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Meaning of managerial economics
Managerial Economics is a discipline that combines economic theory with managerial practice. It tries to bridge the gap between the problems of logic that intrigue economic theorists and the problems of policy that plague practical managers. The subject offers powerful tools and techniques for managerial policy making. An integration of economic theory and tools of decision sciences works successfully in optimal decision making, in face of constraints. A study of managerial economics enriches the analytical skills, helps in the logical structuring of problems, and provides adequate solution to the economic problems. To quote Mansfield, Managerial Economics is concerned with the application of economic concepts and economic analysis to the problems of formulating rational managerial decisions. Spencer and Siegelman have defined the subject as lithe integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management."
Economics and managerial decision making
The best way to become acquainted with Managerial Economics is to come face to face with real world decision problems. Many companies have applied established principles of Managerial Economics to improve their profitability. In the past decade, a number of known companies .have experienced successful changes in the economics a/their business by-using economic tools and techniques. Some cases have-been discussed here.
Example 1: Reliance Industries has maintained top-position in polymers by building a world-scale plan-t and upgrading technology. This has resulted in low operating costs due to economies of .scale. Reliance Petroleum Ltd registered a net profit of Rs 726 crores on sales of Rs 14,308 crores for the six months ended September 30, 2000. Of these, exports amounted to Rs 2,138 crores, which make RPL India's largest manufacturer, exporter,
RPL is -planning to expand its capacity from 27 to 30 million tonnes in April 2001, and further to 40.5 million tonnes by April 2002. The overall economies of scale are in favour of expansion. This expansion will further consolidate the position of RPL in the sector and help -in warding off rivals.'
Example 2: Leading multinational players like Samsung, LG, Sony and Panasonic cornered a large part of Indian consumer durables market in the late 1990s. This was possible because of global manufacturing facilities and investment in technologies. To maintain their market share, they resorted to product differentiation. These companies introduced technologically advanced models with specific product features and product styling.
Example 3: For P&G, the 1990s was a decade of 'value-oriented' consumer. The company formulated policies in view of emergence of India as 'value for money' product market. This means that consumers are willing to pay premium price only for quality goods. Customers are "becoming more price-sensitive and quality conscious more focussed on self satisfaction. It can, therefore, be said that consumer preferences and tastes have come to play a vital role in the survival of companies.
Scope of managerial economics
An analysis of scarcity of resources and choice making poses three basic questions:
Q.1 What to produce and how much to produce?
Q.2 How to produce?
Q.3 For whom to produce?
A firm applies principles of economics to answer these questions. The first question relates to what goods and services should be produced and in what quantities. Demand theory guides the manager in the selection of goods and services. for production. It analyses consumer behaviour with regard to:
Type of goods and services they are likely to purchase in the current period and in the future,
Goods and services which they may stop consuming,
Factors influencing the consumption of a particular good or service, and
The effect of a change in these factors on the demand of that particular good or service,
A detailed study of these aspects of consumer behaviour help the manager to make product decision. At some particular time, a firm may decide to launch new goods and services or stop providing a particular good or service. For example, in 1990s, Videoeon group launched a new company of kitchen appliances. In 1961, Tatas started TCS r while in 1993, the company ceded TOMCO to HLL. Knowledge of demand elasticities helps in setting up of prices in context of revenue of a firm. Methods of demand forecasting help in deciding the quantity of a good or service to be produced.
How to produce the goods and services is the second basic question. It involves selection of inputs and techniques of production. Decisions are made with regard to the purchase of items ranging from raw materials to capital equipment. Production and cost analysis guides a manager in personnel practices such as hiring and staffing and procurement of inputs. For example, the decision to automate clerical activities using PC network results in a more capital-intensive mode of production. Capital budgeting decisions also constitute an integral part of the second basic question. Allocation of available capital in long-term investment projects can be done through project appraisal methods.
Firms third basic question relates to segmentation of market. A firm has to decide for whom it should produce the goods and services. For example, it has to decide whether to target the domestic market or the foreign market. Production of a premium good is another example of market segmentation. An analysis of market structure explains how price and output decisions are taken under different market forms. Table 1.1 depicts the three basic questions and concepts of economics used to solve them.
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Basic questions
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Related Concepts
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Q.1
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What to produce and how much to produce?
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Produce decision: consumer demand, demand elasicities and forecasting.
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Q.2
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How to produce?
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Input-output decision: production and cost analysis and capital budgeting
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Q.3
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For whom to produce
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Market segmentation decision.
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Case 1.1 illustrates and integrates the "scope of Managerial Economics in real world. It explains how Eicher Motors tries to solve the three basic questions faced by the company when introducing a new product in the primary stag-e, customer preferences are captured to decide what to produce. They are translated into product design through 'Quality Function Deployment'. The later stages of 'House of Quality' take care of production and cost decisions, thereby taking the decision of how to produce. The development of a product for a particular section of society considers the question for whom, to produce. For instance, manufacture of special vehicles for poultry segment and buses for school children.
Appropriate business decision making with the help of economic tools has gained recognition in view of complex business environment. Since the macroeconomic environment is dynamic, it changes over time; managerial decisions have to be reviewed constantly. In- this context, concepts of consumer behaviour, demand elasticities, demand forecasting, production and cost analysis, market structure analysis and investment planning help in making prudent decisions.
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