Nature of Managerial Economics Managerial Economics and Business economics are the two terms, which, at times h ave

been used interchangeably. Of late, however, the term Managerial Economics h as become more popular and seems to displace progressively the term Business Eco nomics. managerial economics The prime function of a management executive in a business organization is decis ion making and forward planning. Decision Making means the process of selecting one action from two or more alternative courses of action whereas forward planni ng means establishing plans for the future. The question of choice arises becaus e 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 m aking choices or decisions that will provide the most efficient means of attaini ng a desired end, say, profit maximization. Once decision is made about the part icular goal to be achieved, plans as to production, pricing, capital, raw materi als, labour, etc., are prepared. Forward planning thus goes hand in hand with de cision making. A significant characteristic of the conditions, in which business organizations work and take decisions, is uncertainty. And this fact of uncertainty not only m akes 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 informatio n and the estimates about future predicted as best as possible. As plans are imp lemented over time, more facts become known so that in their light, plans may ha ve to be revised, and a different course of action adopted. Managers are thus en gaged 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, econo mic theory can be pressed into service with considerable advantage. Economic the ory deals with a number of concepts and principles relating, for example, to pro fit, demand, cost, pricing production, competition, business cycles, national in come, etc., which aided by allied disciplines like Accounting. Statistics and Ma thematics 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 busi ness problems. Constitutes the subject matter of Managerial Economics. Definition of Managerial Economics According to McNair and Meriam, "Managerial Economics consists of the use of eco nomic modes of thought to analyse business situation." Spencer and Siegelman have defined Managerial Economics as "The integration of e conomic theory with business practice for the purpose of facilitating decision m aking 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 serve s as a bridge between economics and business management.

Application of Economics to Business Management The application of economics to business management or the integration of econom ic theory with business practice, as Spencer and Siegelman have put it, has the following aspects :Reconciling traditional theoretical concepts of economics in relation to the actual business behavior and conditions. In economic theory, the technique of a nalysis is one of model building whereby certain assumptions are made and on tha t 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 sa tisfactory explanation of that what the firms actually do. Hence the need to rec oncile the theoretical principles based on simplified assumptions with actual bu siness practice and develops appropriate extensions and reformulation of economi c theory, if necessary. Estimating economic relationships, viz., measurement of various types of ela sticities of demand such as price elasticity, income elasticity, cross-elasticit y, promotional elasticity, cost-output relationships, etc. The estimates of thes e economic relationships are to be used for purposes of forecasting. Predicting relevant economic quantities, eg., profit, demand, production, co sts, pricing, capital, etc., in numerical terms together with their probabilitie s. 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 mak ing 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 fo r the future pertaining to profit, prices, costs, capital, etc. The nature of ec onomic forecasting is such that it indicates the degree of probability of variou s possible outcomes, i.e. losses or gains as a result of following each one of t he strategies available. Hence, before a business manager there exists a quantif ied picture indicating the number o courses open, their possible outcomes and th e quantified probability of each outcome. Keeping this picture in view, he decid es about the strategy to be chosen. Understanding significant external forces constituting the environment in wh ich the business is operating and to which it must adjust, e.g., business cycles , fluctuations in national income and government policies pertaining to public f inance, fiscal policy and taxation, international economics and foreign trade, m onetary economics, labour relations, anti-monopoly measures, industrial licensin g, price controls, etc. The business manager has to appraise the relevance and i mpact of these external forces in relation to the particular business unit and i ts business policies.

Characteristics of Managerial Economics It would be useful to point out certain chief characteristics of Managerial Econ omics, in as much it s they throw further light on the nature of the subject matte r and help in a clearer understanding thereof. Managerial Economics is micro-economic in character. Managerial Economics largely uses that body of economic concepts and princip les, which is known as 'Theory of the firm' or 'Economics of the firm'. In addit ion, it also seeks to apply Profit Theory, which forms part of Distribution Theo ries in Economics. Managerial Economics is pragmatic. It avoids difficult abstract issues of ec onomic theory but involves complications ignored in economic theory to face the overall situation in which decisions are made. Economic theory appropriately ign ores the variety of backgrounds and training found in individual firms but Manag erial Economics considers the particular environment of decision making.

Managerial Economics belongs to normative economics rather than positive eco nomics (also sometimes known as Descriptive Economics). In other words, it is pr escriptive rather than descriptive. The main body of economic theory confines it self to descriptive hypothesis, attempting to generalize about the relations amo ng 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 b ad. 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 imp ortant aspects of supply analysis are supply schedule, curves and function, law of supply and its limitations. Elasticity of supply and Factors influencing supp ly. 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 a spects dealt with under this area are :- Price Determination in various Market F orms, Pricing methods, Differential Pricing, Product-line Pricing and Price Fore casting. 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 pr ofits 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 meas urement 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 firm s inves tments. 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 ret urn and Selection of Project. The various aspects outlined above represent the major uncertainties which a nes s firm has to reckon with, viz., demand uncertainty, cost uncertainty, price cer tainty, profit uncertainty, and capital uncertainty. We can, therefore, conclude the subject matter of Managerial Economic consists of applying economic cripple s 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 Manager ial Economics is to examine its relationship with other subjects. In this connec tion, 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 pur e 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 st udy 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 mai n source of concepts and analytical tools for managerial economics. To illustrat e various micro-economic concepts such as elasticity of demand, marginal cost, t he short and the long runs, various market forms, etc., all are of great signifi cance to managerial economics. The chief contribution of macroeconomics is in th e area of forecasting. The modern theory of income and employment has direct imp lications for forecasting general business conditions. As the prospects of an in dividual firm often depend greatly on general business conditions, individual fi rm 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 :Price elasticity of demand, Income elasticity of demand, Opportunity cost, The multiplier, Propensity to consume, Marginal revenue product, Speculative motive, Production function, Balanced growth, and Liquidity preference. Business economics have also found the following main areas of economics as usef ul in their work :Demand theory, Theory of the firm-price, output and investment decisions, Business financing, Public finance and fiscal policy, Money and banking, National income and social accounting, Theory of international trade, and Economics of developing countries. Managerial Economics and Management Accounting Managerial Economics is also closely related to accounting, which is concerned w

ith recording the financial operations of a business firm. Indeed, accounting in formation is one of the principal sources of data required by a managerial econo mist for his decision making purpose. For instance, the profit and loss statemen t 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 us ed safely and effectively. It is in this context that the growing link between management accounting and ma nagerial economics deserves special mention. The main task of management account ing 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 corre ctly; 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 fo r 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 wi th a view to enable the manager take better decisions. Thus, managerial economic s accomplishes the objective of building suitable tool kit from traditional econ omics. Secondly, it also incorporates useful ideas from other disciplines such a psycho logy, sociology, etc., if they are found relevant for decision making. In fact m anagerial 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 im plicit constraints subject to which resource allocation is to be optimized. Thirdly, managerial economics helps in reaching a variety of business decisions. What products and services should be produced? What inputs and production techniques should be used? How much output should be produced and at what prices it should be sold? What are the best sizes and locations of new plants? How should the available capital be allocated? Fourthly, managerial economics makes a manager a more competent model builder. T hus he can capture the essential relationships which characterize a situation wh ile 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 coordi nating the different areas and bringing to bear on the decisions of each departm ent or specialist the implications pertaining to other functional areas. It thus enables business decision making not in watertight compartments but in an integ rated perspective, the significance of which lies in the fact that the functiona l departments or specialists often enjoy considerable autonomy and achieve confl icting coals.

Finally, managerial economics takes cognizance of the interaction between the fi rm and society and accomplishes the key role of business as an agent in the atta inment of social and economic welfare. It has come to be realized that business part from its obligations to shareholders has certain social obligations. Manage rial economics focuses attention on these social obligations as constraints subj ect to which business decisions are to be taken. In so doing, it serves as an in strument in rehiring the economic welfare of the society through socially orient ed business decisions.

Role and Responsibilities of Managerial Economist A managerial economist can play a very important role by assisting the Managemen t in using the increasingly specialized skills and sophisticated techniques whic h are required to solve the difficult problems of successful decision making and forward planning. That is why, in business concerns, his importance is being gr owingly recognized. In developed countries like the U.S.A., large companies empl oy one or more economists. In our country (India) too, big industrial houses hav e come to recognize the need for managerial economists, and there are frequent a dvertisements for such positions. Tatas and Hindustan Lever employ economists. I ndian Petrochemicals Corporation Ltd., a Government of India undertaking, also k eeps an economist. managerial economist Let us examine in specific terms how a managerial economist can contribute to de cision making in business. In this connection, two important questions need be considered :What role does he play in business, that is, what particular management prob lems lend themselves to solution through economic analysis? How can the managerial economist best serve management, that is, what are th e responsibilities of a successful managerial economist? square 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 peri od ahead. In general, these factors can be divided into two category, viz., (i) External and (ii) Internal. The external factors lie outside the control managem ent because they are external to the firm and are said to constitute business en vironment. The internal factors lie within the scope and operations of a firm an d hence within the control of management, and they are known as business operati ons. To illustrate, a business firm is free to take decisions about what to invest, w here to invest, how much labour to employ and what to pay for it, how to price i ts products and so on but all these decisions are taken within the framework of a particular business environment and the firm s degree of freedom depends on such factors as the government s economic policy, the actions of its competitors and t he like. Environmental Studies An analysis and forecast of external factors constituting general business condi tions, e.g., prices, national income and output, volume of trade, etc., are of g

reat significance since every business from is affected by them. Certain important relevant questions in this connection are as follows :What is the outlook for the national economy? What are the most important lo cal, regional or worldwide economic trends? What phase of the business cycle lie s immediately ahead? What about population shifts and the resultant ups and downs in regional pur chasing power? What are the demands prospects in new as well as established markets? Will c hanges in social behavior and fashions tend to expand or limit the sales of a co mpany s products, or possibly make the products obsolete? Where are the market and customer opportunities likely to expand or contract most rapidly? Will overseas markets expand or contract, and how will new foreign governmen t legislation s affect operation of the overseas plants? 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? What the prices of raw materials and finished products are likely to be? Is competition likely to increase or decrease? 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 i n their outlay? What is the outlook regarding government s economic policies and regulations? What about changes in defense expenditure, tax rates, tariffs and import res trictions? Will Reserve Bank s decisions stimulate or depress industrial production and c onsumer spending? How will these decisions affect the company s cost, credit, sale s 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 an d to determine the timing of their specific actions. And it is these questions w hich present some of the areas where a managerial economist can make effective c ontribution. 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 betw een the government and the industry, translating the government s intentions and t ransmitting the reactions of the industry. In fact, government policies charge o ut 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 pr ice, rate of operations, investment, expansion or contraction. Certain relevant questions in this context would be as follows :What will be a reasonable sales and profit budget for the next year? What will be the most appropriate production Schedules and inventory policie s for the next six months? What changes in wage and price policies should be made now?

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 followi ng specific functions performed by them as revealed by a survey pertaining to Br itain conducted by K.J.W. Alexander and Alexander G. Kemp :Sales forecasting. Industrial market research. Economic analysis of competing companies. Pricing problems of industry. Capital projects. Production programs. Security/investment analysis and forecasts. Advice on trade and public relations. Advice on primary commodities. Advice on foreign exchange. Economic analysis of agriculture. Analysis of underdeveloped economics. Environmental forecasting. The managerial economist has to gather economic data, analyze all pertinent info rmation about the business environment and prepare position papers on issues fac ing the firm and the industry. In the case of industries prone to rapid technolo gical advances, he may have to make a continuous assessment of the impact of cha nging technology. He may have to evaluate the capital budget in the light of sho rt and long-range financial, profit and market potentialities. Very often, he ma y 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 i ndustrial market research, has been the most important. For this purpose, they m ay compile statistical records of the sales performance of their own business an d 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 undert ake detailed statistical analysis. There are, of course, differences in the rela tive 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 abili ty to work under pressure. Economic Intelligence Besides these functions involving sophisticated analysis, managerial economist m ay also provide general intelligence service supplying management with economic information of general interest such as competitors prices and products, tax rat es, tariff rates, etc. In fact, a good deal of published material is already ava ilable 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 rec ognition enhances their stature in the organization itself. Indian Context

In the indian context, a managerial economist is expected to perform the followi ng functions :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 a s the company s product-lines, future growth opportunities, market pricing situati on, general business, and various national/international factors affecting indus try and business. Preparing briefs, speeches, articles and papers for top management for vario us Chambers, Committees, Seminars, Conferences, etc. Keeping management informed o various national and international development s on economic/industrial matters. With the adoption of the New Economic Policy, in 1991, the macro-economic Enviro nment in India is changing fast at a pace that has been rarely witnessed before. And these changes have tremendous implications for business. The managerial eco nomist 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 whol ly owned or in association with local partners.

Responsibilities of Managerial Economist Having examined the significant opportunities before a managerial economist to c ontribute to managerial decision making, let us now examine how he can best serv e the management. For this, he must thoroughly recognize his responsibilities an d 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 capi tal. His academic training and the critical comments from people outside the bus iness may lead a managerial economist to adopt an apologetic or defensive attitu de towards profits. Once management notices this, his effectiveness is almost su re 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 chi ef obligation is to help enhance the ability of the firm to make profits. Most management decisions necessarily concern the future, which is rather uncert ain. It is, therefore, absolutely essential that a managerial economist recogniz es his responsibility to make successful forecasts. By making best possible fore casts and through constant efforts to improve upon them, he should aim at minimi zing, if not completely eliminating, the risks involved in uncertainties, so tha t 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 i n some activity of importance to management. In any case, he must be willing to make considered but fairly positive statements about impending economic developm

ents, based upon the best possible information and analysis and stake his reputa tion upon his judgment. Nothing will build management confidence in a managerial economist more quickly and thoroughly than a record of successful forecasts, we ll-documented in advance and modestly evaluated when the actual results become a vailable. A few corollaries to the above proposition need also be emphasized here.

First, he has a major responsibility to "alert management at the earliest possib le moment" in case he discovers an error in his forecast. By promptly drawing at tention 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 hi s 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 m anagement. Extensive familiarity with reference sources and material is essentia l, 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 j oin 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 h is ability to obtain information quickly by personal contacts rather than by len gthy research from either readily available or obscure reference sources. Within any business, there may be a wealth of knowledge and experience but the manager ial 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 su ccessful decision making and forward planning, he must be able to earn full stat us on the business team. He should be ready and even offer himself to take up sp ecial 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 exp erience, 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 hims elf clearly and simply and must always try to minimize the use of technical term inology in communicating with his management executives. For, it is well-known t hat if management does not understand, it will almost automatically reject. Furt her, while intellectually he must be in tune with industry s thinking the wider na tional perspective should not be absents from his advice to top management.