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 firms 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 firms 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 firms objectives, identification of problems involved in achievement of those objectives, development of various alternative solutions, 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.

Managerial Economics deals with allocating the scarce resources in a manner that minimizes the cost. As we have already discussed, Managerial Economics is different from microeconomics and macroeconomics. Managerial Economics has a more narrow scope - it is actually solving managerial issues using micro-economics. Wherever

there are scarce resources, managerial economics ensures that managers make effective and efficient decisions concerning customers, suppliers, competitors as well as within an organization. The fact of scarcity of resources gives rise to three fundamental questionsa. What to produce? b. How to produce? c. For whom to produce? To answer these questions, a firm makes use of managerial economics principles. The first question relates to what goods and services should be produced and in what amount/quantities. The managers use demand theory for deciding this. The demand theory examines consumer behaviour with respect to the kind of purchases they would like to make currently and in future; the factors influencing purchase and consumption of a specific good or service; the impact of change in these factors on the demand of that specific good or service; and the goods or services which consumers might not purchase and consume in future. In order to decide the amount of goods and services to be produced, the managers use methods of demand forecasting. The second question relates to how to produce goods and services. The firm has now to choose among different alternative techniques of production. It has to make decision regarding purchase of raw materials, capital equipments, manpower, etc. The managers can use various managerial economics tools such as production and cost analysis (for hiring and acquiring of inputs), project appraisal methods( for long term investment decisions),etc for making these crucial decisions. The third question is regarding who should consume and claim the goods and services produced by the firm. The firm, for instance, must decide which is its niche market-domestic or foreign? It must segment the market. It must conduct a thorough analysis of market structure and

thus take price and output decisions depending upon the type of market. Managerial economics helps in decision-making as it involves logical thinking. Moreover, by studying simple models, managers can deal with more complex and practical situations. Also, a general approach is implemented. Managerial Economics take a wider picture of firm, i.e., it deals with questions such as what is a firm, what are the firms objectives, and what forces push the firm towards profit and away from profit. In short, managerial economics emphasizes upon the firm, the decisions relating to individual firms and the environment in which the firm operates. It deals with key issues such as what conditions favour entry and exit of firms in market, why are people paid well in some jobs and not so well in other jobs, etc. Managerial Economics is a great rational and analytical tool. Managerial Economics is not only applicable to profit-making business organizations, but also to non- profit organizations such as hospitals, schools, government agencies, etc.

Nature of Managerial Economics

Managerial Economics and Business economics are the two terms, which, at times have been used interchangeably. Of late, however, the term Managerial Economics has become more popular and seems to displace progressively the term Business Economics. The prime function of a management executive in a business organization is decision making and forward planning. Decision Making means the process of selecting one action from two or more alternative courses of action whereas forward planning means establishing plans for the future. The question of choice arises because resources such as

capital, land, labour and management are limited and can be employed in alternative uses. The decision making function thus becomes one of making choices or decisions that will provide the most efficient means of attaining a desired end, say, profit maximization. Once decision is made about the particular goal to be achieved, plans as to production, pricing, capital, raw materials, labour, etc., are prepared. Forward planning thus goes hand in hand with decision making. A significant characteristic of the conditions, in which business organizations work and take decisions, is uncertainty. And this fact of uncertainty not only makes the function of decision making and forward planning complicated but adds a different dimension to it. If knowledge of the future were perfect, plans could be formulated without error and hence without any need for subsequent revision. In the real world, however, the business manager rarely has complete information and the estimates about future predicted as best as possible. As plans are implemented over time, more facts become known so that in their light, plans may have to be revised, and a different course of action adopted. Managers are thus engaged in a continuous process of decision making through an uncertain future and the overall problem confronting them is one of adjusting to uncertainty. In fulfilling the function of decision making in an uncertainty framework, economic theory can be pressed into service with considerable advantage. Economic theory deals with a number of concepts and principles relating, for example, to profit, demand, cost, pricing production, competition, business cycles, national income, etc., which aided by allied disciplines like Accounting. Statistics and Mathematics can be used to solve or at least throw some light upon the problems of business management. The way economic analysis can be used towards solving business problems. Constitutes the subject matter of Managerial Economics. Definition of Managerial Economics

According to McNair and Meriam, "Managerial Economics consists of the use of economic modes of thought to analyse business situation." Spencer and Siegelman have defined Managerial Economics as "The integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management." We may, therefore define Managerial Economics as the discipline which deals with the application of economic theory to business management. Managerial Economics thus lies on the borderline between economics and business management and serves as a bridge between economics and business management. Chart 1 Economics, Business Management and Managerial Economics.

Application of Economics to Business Management

The application of economics to business management or the integration of economic theory with business practice, as Spencer and Siegelman have put it, has the following aspects :1. Reconciling traditional theoretical concepts of economics in relation to the actual business behavior and conditions. In

2.

3.

4.

5.

economic theory, the technique of analysis is one of model building whereby certain assumptions are made and on that basis, conclusions as to the behavior of the firms are drown. The assumptions, however, make the theory of the firm unrealistic since it fails to provide a satisfactory explanation of that what the firms actually do. Hence the need to reconcile the theoretical principles based on simplified assumptions with actual business practice and develops appropriate extensions and reformulation of economic theory, if necessary. Estimating economic relationships, viz., measurement of various types of elasticities of demand such as price elasticity, income elasticity, cross-elasticity, promotional elasticity, cost-output relationships, etc. The estimates of these economic relationships are to be used for purposes of forecasting. Predicting relevant economic quantities, eg., profit, demand, production, costs, pricing, capital, etc., in numerical terms together with their probabilities. As the business manager has to work in an environment of uncertainty, future is to be predicted so that in the light of the predicted estimates, decision making and forward planning may be possible. Using economic quantities in decision making and forward planning, that is, formulating business policies and, on that basis, establishing business plans for the future pertaining to profit, prices, costs, capital, etc. The nature of economic forecasting is such that it indicates the degree of probability of various possible outcomes, i.e. losses or gains as a result of following each one of the strategies available. Hence, before a business manager there exists a quantified picture indicating the number o courses open, their possible outcomes and the quantified probability of each outcome. Keeping this picture in view, he decides about the strategy to be chosen. Understanding significant external forces constituting the environment in which the business is operating and to which it must adjust, e.g., business cycles, fluctuations in national income and government policies pertaining to public finance, fiscal policy

and taxation, international economics and foreign trade, monetary economics, labour relations, anti-monopoly measures, industrial licensing, price controls, etc. The business manager has to appraise the relevance and impact of these external forces in relation to the particular business unit and its business policies. Characteristics of Managerial Economics

It would be useful to point out certain chief characteristics of Managerial Economics, in as much its they throw further light on the nature of the subject matter and help in a clearer understanding thereof. 1. Managerial Economics is micro-economic in character. 2. Managerial Economics largely uses that body of economic concepts and principles, which is known as 'Theory of the firm' or 'Economics of the firm'. In addition, it also seeks to apply Profit Theory, which forms part of Distribution Theories in Economics. 3. Managerial Economics is pragmatic. It avoids difficult abstract issues of economic theory but involves complications ignored in economic theory to face the overall situation in which decisions are made. Economic theory appropriately ignores the variety of backgrounds and training found in individual firms but Managerial Economics considers the particular environment of decision making. 4. Managerial Economics belongs to normative economics rather than positive economics (also sometimes known as Descriptive Economics). In other words, it is prescriptive rather than descriptive. The main body of economic theory confines itself to descriptive hypothesis, attempting to generalize about the relations among different variables without judgment about what is desirable or undesirable. For instance, the law of demand states that as price increases. Demand goes down or vice-versa but this

statement does not tell whether the outcome is good or bad. Managerial Economics, however, is concerned with what decisions ought to be made and hence involves value judgments. Production and Supply 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 with 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.

Pricing Decisions, Policies and Practices Pricing is a very important area of Managerial Economics. In fact, price is the ness of the revenue of a firm and as such the success of a business firm largely depends on the correctness of the prices 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.

Profit Management Business firms are generally organized for the purpose of making profits and, in long run, profits provide the chief measure of success. In this connection, an important point worth considering is the element of uncertainty exiting about profits because of variations in costs and revenues which, in turn, are caused by torso both internal and external to

the firm. If knowledge about the future were fact, profit analysis would have been a very easy task. However, in a world of certainty, expectations are not always realized so that profit planning and measurement constitute the difficult are of Managerial Economics. The important acts covered under this area are :- Nature and Measurement of Profit, Profit Testing and Techniques of Profit Planning like Break-Even Analysis.

Capital Management Of the various types and classes of business problems, the most complex and able some for the business manager are likely to be those relating to the firms 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 term for top-level decision. Briefly, capital management implies planning and trolls of capital expenditure. The main topics dealt with are :- Cost of Capital, Rate return and Selection of Project.

The various aspects outlined above represent the major uncertainties which a ness firm has to reckon with, viz., demand uncertainty, cost uncertainty, price certainty, profit uncertainty, and capital uncertainty. We can, therefore, conclude the subject matter of Managerial Economic consists of applying economic cripples and concepts towards adjusting with various uncertainties faced by a ness firm.

Managerial Economics and Other Subjects

Yet another useful method of throwing light upon the nature and scope of Managerial Economics is to examine its relationship with other subjects. In this connection, Economics, Statistics, Mathematics and Accounting deserve special mention.

Managerial Economics and Economics Managerial Economics has been described as economics applied to decision making. It may be viewed as a special branch of economics bridging the gulf between pure economic theory and managerial practice. Economics has two main divisions :- (i) Microeconomics and (ii) Macroeconomics. Microeconomics has been defined as that branch of economics where the unit of study is an individual or a firm. Macroeconomics, on the other hand, is aggregate in character and has the entire economy as a unit of study. Microeconomics, also known as price theory (or Marshallian economics) is the main source of concepts and analytical tools for managerial economics. To illustrate various micro-economic concepts such as elasticity of demand, marginal cost, the short and the long runs, various market forms, etc., all are of great significance to managerial economics. The chief contribution of macroeconomics is in the area of forecasting. The modern theory of income and employment has direct implications for forecasting general business conditions. As the prospects of an individual firm often depend greatly on general business conditions, individual firm forecasts depend on general business forecasts.

A survey in the U.K has shown that business economists have found the following economic concepts quite useful and of frequent application :-

The Price Elasticity of Demand

In economics, the demand for a certain good or service is represented by the demand curve. The demand curve is plotted on a graph with price labeled on the y-axis and quantity labeled on the x-axis. The resulting curve is downward-sloping; thus, increases in price result in a fall in demand for a given product. Just the amount by which demand falls with an increase in price is measured by the price elasticity of demand; the price elasticity of demand is measured by the percentage change in quantity demanded divided by the percentage change in price. So, if price increases by 10 percent, and demand falls by -0.5 percent, the price elasticity of demand would be -0.5. However, by convention, price elasticity is expressed as a positive number. The elasticity would thus be expressed as 0.5, not -0.5.

Analyzing the Price Elasticity of Demand

After calculating the price elasticity of demand, one of five results may be obtained. An elasticity equal to one is said to be unit elastic; that is, any change in price is matched by a change in quantity demanded. An elasticity of between zero and one is said to be relatively inelastic, when large changes in price cause small changes in demand. An elasticity equal to zero is said to be perfectly inelastic, when a change in price does not change the quantity demanded. A relatively elastic good is where elasticity lies between one and infinity, and a small change in price results in a relatively large change in demand. The last category is that of a perfectly elastic good, when a minute change of price results in an infinitely large change in demand.

Applying the Price Elasticity of Demand

The price elasticity of demand for a certain good or service has considerable implications for businesses. If an ice cream shop, for example, were to increase the price of vanilla ice cream by 10 percent, and if demand fell by 5 percent as a result, management would then know that the price elasticity of demand for that particular good was elastic. But if they also increased the price of their top-selling flavor, chocolate, by the same amount, and if prices remained the same, then they would have a relatively inelastic product. Thus, elasticities differ with respect to variety of product in question. Businesses must therefore make pricing decisions based on these elasticity assumptions.

Impact on Business Management Problems

Price elasticity of demand affects a business's ability to increase the price of a product. Elastic goods are more sensitive to increases in price, while inelastic goods are less sensitive. Assuming that there are no costs in producing the product, businesses would simply increase the price of a product until demand falls. Things become more complicated, however, after introducing costs. Let's say that the cost of vanilla flavoring increases as a result of short market supply. As profits equal revenue minus costs, this would lower the ice cream shop's profits. If costs were close to the price of vanilla ice cream, profits would be almost zero. As vanilla ice cream is elastic, the shop manager would be unable to increase the price without damaging demand. Some businesses,

therefore, sell some goods that have little to no profit margin. Their main profits come from products in higher demand. In this case, the ice cream shop would increase the price of the more inelastic good, chocolate ice cream, in order to compensate for the loss in profits.

Income Elasticity of Demand

How sensitive is the demand for a product to a change in the real incomes of consumers? We use income elasticity of demand to measure this. The results are important since the values of income elasticity tell us something about the nature of a product and how it is perceived by consumers. It also affects the extent to which changes in economic growth affect the level and pattern of demand for goods and services. Definition of income elasticity of demand Income elasticity of demand measures the relationship between a change in quantity demanded for good X and a change in real income. The formula for calculating income elasticity: % change in demand divided by the % change in income Normal Goods Normal goods have a positive income elasticity of demand so as consumers income rises, so more is demanded at each price level i.e. there is an outward shift of the demand curve

Normal necessities have an income elasticity of demand of between 0 and +1 for example, if income increases by 10% and the demand for fresh fruit increases by 4% then the income elasticity is +0.4. Demand is rising less than proportionately to income. Luxuries have an income elasticity of demand > +1 i.e. the demand rises more than proportionate to a change in income for example a 8% increase in income might lead to a 16% rise in the demand for restaurant meals. The income elasticity of demand in this example is +2.0. Demand is highly sensitive to (increases or decreases in) income.

Inferior Goods Inferior goods have a negative income elasticity of demand. Demand falls as income rises. Typically inferior goods or services tend to be products where there are superior goods available if the consumer has the money to be able to buy it. Examples include the demand for cigarettes, low-priced own label foods in supermarkets and the demand for council-owned properties.

The income elasticity of demand is usually strongly positive for Fine wines and spirits, high quality chocolates (e.g. Lindt) and luxury holidays overseas. Consumer durables - audio visual equipment, 3G mobile phones and designer kitchens. Sports and leisure facilities (including gym membership and sports clubs). In contrast, income elasticity of demand is lower for Staple food products such as bread, vegetables and frozen foods. Mass transport (bus and rail). Beer and takeaway pizza! Income elasticity of demand is negative (inferior) for cigarettes and urban bus services. Product ranges: However the income elasticity of demand varies within a product range. For example the Yed for own-label foods in supermarkets is probably less for the high-value finest food ranges that most major supermarkets now offer. You would also expect income elasticity of demand to vary across the vast range of vehicles for sale in the car industry and also in the holiday industry. Long-term changes: There is a general downward trend in the income elasticity of demand for many products, particularly foodstuffs. One reason for this is that as a society becomes richer, there are changes in consumer perceptions about different goods and services together with changes in consumer tastes and preferences. What might have been considered a luxury good several years ago might now be regarded as a necessity (with a lower income elasticity of demand). Consider the market for foreign travel. A few decades ago, long-distance foreign travel was regarded as a luxury. Now as real price levels have come down and incomes have grown, so millions of consumers are able to fly overseas on short and longer breaks. For many an annual holiday overseas has become a necessity and not a discretionary item of spending! How do businesses make use of estimates of income elasticity of demand? Knowledge of income elasticity of demand for different products helps firms predict the effect of a business cycle on sales. All countries experience a business cycle where actual GDP moves up and down in a regular pattern causing booms and slowdowns or perhaps a recession. The business cycle means incomes rise and fall. Luxury products with high income elasticity see greater sales volatility over the business cycle than necessities where demand from consumers is less sensitive to changes in the economic cycle The UK economy has enjoyed a period of economic growth over the last twelve years. So average real incomes have increased, but because of differences in income elasticity of demand, consumer demand for products will have varied greatly over this period. Income elasticity and the pattern of consumer demand

Over time we expect to see our real incomes rise. And as we become better off, we can afford to increase our spending on different goods and services. Clearly what is happening to the relative prices of these products will play a key role in shaping our consumption decisions. But the income elasticity of demand will also affect the pattern of demand over time. For normal luxury goods, whose income elasticity of demand exceeds +1, as incomes rise, the proportion of a consumers income spent on that product will go up. For normal necessities (income elasticity of demand is positive but less than 1) and for inferior goods (where the income elasticity of demand is negative) then as income rises, the share or proportion of their budget on these products will fall (http://www.netmba.com/econ/micro/cost/opportunity/

1. Opportunity cost,
An opportunity cost is defined as the value of a forgone activity or alternative when another item or activity is chosen. Opportunity cost comes into play in any decision that involves a tradeoff between two or more options. It is expressed as the relative cost of one alternative in terms of the next-best alternative. Opportunity cost is an important economic concept that finds application in a wide range of business decisions. Opportunity costs are often overlooked in decision making. For example, to define the costs of a college education, a student would probably include such costs as tuition, housing, and books. These expenses are examples of accounting or monetary costs of college, but they by no means provide an all-inclusive list of costs. There are many opportunity costs that have been ignored: (1) wages that could have been earned during the time spent attending class, (2) the value of four years' job experience given up to go to school, (3) the value of any activities missed in order to allocate time to studying, and (4) the value of items that could have purchased with tuition money or the interest the money could have earned over four years. These opportunity costs may have significant value even though they may not have a specific monetary value. The decision maker must often subjectively estimate Opportunity costs. If all options were purely financial, the value of all costs would be concrete, such as in the example of a mutual fund investment. If a person invests $10,000 in Mutual Fund ABC for one year, then he forgoes the returns that could have been made on that same $10,000 if it was placed in stock XYZ. If returns were expected to be 17 percent on the stock, then the investor has an opportunity cost of $1,700. The mutual fund may only expect returns of 10 percent ($1,000), so the difference between the two is $700. This seems easy to evaluate, but what is actually the opportunity cost of placing the money into stock XYZ? The opportunity cost may also include the peace of mind for the investor having his money invested in a professionally managed fund or the sleep lost after watching his stock fall 15 percent in the first market correction while the mutual fund's losses were minimal. The values of these aspects of opportunity cost are not so easy to quantify. It should also be noted that an alternative is only an opportunity cost if it is a realistic option at that time. If it is not a feasible option, it is not an opportunity cost.

Opportunity-cost evaluation has many practical business applications, because opportunity costs will exist as long as resource scarcity exists. The value of the next-best alternative should be considered when choosing among production possibilities, calculating the cost of capital, analyzing comparative advantages, and even choosing which product to buy or how to spend time. According to Kroll, there are numerous real-world lessons about opportunity costs that managers should learn:
1. Even though they do not appear on a balance sheet or income statement, opportunity costs are real. By choosing between two courses of action, you assume the cost of the option not taken. 2. Because opportunity costs frequently relate to future events, they are often difficult to quantify. 3. Most people will overlook opportunity costs.

Because most finance managers operate on a set budget with predetermined targets, many businesses easily pass over opportunities for growth. Most financial decisions are made without the consultation of operational managers. As a result, operational managers are often convinced by finance departments to avoid pursuing value-maximizing opportunities, assuming that the budget simply will not allow it. Instead, workers slave to achieve target production goals and avoid any changes that might hurt their short-term performance, for which they may be continually evaluated. People incur opportunity costs with every decision that is made. When you decided to read this article, you gave up all other uses of this time. You may have given up a few minutes of your favorite television program or a phone call to a friend, or you may have even forgone the opportunity to invest or earn money. All possible costs should be considered when making financial or economic decisions, not simply those that can be concretely measured in terms of dollars or rates of return.

Read more: Opportunity Cost - examples, advantages, school, business http://www.referenceforbusiness.com/management/Ob-Or/Opportunity-Cost.html#ixzz1aZqdYWCd

2. The multiplier,

3. Propensity to consume,
4. What Does Marginal Propensity To Consume - MPC Mean? A component of Keynesian theory, MPC represents the proportion of an aggregate raise in pay that is spent on the consumption of goods and services, as opposed to being saved. 5. Read more: http://www.investopedia.com/terms/m/marginalpropensitytoconsume.asp#ixzz1aZrCDL37

You know your raise is due tomorrow. It's been a year of hard work and you know that the appraisal is long due and well deserved. So now that you know that a little more than usual is going to enter your bank account this month on, I'm sure you'll have some plans for it? Maybe a party for your friends, something for the house, a cool new gadget perhaps? Maybe, here you would like to spare a thought for your marginal propensity to consume. What is marginal propensity to consume? Read on to find out. Find out about the basic principle of economics. Marginal Propensity to Consume - Definition To spend or not to spend? That is the question. And how much you do spend is what the marginal propensity to consume talks about. As the definition of the marginal propensity to consume goes, it is the increase in consumer spending with an increase in disposable income. In the first paragraph I highlighted the basic and common situation under which the disposable income of the person increases. Now, whether he chooses to spend it, or perhaps more accurately, how much he chooses to spend is his propensity to consume. And since it has something to do with a slight increase over normal (in this case, the disposable income) the world 'marginal' comes into play in this concept, known as the marginal propensity to consume. Marginal Propensity to Consume Calculator While slightly technical and complicated sources with a lot of Greek alphabets will completely confuse you with this otherwise terribly simple marginal propensity to consume formula, a much simpler, easyto-use version of it is given here. Marginal Propensity to Consume = Change in Consumption (C)/Change in Disposable Income (Y) So basically, if you get a US$ 100 raise, and you spend US$ 80 of it for whatever purpose, then your marginal propensity to consume is 80/100 = 0.8 What this formula does is that it equates two variables, which are central to the concept of marginal propensity to consume - the disposable income and the consumption. The marginal propensity to consume pretty much espouses a basic assumption that with an increase in disposable income, there will be an increase in consumption, because well, lets face it, not too many people feel encouraged to reduce spending while at the receiving end of an increase in income! Factors that Affect Marginal Propensity to Consume Of course, this economic concept is not a stand-alone one and comes with a variety of ifs and buts with it. Here are a few factors, which affect the marginal propensity to consume.

1. Recession: After facing a big one, which has lasted for nearly two years by now, one cannot simply overlook the range of impacts of an economic recession. During a recession, the marginal propensity to consume of the people is generally lower, as people choose to hang on to and save every penny that they can lay their hands on. Conversely, during a period of boom with rising salaries, the marginal propensity to consume will be a lot higher. 2. Monetary Volatility: How stable is your currency? Does the exchange rate fluctuate a lot, when you compare it with other currencies? What is the rate of inflation like? Is the GDP showing stable growth over a sustained period of time? Because, if the currency fluctuates a lot and the inflation is pretty high, then the marginal propensity to consume will be relatively lower, as people tend to spend their earnings more prudently. 3. Age of the Sample: It is widely and perhaps correctly assumed, that the younger lot tends to spend a lot more than the older lot. So, if the sample population you are assuming for testing the marginal propensity to consume concept is a younger lot, more often than not, the marginal propensity to consume is relatively higher. 4. Job Security: If you work for the government on in the armed forces, chances are quite high that you may never lose your job. And with an employment guarantee, one is entitled to feel a bit lax with his or her spending as compared to say someone who has the sword of unemployment dangling right above his head, ready to fall any time. So for people in a more secure sort of job, the marginal propensity to consume is higher.

6. Marginal revenue product,

7. Speculative motive, 8. Production function, 9. Balanced growth, and 10. Liquidity preference. Business economics have also found the following main areas of economics as useful in their work :1. 2. 3. 4. 5. Demand theory, Theory of the firm-price, output and investment decisions, Business financing, Public finance and fiscal policy, Money and banking,

6. National income and social accounting, 7. Theory of international trade, and 8. Economics of developing countries. Managerial Economics and Management Accounting Managerial Economics is also closely related to accounting, which is concerned with recording the financial operations of a business firm. Indeed, accounting information is one of the principal sources of data required by a managerial economist for his decision making purpose. For instance, the profit and loss statement of a firm tells how well the firm has done and the information it contains can be used by managerial economist to throw significant light on the future course of action whether it should improve or close down. Of course, accounting data call for careful interpretation. Recasting and adjustment before they can be used safely and effectively. It is in this context that the growing link between management accounting and managerial economics deserves special mention. The main task of management accounting is now seen as being to provide the sort of data which managers need if they are to apply the ideas of managerial economics to solve business problems correctly; the accounting data are also to be provided in a form so as to fit easily into the concepts and analysis of managerial economics.

Uses of Managerial Economics

Managerial economics accomplishes several objectives. First, it presents those aspects of traditional economics, which are relevant for business decision making it real life. For the purpose, it calls from economic theory the concepts, principles and techniques of

analysis which have a bearing on the decision making process. These are, if necessary, adapted or modified with a view to enable the manager take better decisions. Thus, managerial economics accomplishes the objective of building suitable tool kit from traditional economics. Secondly, it also incorporates useful ideas from other disciplines such a psychology, sociology, etc., if they are found relevant for decision making. In fact managerial economics takes the aid of other academic disciplines having a bearing upon the business decisions of a manager in view of the carious explicit and implicit constraints subject to which resource allocation is to be optimized. Thirdly, managerial economics helps in reaching a variety of business decisions. 1. What products and services should be produced? 2. What inputs and production techniques should be used? 3. How much output should be produced and at what prices it should be sold? 4. What are the best sizes and locations of new plants? 5. How should the available capital be allocated? Fourthly, managerial economics makes a manager a more competent model builder. Thus he can capture the essential relationships which characterize a situation while leaving out the cluttering details and peripheral relationships. Fifthly, at the level of the firm, where for various functional areas functional specialists or functional departments exist, e.g., finance, marketing, personal production, etc., managerial economics serves as an integrating agent by coordinating the different areas and bringing to bear on the decisions of each department or specialist the implications pertaining to other functional areas. It thus enables business decision making not in watertight compartments but in an integrated perspective, the significance of which lies in the fact that the functional departments

or specialists often enjoy considerable autonomy and achieve conflicting coals. Finally, managerial economics takes cognizance of the interaction between the firm and society and accomplishes the key role of business as an agent in the attainment of social and economic welfare. It has come to be realized that business part from its obligations to shareholders has certain social obligations. Managerial economics focuses attention on these social obligations as constraints subject to which business decisions are to be taken. In so doing, it serves as an instrument in rehiring the economic welfare of the society through socially oriented business decisions. Role and Responsibilities of Managerial Economist

A managerial economist can play a very important role by assisting the Management in using the increasingly specialized skills and sophisticated techniques which are required to solve the difficult problems of successful decision making and forward planning. That is why, in business concerns, his importance is being growingly recognized. In developed countries like the U.S.A., large companies employ one or more economists. In our country (India) too, big industrial houses have come to recognize the need for managerial economists, and there are frequent advertisements for such positions. Tatas and Hindustan Lever employ economists. Indian Petrochemicals Corporation Ltd., a Government of India undertaking, also keeps an economist. Let us examine in specific terms how a managerial economist can contribute to decision making in business. In this connection, two important questions need be considered :-

1. What role does he play in business, that is, what particular management problems lend themselves to solution through economic analysis? 2. How can the managerial economist best serve management, that is, what are the responsibilities of a successful managerial economist?

Role of Managerial Economist

One of the principal objectives of any management in its decision making process is to determine the key factors which will influence the business over the period ahead. In general, these factors can be divided into two category, viz., (i) External and (ii) Internal. The external factors lie outside the control management because they are external to the firm and are said to constitute business environment. The internal factors lie within the scope and operations of a firm and hence within the control of management, and they are known as business operations. To illustrate, a business firm is free to take decisions about what to invest, where to invest, how much labour to employ and what to pay for it, how to price its products and so on but all these decisions are taken within the framework of a particular business environment and the firms degree of freedom depends on such factors as the governments economic policy, the actions of its competitors and the like.

Environmental Studies An analysis and forecast of external factors constituting general business conditions, e.g., prices, national income and output, volume of trade, etc., are of great significance since every business from is affected by them. Certain important relevant questions in this connection are as follows :-

1. What is the outlook for the national economy? What are the most important local, regional or worldwide economic trends? What phase of the business cycle lies immediately ahead? 2. What about population shifts and the resultant ups and downs in regional purchasing power? 3. What are the demands prospects in new as well as established markets? Will changes in social behavior and fashions tend to expand or limit the sales of a companys products, or possibly make the products obsolete? 4. Where are the market and customer opportunities likely to expand or contract most rapidly? 5. Will overseas markets expand or contract, and how will new foreign government legislations affect operation of the overseas plants? 6. Will the availability and cost of credit tend to increase or decrease buying? Are money or credit conditions ahead likely to be easy or tight? 7. What the prices of raw materials and finished products are likely to be? 8. Is competition likely to increase or decrease? 9. What are the main components of the five-year plan? What are the areas where outlays have been increased? What are the segments, which have suffered a cut in their outlay? 10. What is the outlook regarding governments economic policies and regulations? 11. What about changes in defense expenditure, tax rates, tariffs and import restrictions? 12. Will Reserve Banks decisions stimulate or depress industrial production and consumer spending? How will these decisions affect the companys cost, credit, sales and profits? Reasonably accurate answers to these and similar questions can enable management to chalk out more wisely the scope and direction of their own business plans and to determine the timing of their specific actions.

And it is these questions which present some of the areas where a managerial economist can make effective contribution. The managerial economist has not only to study the economic trends at the macro level but must also interpret their relevance to the particular industry / firm where he works. He has to digest the ever growing economic literature and advise top management by means of short, business like practical notes. In a mixed economy like India, the managerial economist pragmatically interprets the intentions of controls and evaluates their impact. He acts as a bridge between the government and the industry, translating the governments intentions and transmitting the reactions of the industry. In fact, government policies charge out of the performance of industry, the expectations of the people and political expediency.

Business Operations A managerial economist can also be helpful to the management in making decisions relating to the internal operations of a firm in respect of such problems as price, rate of operations, investment, expansion or contraction. Certain relevant questions in this context would be as follows :1. What will be a reasonable sales and profit budget for the next year? 2. What will be the most appropriate production Schedules and inventory policies for the next six months? 3. What changes in wage and price policies should be made now? 4. How much cash will be available next month and how should it be invested? Specific Functions

A further idea of the role of managerial economists can be seen from the following specific functions performed by them as revealed by a survey pertaining to Britain conducted by K.J.W. Alexander and Alexander G. Kemp :1. Sales forecasting. 2. Industrial market research. 3. Economic analysis of competing companies. 4. Pricing problems of industry. 5. Capital projects. 6. Production programs. 7. Security/investment analysis and forecasts. 8. Advice on trade and public relations. 9. Advice on primary commodities. 10. Advice on foreign exchange. 11. Economic analysis of agriculture. 12. Analysis of underdeveloped economics. 13. Environmental forecasting. @@@@@@@ summary The managerial economist has to gather economic data, analyze all pertinent information about the business environment and prepare position papers on issues facing the firm and the industry. In the case of industries prone to rapid technological advances, he may have to make a continuous assessment of the impact of changing technology. He may have to evaluate the capital budget in the light of short and long-range financial, profit and market potentialities. Very often, he may have to prepare speeches for the corporate executives. It is thus clear that in practice managerial economists perform many and varied functions. However, of these, marketing functions, i.e., sales forecasting and industrial market research, has been the most important. For this purpose, they may compile statistical records of the sales performance of their own business and those relating to their rivals, carry our analysis of these records and report on trends in demand, their

market shares, and the relative efficiency of their retail outlets. Thus while carrying out their functions; they may have to undertake detailed statistical analysis. There are, of course, differences in the relative importance of the various functions performed from firm to firm and in the degree of sophistication of the methods used in carrying them out. But there is no doubt that the job of a managerial economist requires alertness and the ability to work under pressure, making use of different concepts of managerial economics.

Economic Intelligence Besides these functions involving sophisticated analysis, managerial economist may also provide general intelligence service supplying management with economic information of general interest such as competitors prices and products, tax rates, tariff rates, etc. In fact, a good deal of published material is already available and it would be useful for a firm to have someone who understands it. The managerial economist can do the job with competence.

Participating in Public Debates Many well-known business economists participate in public debates. Their advice and views are being sought by the government and society alike. Their practical experience in business and industry ads stature to their views. Their public recognition enhances their stature in the organization itself.

Indian Context In the indian context, a managerial economist is expected to perform the following functions :-

1. 2. 3. 4. 5. 6. 7.

8. 9.

Macro-forecasting for demand and supply. Production planning at macro and micro levels. Capacity planning and product-mix determination. Economics of various productions lines. Economic feasibility of new production lines/processes and projects. Assistance in preparation of overall development plans. Preparation of periodical economic reports bearing on various matters such as the companys product-lines, future growth opportunities, market pricing situation, general business, and various national/international factors affecting industry and business. Preparing briefs, speeches, articles and papers for top management for various Chambers, Committees, Seminars, Conferences, etc. Keeping management informed o various national and international developments on economic/industrial matters.

With the adoption of the New Economic Policy, in 1991, the macroeconomic Environment in India is changing fast at a pace that has been rarely witnessed before. And these changes have tremendous implications for business. The managerial economist has to play a much more significant role. He has to constantly gauge the possibilities of translating the rapidly changing economic scenario into viable business opportunities. As India marches towards globalization, he will have to interpret the global economic events and find out how his firm can avail itself of the carious export opportunities or of establishing plants abroad either wholly owned or in association with local partners. Responsibilities of Managerial Economist

Having examined the significant opportunities before a managerial economist to contribute to managerial decision making, let us now examine how he can best serve the management. For this, he must thoroughly recognize his responsibilities and obligations.

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 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. @@@@@@ conclusion 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, welldocumented 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 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 if management does not understand, it will almost automatically reject. Further, while intellectually he must be in tune with industrys thinking the wider national perspective should not be absents from his advice to top management.

Questions on Managerial Economics

1. 2. 3. 4. 5. 6.

Define managerial economics with definition. How does managerial economics differ from economics? Write a short note on managerial economist. Explain the scope of managerial economics. Explain role and responsibilities of managerial economist. A business manager is essentially involved in the processes of decision making as well as forward planning. Decision making is an integral part of management. Management and decision making are to be considered as inseparable. It is the intellectual process and a purposeful activity which at varied times takes in hands all the managerial activities, such as, planning, organizing, staffing, directing and controlling. It is the process wherein an executive, by taking in to consideration several alternatives reaches at the conclusion about how it should be dealt successfully in a given situation. Thus, being a continuous activity, decision making is regarded to be the heart of management. 7. Decision making is nothing but choice-making and the importance of choice-making emerges due to the fact that a business faces the changes in the conditions in which it operates and there arise unforeseen contingencies. The survival and the growth of a business in such situations is directly determined through decision making process. It can be defined clearly as selecting one of the best alternatives available - that entails being two or more alternatives. According to George Terry, Decision making is the selection of a particular course of action, based on some criteria, from two or more possible alternatives. Decision making is thus choosing the best course of action out of the available options while aiming at the achievement of particular organizational objectives.

8. Since a business organization has the available resources, such as, capital, land and labor, a business manager needs to select the best alternative among others and employ in the most efficient manner so as to attain the desired results. After a particular decision is made relating to resources, plans about production, pricing and materials are to be implemented. In this way, decision making and forward planning go conjointly. 9. The fact that a business entity is influenced by the conditions is uncertainty about the future and due to the changes in the business environment resulting complexities in business decisions. Since no information or the knowledge about the future sales, profits or the costs is available for a business executive, the decisions are to be made on the basis of past data as well as the approximations being forecasted. In order that the decision making process is carried out in such conditions in an efficient way, economic theory is of great value and relevance as it deals with production, demand, cost, pricing etc. This gives rise to understand the concepts of managerial economics for business manager so that he may apply the economic principles to the business and appraise the relevance and impact of external factors in relation to the business. 10. Having been regarded as micro economic as well as the economics of the firm, managerial economics is related to the economic theory which is to be applied to the business with the objective of solving business problems and to analyze business situations and the factors constituting the environment in which a business is operated. Managerial economics has been defined by Spencer and Siegelman as, The integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. 11. Managerial economics is very much capable of serving various purposes and useful for managers in making decisions in relation to the internal environment. It aims at the development of economic theory of the firm while facilitating the decision making process with regard to sales and profits etc. Moreover, it enables to take decisions about appropriate production and inventory policies

for the future. It is a branch of economics that is applied to analyze almost all business decisions. It is meant to undertake risk analysis, production analysis that is useful for production efficiency. Likewise, it is of great use for capital budgeting processes as well. In the most positive form, it seeks to make successful forecasts with the objective of minimizing the risks involved. It deals with the aspects as how much cash should be available and how much of it should be invested in relation to a choice of processes and projects while making possible the economic feasibility of various production lines. 12. A business produces goods which are in course of time to be sold in the market on the basis of demand of consumers. Demand can be defined in brief as the quantity of goods that the consumers are willing to buy at certain prices. In this pursuit, the decisions related to demand are of much significance for managers as the process entails making appropriate estimates with successful forecasts on sales before the activity of production is to be carried out. It is therefore demand analysis is essential part of managerial economics since it enables to analyze the demand determinants and forecasting with a deep involvement of value judgments. Above and beyond, by considering whether the competitions are likely to increase or decrease, a business manager with the help of managerial economics applications is able to asses demand prospects as well as the social behavior that can result in the expansion or the reduction of the sales of business products. 13. As regards the pricing of products being produced by a business entity, it is one of the most critical decisions for a manager to fix the price of particular products as it is by means of pricing decisions taken by a manager, the inflow of revenue is determined. The areas that are to be covered through managerial economics application in this respect are, price methods, product line pricing and price forecasting. Further, Managerial economics deals with the cost estimates that are helpful for management decisions. More to the point, it is important for a manager to undertake production analysis and to determine economic cost with

the objective of profit planning and cost control processes. Since the objective of a business entity in general is to generate profits, profit is the chief measure of success in this way. In respect of this, managerial economics cover the aspects, such as, Profit policies and the techniques of profit planning Break Even Analysis also called as cost volume profit analysis - that assists significantly in profit planning and cost control methods with a view to maximize profits of the business 14. Managerial economics plays a significant role in the business organizations. It is very much effective to the management in decision making and forward planning in relation to the internal operations of a business as it gives clear understanding of market conditions as well as analytical tools through which the competitions prevailing in the markets can be studied, at the same time the market behavior can be predicted. It enables to analyze the information about the business environment in which a business is managed. It is meant to undertake systematic course of business plans by making possible forecasts. Managerial economics contributes to the profitable growth of business and effective solutions of the business problems by changing the economic scenario in to the feasible business opportunities for business organizations while enabling managers to optimize business decisions as well as involving them in the activity of forward planning efficiently. http://www.economics4development.com/index.htm

Business Economics Business economics is defined as the study of how businesses manage scarce resources. Microeconomics is the study of the decisions of

individuals, households, and businesses in specific markets, whereas macroeconomics is the study of the overall functioning of an economy such as basic economic growth, unemployment, or inflation. Scarcity in microeconomics is not the same as poverty. It arises from the assumption of very large (or infinite) wants or desires, and the fact that resources to obtain goods and services are limited.

wants exceed resources necessary to obtain them therefore we must make choices every choice leads to a cost