market condition. — (iii) Advertising Decision : It is obvious that in today’s world. advertisement is a powerful too! to maintain or even increase the demand for a product. There are many avenues for advertisement like newspaper, T.V., radio, internet etc. and the manager has to decide how much should be the total budget for advertisement and required to take many business deci- . Some of the F ay be briefly described as14 Economics for Managerg eS then how to allocate it to the different channels of advertisment go as to increase the total exposure of the product among the public, and this will also depend upon the degree of eilectiveness of various channels of advertising. {iv) Investment Decision : The manager has to take a decision about how the firm will be allocating its investible fund to various channels, which will obviously depend upon the type of investment and the level of risk involved and the expected rate of return ete, Apart from these, there are many other business decesions which the manager of a firm is required to take like demand decesion, long run production decision etc. [5 A-1.1] Significance of Managerial Economics : ‘The significance of managerial economics is to be traced to the development of business corporate planning and policy decisions - which are firmly based on a closely argued analysis of all relevant data, evidence and past experience, present outcomes and future expectations. Managerial economics does not give importance only to the study of theoretical economic concepts. Its main concern is to apply theories to find solutions to day-to-day practical problems faced by a firm. The following points indicate the significance of managerial economics in its right perspective : (i) Managerial economics has a pivoted place in allied business disciplines concerned into the arena of decision making. It dy us models which help i decision making process. i) ‘provides the neresary conceptual tools, technical skills, box of analysis and technique of thinking and such other modern tools and instruments for the analysis of business problems. Thus, for example, Concepts like elasticity of demand, opportunity cost, fixed and variable cost, short - run and long-run costs, break-even analysis income and expenditure, profit and volume of production etc. helps in understanding and solving decision problems. Managerial economics is also helpful making such decisions like choice of the level of output and price of the product, | choice of product — mix, cho ertaining to investment | decisions. advertisement expenditure, raising of capital | resources andsoon, SSCS a_ase—~=-—n“s: (iv) Managerial economics as an applied science helps in analysing the firms markets, industry trends and macro forces which are directlyrelevant tothe concerned business | Mec. lalps inkegrole € Lg omc | aery with busines Prechta .Definition, Nature and Scope of Managerial Economics 15 (v) Managerial economics helps the manager to understand the intricacies of the business problems whicli solving easier and quicl Hecision at the righ Fe ean appropriate decisions and soon. A major contribution of managerial economics to management pertains to its guidance for optimisation and identification of key variables in the business decision-making PROCESS) Wve ont Ye x) Probl. (vi) Managerial economics provides necessary skills in furtherance of business goals and functions. It is fundamentally concémed with thé interaction between internal operations of the business firm and the business and economic environment such as marketing, business development, government business policy, investment climate and finance which are all affectred by the macro- economic policies of the government 4 (vii)In the context of gl Jobalisatid’ brvhtishtloy! liberalisation and a highly competitive dynamic“economy, it helps in identifying various business and managerial problems, their “Causes and consequences and Suggests Various policies and programmes to overcome them. Shwsat®4qic Pla Syéy- (viii) Managerial economics helps the busiiess wanes t5° become much more responsive, realistic and compéTent to a Rg BES TT ie une worl (x) Most of the managerial decisions are made under the conditions of uncertainty about the future, To reduce this ~dlement of uncertainty it is essential to undertake research and investigation of the problem before taking any action. This process of business research involves the following maih steps : 7 (a) problem definition (b) research design (c) data collection (d) data analysis and (e) interpreting the results. Here, the knowledge of business economics alongwith management science and statistical techniques will be of immense help to a manager in understanding, interpreting and evaluating of quantified variables pertaining to market and business economy. To, sum up, managerial economics has become a highly useful and practical discipline in recent years to analyse and find solutions to various kinds of business and managerial problems in a systematic and rational manner. Knowledge of managerial economics has proved to be a boon to a manager. businessman and an entrepreneure. It is truly an applied economic science which is useful in the pursult16 Economics for Managers SS of its objectives as well as efficient functioning and performance of a business firm. Managerial economics, indeed, is basically concerned with micro rather than macro area *f economic analysis, whiclris directly relevant to the practical business-economic decision ing, In short, managerial economics deals directly with business realities; it deals with a thorough analysis of key elements involve in the business decision making. {5'A-2], Limitations of Economic Analysis in Business Decision Making : ‘The following are same of the main limitations of €cono,,,, analysis to business decision making. fa) Iti assumed that the decision-maker is always T@Uonal jy his approach; this, however, need not be s0 in each ang every case. {o) The analysis is based on the assumption that Profit maximisation is the sole goal of a firm and maximum satisfaction is the sole goal of a consumer. But in real lif firms do not always work for maximum profits: there are other considerations too which it have to be taken into ‘account. Likewise consumers also in certain cases may forego maximum éatisfaction at the altar of other consideration. () ‘The analysis rests on the assumption of perfect knowledge, but what we generally find is that the decision maker has to remain satisfied with limited information and naturally therefore, his decision is not always rational. {5.B] Forward Planning : Apart from decision-making, the second important function of a business economist is forward planning. Forward planning means preparing plans for the future or deciding the future course of action for the firm. Once a decision is made about a particular goal to be achieved, plans regarding procluction, pricing, cost structure, capital - budgeting, management of inventories, etc. are prepared; forvard planning, thus, implies formulating plans for the future and goes hand in hand with the process of decison - making. Forward planning is indispensable for the smooth functioning of the firm. At the same time, it should be noted here that forward planning is a highly complicated task. It demands much more carefulness and prudence than operational issues. It requires adequate knowl bout future pattern of consumers’ behaviour. movements in the input markets and general economic nd environment in. the country.Definition, Nature and Scope of Managerial Economics W7 ‘The decision taken by a firm affects its future. Ther decisions which are taken during the present p implemented also during the present but its et sare only in future. Thus, for example, the decision to increase advertisement expenditure would not result in inereased sales immediately but only after some time in future; likewise there are certain decisions which are taken during the present period but these are to be implemented in future. Thus for instance, the decision to increase the total volume of sales by 10 percent next year may have been taken at present, but it is to be implemneted next year, Besides, the manager is more interested in the future of the firm rather than its present. This is because, the present state of the firm is already decided, and known, the manager now has to show his ability and skill in framing the future set up of the firm, The plans prepared by the manager for the alround future development of the firm is known as forward planning. Forward planning generally is of two types: (1) short term planning and (ii) long term planning. Short term planning is planning for the very near future, while long term planning is planning for distant future. Forward planning is related with the future which is uncertain and therefore forward planning is also full of uncertainties. It cannot be said with any degree of certainty that plans for the future development of the firm shall be successful, because no manager can claim to possess perfect knowledge and information about the future. As such in order that forward planning may be as accurate as possible and minimise the element of uncertainty, economic models and mathematical and statistical tools are widely used in mordern times. are certain tod and are To conclude, we may say that a managerial economist has to play a key role in the decision - making process and forward planning of a firm. He must be fully conscious of his responsibilities and obligations in order that he can discharge his role in a most successful manner. [6] Role and Responsibilities of a Managerial Economist: In moder times, managerial economists are playing a leading role in the solution of complex and intricate problems of decision- making and forward planning. A mangerial economist with his re- search and analitycal tools now occupies a prominent place in the hierachy of industry, trade and commerce. Due to a continuous increase in the demand for managerial economists, the number of such economists working in business and research departments as also in government nistitutions has shown a marked rise in recent epee a,18 Economics for Managers ee years, The growing inportance of these economists can be judged from the fact that in recent times a number of national and inter. national associations of business economists have been set up for mutual exchange for information and ideas on the subjects of com. mon interest. 16.1] Functions or Role of a Managerial Economist : One of the important functions of a managerial economist is {he process of decision - making which seeks to determine the key fag. tors that infulence the business over the period ahead. These fae, tors are mainly of two types : (1) External factors and (2) Internal factors. (1) External factors : The external factors affect the business decisions from outside, and so these factors are outside the contro} of the firm. These are known as ‘business environment.’ (2) Internal factors : The internal factors are within the scope and ambit of the firm and hence these are within its control. These factors are also known as ‘business operations’. ‘Thus, for example the decision of the firm regarding what, ow and where to produce, how much and where to invest, how many: workers should be employed and at what wage rate, or at what level the price of the product should be fixed are matters about which the firm can take indepedent decisions, and so these are called internal factors. But at the same time all these decisions of the firm are to be taken within the frame-work and parameter of a particular bus!- ness environmenit, and that is why, while taking its decisions the firm has to take into account government's economic policy or the actions and reactions of it's rival firms. These are external factors which a firm has to bear in mind while taking its decisions. {6.2} An Analysis of the External Factors : A mangerial economist has to analyse and make a forecast about the external factors in the context of general business condl- tons prevailing in the economy. These factors include general price ~ level, national income and output, volume of trade, etc. These are of great importance and aflect each and every firm, For this , it is i indepth study of the following : () Government's ec (2) Chan policies an in the degree of com he country-local. regional, | | | |pnomlen 1) Definition, Nature and Scope of Managerial (4) Potentialities of demand in the existing markets and new markets. (5) Possibilities of ¢ tunities and co} (6) Availability and cos (7) Money and Capital market conditions tn the economy, (8) Price situation regarding raw materials nd finished prod ucts, tnision and contraction of re atumner opportunities: sLoppor of the eredit sis of the above potits can help (he maniyerent spe and direction of Hel business plans, agerial ceonomis| with his comprehensive study of these prob. 1 provide the necessary guidance to the thanayement for alonal business decisions, [6.3] An analysis of the Internal Factors: dal economist also plays an portant role tn the man nent of the firm, He helps in deciding about the seale of produc tion and investment, sales and inventory sehedules, price poltey, expansion or contraction of the firm, ete. These are known aa inter nal factors or business operations and through a study of these factors, a managerial economist ean offer sell guidance to man, agement in its decision — maldng. For Unis, an indepth study of the following points 1s essential (1) Sal (2) Appropriate production sehedul the next six months, rc taking Amanag and profit budgets for the next year und inventory policy for (3) Selection of the most profitable product «mix for the firm (4) Changes tn the existing wage and pricing policies, fneeded (5) Cash flow available for the month and the mode of tt tn vestment [6.4] Specific fnuctions of a Managerial Economist: An idea about the specific functions of 4 managerial economist can be had from a study of the British industry undertaken by Alexander and Kemp. According to these writers, a managerial economist performs the following specific functions: Production scheduling, Demand forecastityg Market research, Economie analysis of the industry, Investment analysis and forecast20 Economics for Managers (6) Pricing and related decisions, (7) Advice on trade, {8) Advicé on foreign exchange management, 3 (9) Environmental forecasting, (10) Advice on capital projects, (11) Analysis of under-developed economies. {6.5] Some Other Functions of a Managerial Economist ; Besides the above futnctions, a managerial economist performs some other functions also like : (1) One of the main functions of a managerial economist is to improve the quality of policy making as it aflects short term opera-> ‘Hions:and long.term planning. He has to assist the management with his specialisted skill and sophisticated techniques to deter- mine the factors that influence the business. +. {2) The managerial economist has to prepare the forecast for general business activity. The purpose is to provide a framework for levelopment of sales and profit forecasts. (3). A managerial economist also helps the firm in product desi , product improvement and product planning through a fas also to estimate total market potential and the firm's perspec- tive share in the market in the light of past trends, present position _ and future expectations, | (4) A managerial economist can be helpful in many fields such as production planning, sales promotion, mventory control, opt jam Wolisation of manpower, etc, | (5) A managerial economist serves as constructive, and some- times as a stimulating and restraining influence. He infuses objec- tivity, broad perspective and concept of alternatives into the deci- sion - making process. In the words of Baumal, “A managerial econo- mist can become a far more helpful member of a management group by virtue of his studies in economic analysis, primarily because, there he learns to become an effective model builder and because, there he requires a very rich body of tools and techniques which can help him to deal with the problems of the firm in a far more rigorous, a far more probing and a far deeper manner. (6.6] Responsibilities of a Managerial Economist : We have seen above tant role of play in the planning. Let us now st ment, that is to say what are | q | hat a managerial economist has an impor- | rocess of decision - making and forward J] how best he can serve the manage- es towards his job.Definition, Nature and Scope of Managerial Economics 21 (1) In the first pla hggnanagertal economist must keep in mind the basic fact that(thebbjective of the S$ aximise profits and sccure maximum possible rewurn on the 0, he must direct all his energies and skillin helping the in: D mefit to achieve this objective) trrespective oF his own personal vi “AS Tong as Tie managerial’economist helps the management in achieving this goal, he will be siccessfully discharging his respon- sibilities as a managerial economist or else he will lose the confi- dence of the management. (2) The second responsibility of a managerial economist is to make forecast as accurately as possible so as to minimise the risk involved in the uncertainties of future. He has to make this forecast on the basis of the data of the market, general economic environ- ment, government policy and The working of the firm itself.)How- ~ever in case the managerial economist finds that due to some sud- den and unaccounted factors, his forecast has undergone a change or gone wrong, he should immediately bring it to the notice of the management and work out a new forecast. By doing so, he will not only assist the management in making appropriate adjustment in its policies but also inspire their confidence. (3) By objectively applying economic criteria, the managerial economist influences the ultimate decisions. He also seeks to re- duce the range of executive decision - making by mtroducing rel vant facts, weiging them objectively and making necessary recom- tendations and there by improve the chances of success of the (4) The function of a managerial economist is not to take deci- sions, but to analyse, conclude and recommend. For this, he should have necessary autonomy and freedom. He must not be isolated Trom any action taken by the firm, but should be properly acquainted with the ‘day to day affairs of the firm His basic role is to provide- quantitative base for decision - making.\He has also to’ perform an educational function and in that he has to explain to the man- agement the assistance which managerial economics 6 provide in the fulfilment of their duties and responsibilities. — (5)(The caliber‘of a managerial economist is generally judged by his ability to obtain necessary information quickly by personal contacts rather than by lengthy correspondence(For this, he should become member of various professional bodies afi attive part in their deliberations.) (6)(A managerial economist must be able to earn full statug.in the business team and must be ready to take up challenging tasks)tt Leonomics for Man, AL Lime’, he should offer hin spe algtiment and ander fo take his seryives indisp help of his abthty, training and experience - OY HF to the management 10 Lake yy ce 1in all serlonisne (7) Fhe: managerial econonnfat must possess (he rollow ing aay ties In order that he can disebarge the responsibilities CHeetives and efelently: = seeks as (Diplomacy this helps hin fo maintain good relations Te headquarters and with executives (He should have the firm, (iY) He should have a rare intuitive ability to Judge whay good or bad for the fam. : should poasess acrealive mud. and should fy tan measure of huntlity, a pi desire to learn, Wit) thorough Knowledge of the working sould be mod ed Lo provide and careful thle 1 (vi) He should be express nivel clearly and stip aiid Wy to aitnife Hie wse OF feclinleal CermtTOlopy jy communicating with the management. Wi) He should be bot conceptual and metiieal, heestuise yy “has been well said, ‘theory without measurement 4g naively useful and measurement without theory ean lead fg misleading conclusions, A, lirm and disere Cand should be wey brass for the considered judgerjeny dec in malig bushes de slony, To conclude, we may say that a managerial economist has ty play a key role tn the deciston » making process and forward play ning of a firm. He must be fully conscious of his responsibilities and obligations in order that he can discharge his role tn a most suecesstul manner, IEW _ EXERCISES Q.1. What is managerial economies ? Discuss tts main characteristic Q.2. Examine the nature, seope and subject matter of mane economics, Q.3. What is meant by decision - making and forward planning? What role does a managerial economist play tn this ? erial Q.4. Discuss role and responsibilities of a managerial economistDefinition, Noture and Scope of Managerial Economies 23 Q.6. Write short note oF | (i) Definition of managerial economies, (i) Charactertatis of maingertal ecouomies, (1) Scope and subject matter of managerial economics, (Wy) Role itid responsibilities of a managerial evoporniet SHORT QUESTIONS WITH ANSWERS: Q. 1. State the main characteristics of managerial economien, (April, 2012) ‘The following ave (he mati eharacteritics of managerial economies: | (1) Manny economies rial economies ta braneh and diselphine of general Managerial economics te mainly mero tn characteor The contents of nvinagerial ceonomice are mainly based ot the theory of finn. (4) Manapertal economies is normative in character that is, ihe preseripiive rather than more deserlptive, (5) ‘The seope of managerial economies Jy linited as compared to general economies, (6) Manag (7) Managerial economics helps business executives tn tale rational decisions, rial economies ts both conceptual and metrical, Q. 2. Give a definition of managerial ecomomics, Managerial economies is the application of economle theory and analysis (o practices of business firms and other Institutions, It may be defined as the study of those economle theories, logic and methodology which are generally applied to seck solution to the practical problems of bu According to Spencer and Seegelman, "Managirial economies is the integration of economic theory with: business practice for the purpose of facttitating deelston « malding and forward planning by the management.” Q. 3.What is the scope of managerial economics ? rhe scope of managerial economies inchides the following: (1) Allocation of resources as between different uses . (2) Demand analysis and demand foreesting . (3) Cost and production analy: (4) Pricing policies and practice“a4 Economics for M Manag 7, Q. 4. State the functions of a managerial economist, State any two functions of a aan Sconomist, (2) Demand and sales forecast {3} Market research, | (4) Investment analysis and forecasts. (7) Business environmental forecasting, (8) To improve the quality of policy making. (9) To help the firm in product designing, product improvemeny and product planning, (10)To help in sales promotion, inventory control and optimur, utilisation of manpower, (11) To study changes in government economic policies and regy, jations as also trends in money and capital markets, Q.5. What are the main responsibilities of a business economist) ‘The main responsibilities of a managerial economist are as fo]. lows: (1) The managerial economist must keep in mind the basic fact that the objective of the firm is to earn maximum profits and so he must direct all his energies and skill in helping management to achieve this objective. (2) His second responsibility is to make forecast as accurately ible so as to minimise the risk of uncertainly of future, asic role is to provide quantitative base for decision - making. (4) He should be able to obtain necessary information quickly by personal contacts rather than by lengthy correspondence. For this, he should become member of various professional bodies and take active part in their deliberations. (5) He should be able to earn full status in the business team and must be ready to take up challenging tasks,firm and ability to ¢ Q.6. State Mc Nair and Merian's defini economics. (April, 2014) The following is the definition of managerial economics given by Mc Nair and Meriam :- “Managerial economics consists of the use of economic modes of thought to analyse business situations’ Q.7. State Spencer and Seigelman’s definition of managerial economics. (April, 2013, Oct., 2013, April, 2015) ‘The following is the definition of managerial economics "Mana- gerial economics is the integration of economic theory with busi- ness practices for the purpose of facilitating decision - making and forward planning by the management.” Q.8. State Brimgham and Paecas's definition of managerial economics, (October, 2015, April, 2017) ‘The following is the definition of managerial economics given by Bringham and Pappas. "Managerial economics is the application of economic theory and methodology to business administration practice.” QUESTIONS ASKED AT THE VEER NARMAD SOUTH GUJARAT UNIVERSITY EXAMINATION Q. 1. Explain the role and responsibility of a managerial economist in business. (October, 2011, April, 2015, October, 2016, April, 2017) Q.2. What is managerial economics ? Discuss the nature and scope of managerial economics in detail. (April, 2012, April, 2015) Q. 3. Write a short note on : Functions of Managerial economists. (April, 2012, October, 2015) Q. 4. What is managerial economics ? Discuss the nature of managerial economics. OR Discuss the role and responsibilities of a managerial economist. (October, 2012)Economics for Managen | economics tS to show can be used in formulating busin y this statem (October, 2016) a 2° Discuss the role antl responsibilities of a manager] ‘ economist (April, 2019, Q.6. Point out the significance and chief characteristiog managerial economics, _—_ (October, 2013, April, 2014) Q. 7. Write a short note on : fa} Responsibilities of managerial economist, fo). Managerial economics and traditional economics, (October, 2013) how Q. 8. Discuss the various fisnctions ofa managerial economist, In what manner will be best serve the management ? (April, 2014) Q. 9.. What role does the managerial economist play in : business. (October, 2014) Q. 10. Write a short note on : Characteristics of managerial economics (October, 2014) “Q. 12, "Managerial economics {s an application of economic theory,’ “Explain. (October, 2015) Q. 12, Write a short note on : Role and responsibilities of g managerial economist. (Oct., 2016) Q. 13, Discuss the role and responsibilities of a managerjay economist. In what way he can best serve the management? (April, 2017) oes