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GM 04 MANAGERIAL ECONOMICS assignment AIMA PGDM
4. Managerial economics involves use ofeconomic analysis to make business decisions involving the best use of a firm’sscarce resources” Explain the statement with suitable example.
Managerial
Economics can be defined as amalgamation of economic theory with business
practices so as to ease decision-making and future planning by management.
Managerial Economics assists the managers of a firm in a rational solution of
obstacles faced in the firm’s activities. It makes use of economic theory and
concepts. It helps in formulating logical managerial decisions. The key of
Managerial
Economics is the micro-economic theory of the firm. It lessens the gap between
economics in theory and economics in practice. Managerial Economics is a
science dealing with effective use of scarce resources. It guides the managers
in taking decisions relating to the firm’s customers, competitors, suppliers as
well as relating to the internal functioning of a firm. It makes use of
statistical and analytical tools to assess economic theories in solving
practical business problems.
Study of
Managerial Economics helps in enhancement of analytical skills, assists in
rational configuration as well as solution of problems. While microeconomics is
the study of decisions made regarding the allocation of resources and prices of
goods and services, macroeconomics is the field of economics that studies the
behavior of the economy as a whole (i.e. entire industries and economies).
Managerial Economics applies micro-economic tools to make business decisions.
It deals with a firm.
The use of
Managerial Economics is not limited to profit-making firms and organizations.
But it can also be used to help in decision-making process of non-profit
organizations (hospitals, educational institutions, etc). It enables optimum
utilization of scarce resources in such organizations as well as helps in
achieving the goals in most efficient manner. Managerial Economics is of great
help in price analysis, production analysis, capital budgeting, risk analysis
and determination of demand.
Managerial
economics uses both Economic theory as well as Econometrics for rational
managerial decision making. Econometrics is defined as use of statistical tools
for assessing economic theories by empirically measuring relationship between economic
variables. It uses factual data for solution of economic problems.
Managerial
Economics is associated with the economic theory which constitutes “Theory of
Firm”. Theory of firm states that the primary aim of the firm is to maximize
wealth. Decision making in managerial economics generally involves
establishment of firm’s objectives, identification of problems involved in
achievement of those objectives, development of various alternative solutions,
and selection of best alternative and finally implementation of the decision.
The following
figure tells the primary ways in which Managerial Economics correlates to
managerial decision-making.
All the
economic theories, tools, and concepts are covered under the scope of
managerial economics to analyze the business environment and make managerial
decisions while utilizing scarce resources efficiently and effectively.
Following are the major applications of managerial economics in sound business
decision making process involving the best use of a firm’s scarce resources -
Demand analysis and forecasting
When a business
manager decides to venture into a business, the very first thing he needs to
find out is the nature and amount of demand for the product, both at present
and in the future. A firm's performance and profitability depends upon accurate
estimates of demand. The firm will prepare its production schedule on the basis
of demand forecast. Demand analysis helps to identify the factors influencing
the demand for a firm's product and thus helps a manager in business planning.
Demand analysis
and forecasting thus help him in the choice of the product and in planning
output levels. The main topics covered under demand analysis and forecasting
are the concepts of demand, demand determinants, law of demand, its
assumptions, elasticity of demand (price, income and cross elasticity), demand
forecasting, etc.
Cost and production analysis
- Estimation of the cost in production.
- Recognizing the factors, which are causing cost to
firm.
- Suggests cost should be reduced for making good
profits.
- Production analysis deals with, Minimum cost should
be spend on raw materials and maximum production should be obtained
Pricing decisions, policies and practices
Once a
particular quantity of output is ready for sale, the firm has to fix its price
given the conditions in the market. Pricing is a very important aspect of
Managerial Economics as a firm's revenue earnings largely depend on its pricing
policy. A correct pricing policy makes a firm successful, while incorrect pricing
may lead to its elimination. The topics covered under this area are: price
determination in various market forms such as perfect market, monopoly,
oligopoly, etc., pricing methods such as differential pricing and product-line
pricing, and price forecasting.
Business firms
are established with the objective of making profits and it is thus the chief
measure of success. For maximizing profits the firm needs to take care of
pricing, cost aspects and long-range decisions, i.e., it has to evaluate its
investment decisions and carry out the best policy of capital budgeting for the
firm under a given set of conditions. If we know the future, profit analysis
would be an easy task. However, in a world of uncertainty our expectations are
not always realized, so that profit planning and measurement constitute a
difficult area of Managerial Economics. The important aspects covered under
this area are: nature and measurement of profit, profit policies, and
techniques of profit planning like break-even analysis, cost-volume-profit
analysis, etc.
Large amount of
capital / money is invested in to the business and that money should be managed
efficiently. Capital management involves planning and controlling of expenses.
There are many problems related to capital investments which involve
considerable amount of time and labor. Cost of capital and rate of return are
important factors of capital management.
Study of
markets is one of the important aspects of the work of a managerial economist.
A manager should have clear knowledge of different markets existing in the
environment. The environment is not constant and goes on changing. Thus, the
manager should know clearly about perfect and imperfect markets so as to
introduce the product in such markets where he can increase the sales revenue.
The main aspects are perfect market, monopoly market, monopolistic market,
oligopoly market, and price fixation under different market conditions.
Role of managerial economics in business
decision making process
Tools of
managerial economics can be used to achieve all the goals of a business
organization in an cost effective and efficient manner with the motive to
optimal utilization of scarce. Typical managerial decision making may involve one
of the following issues:
Managerial
economics assists businesses in determining pricing strategies and appropriate
pricing levels for their products and services. Some common analysis methods
are price discrimination, value-based pricing and cost-plus pricing.
Economists can
determine price sensitivity of products through a price elasticity analysis.
Some products, such as milk, are consider a necessity rather than a luxury and
will purchase at most price points. This type of product is considered
inelastic. When a business knows they are selling an inelastic good, they can
make marketing and pricing decisions easier.
Managerial
economics uses quantitative methods to analyze production and operational
efficiency through schedule optimization, economies of scale and resource
analyses. Additional analysis methods include marginal cost, marginal revenue
and operating leverage. Through tweaking the operations and production of a
company, profits rise as costs decline.
Many managerial
economic tools and analysis models are used to help make investing decisions
both for corporations and savvy individual investors. These tools are use to
make stock market investing decisions and decisions on capital investments for
a business. For example, managerial economic theory can be used to help a
company decide between purchasing, building or leasing operational equipment.
Uncertainty
exits in every business and managerial economics can help reduce risk through
uncertainty model analysis and decision-theory analysis. Heavy use of
statistical probability theory helps provide potential scenarios for businesses
to use when making decisions.
