1 Managerial Economics 1 A. Meaning and Scope Sources: Salvatore Geetika et al.

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Managerial Economics

1 A. Meaning and Scope

Sources: Salvatore

Geetika et al

76% of senior executives say that it is important they have the knowledge and skills to respond to trends like resource scarcity, the low carbon economy and doing business in emerging markets

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What is Economics?

Unlimited wants and scarce resources

CHOICE

Science or Art?

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Basic Assumptions

Ceteris Paribus- Other things remaining equal

• “ The existence of other tendencies is nor denied, but their disturbing effect is neglected for a time “- Marshall

• Easier to handle, if issue is narrowed, but less closely corresponds to real life

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Basic Assumptions

Rationality

• Implies that consumers and producers measure and compare costs and benefits before taking decisions

• Consumers: Maximising utility and minimising sacrifice

• Producers : Maximising profits and minimising costs

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Types of Economic Analysis

A. Micro(individual consumers and firms)

Macro (Aggregates- Industry, not firm)

B. Positive (factual statements- “What is”)

Normative (Value judgments- “What ought to be”)

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C. Time period

Short run -A time period not long enough for consumers and producers to adjust to a new situation- K/L

Long run- Planning horizon- A time period long enough for consumers and producers to adjust to a new situation- All inputs can be varied- K and L- Whether to change product lines, build new plant etc

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Marshall• Market Period- Prices adjust to clear market-

perishable goods• Short Period- industry capacity is assumed to be

given• Long Period- Stock of equipment and machinery

(K) changeable• Very Long Period-Tech, population, tastes etc

change

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Types of Economic Analysis:Partial and General Equilibrium

D. Equilibrium: State of balance

Partial: Looks at internal outcome of any policy action in a single market or consumer (the one that is directly affected) – say, a single cement firm in Indian cement industry may be in equilibrium, whereas others may not be- unrealistic

General Equilibrium: Explains economic phenomena like production, consumption and prices in the economy as a whole

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Types of Economic Analysis:Partial and General Equilibrium

• A petroleum company may hike petro prices without considering the effects on prices of other commodities

• Under general equilibrium, this won’t be analysed in isolation but taking into account linkages with other sectors.

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Kinds of Economic Questions

1. What to Produce? (Micro)

2. How to Produce? (Micro)

3. How much to produce? (Micro)

4. For Whom to Produce? (Micro)

5. Are Resources Used optimally? (Micro)

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6. Are Resources fully employed? (Macro)

7. Is the economy Growing? (Macro)

8. In what phase of business cycle is the economy? (Macro)

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Managerial Economics- Meaning & Nature

“Application of economic theory and tools of analysis of decision science to examine how an organization can achieve its objectives most efficiently”- Salvatore

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Meaning & Nature

Spencer and Siegelman: “… Integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management”

Evan Douglas: “Application of economic principles and methodologies to the decision-making process within the firm or organization…under conditions of uncertainty”

Decision Making Process

5 Stages of Decision making Process:

1. Define the problem

2. Determine the objective

3. Identify possible solutions

4. Select the best possible solution

5. Implement the decision

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Meaning & Nature

Importance of Quantitative Tools

• Analysis of variables is a key procedure in economic analysis.

• Economic research and policy-making require up-to-date data and extensive analysis.

• Use of Mathematical tools

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Meaning & Nature

Use of Statistical Techniques

• Time Series: For Demand forecasting

• Regression: Two or multiple variables used to study interrelationships, estimation and prediction

• Measures of central tendency and variation

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Meaning & Nature

Managerial Economics is essentially

- Applied economics

- Normative bias- Why?

- Decision-making under partial equilibrium

Role of Economics

What is the role of Economics in Business?

Costs, prices, output, compensation, strategic behaviour, importantly, ethics

The Big Picture- Whose job?

Economic theory forms the basis for different management areas such as accounts, finance, marketing, systems and operations.

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Role of Economics

A manager has to deal with problems pertaining to the individual firm as well as domestic and global environment.

• Microeconomics: Deals with individual unit

• Macroeconomics: Deals with aggregates

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Role of Economics

Microeconomics:

Theory of demand and supply- consumer behaviour, demand theory, demand forecasting and factors affecting individual and market supply- Helps in choice of commodities for production

Theory of Production: Production function and laws of returns to scale etc- gives an idea about I/O relations, input requirement size of firm, technology choice of output. Helps producer to plan production, cost and budget.

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Role of Economics

Market Analysis: helps understand degrees of competition, pricing-output decisions, price discrimination, monopoly power, advertising

Profit Analysis: Provides logical analysis of break-even point, emergence of profits, profit-maximising output, dealing with risk and uncertainty

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Role of Economics

• Theory of capital: Along with quantitative techniques enables investors to calculate cost of capital, efficiency of capital, efficient allocation of capital, and choice of projects as per risk-return analysis

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Role of Economics

Behaviour of macro economic indicators: GDP, GNP, GDCF, GDS, HDI etc.

Business Cycles – Inflation- Employment Fiscal Policy Monetary Policy Foreign Trade: Imports and exports, Exchange

rate, trade policies and capital flows

Macro economic variables and policies impact business

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Role of Economics in Business

• Economics is a tool, means to an end• To help Efficient allocation and achieve

business objectives• Optimising behaviour- Maximise goals,

minimize costs under constraint

Logic, tools and techniques of economics to analyse business problems, evaluate business options and opportunities with a view to arriving at an appropriate business decision.


“The theory of Economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps the possessor to draw correct conclusions”

- J.M. Keynes

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3 main contributions of economic theory to business economics, according to Baumol:

1. Analytical models: To recognize the structure of managerial problems, eliminate minor details, and concentrate on main issue

2. Ascertaining relevant variables and specifying the data- Even if the models are not directly applicable, they enhance capabilities of business analyst

3. Economic theories offer conceptual clarity to avoid conceptual pitfalls

Provides consistency to business analysis

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Role of Managerial Economist

Role Of Managerial Economist: To decide

• What to produce?

• Where

• How

• How much

• Allocation of resources

• For whom to produce

• At what price to sell

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Plan and control business operations-

• Cost minimisation

• Profit maximisation ??

• Managing competition

• Economic intelligence

• Market research

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Uncertainty & Risk management • Forecast change in environment and policies-

domestic and international

• To manage change in global scenario

• Everything comes at a price- quality is not free

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Growing Challenges to the Managerial Economist

A) GlobalizationWhat is Globalization ?

People-goods-services- communication- Finance- Ideas


Global corporations- Research & production facilities across

countries- Global markets- Global Finance- Employment Diversity- Global work culture

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Resource base: Crossing boundaries

Global management practices

Outsourcing


Increased competition Increased Opportunity Tastes converging internationally? Customising to local tastes

Not merely exporters, but need to be insiders in major markets

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Trans-nationality Index

UN’s World Investment Report constructs TNI as the average of 3 Ratios:

• Foreign sales to total sales

• Foreign assets to total assets

• Foreign employment to total employment

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Global Corporations

Company Country TNI (%)

Vodafone Group UK 85

British Petroleum UK 82

Nestle Switzerland 74

Honda/ Shell Japan/UK 72

Sony, Volkswagen, IBM > 50

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B) Computerisation and Technology Easier model-building and simulation Quick and complicated data analysis Rapid spread of information Internet changing both buyers and sellers Videoconferencing- saving cost and time Paperless administration Speed of dispatch, lower inventories, less waste

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C. Dismantling of Traditional Hierarchies

Information today can be transmitted directly from top management to workers

Middle managers are today increasingly being used to shelter top management from day-to-day activities

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D. Changing Basis for Value Creation

Peter Drucker: World is moving from “economy of goods” to an “economy of knowledge”

Creation of value increasingly based on knowledge and communications and not natural resources and physical labour

On eBay, ET, 30 Aug 2010

• Gives tech edge to small entrepreneurs from saddle makers of Kanpur to carpet makers of Benares

• The Malad shopkeeper goes to Hong Kong to source products to sell on eBay

• The $500-mn e commerce market in India is growing at 30% annually

• With 3G and broadband rollout, the market is expected to grow even more

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Bridging the gap between theory and Practice :

• Real world is complex, “chaotic”, interdependent as against simplifying economic assumptions

• Not tailor-made solutions but a framework of logical thinking

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The Global business Leader has to

Imbibe and inculcate essential qualities such as Global outlook Managing diversities Flexibility with efficiency Long-term goals with steps and migration path Speed and stamina for transformation

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The Global Business Leader

Customer-centric Networking and negotiating Interpersonal skills-managing multiple

simultaneous relationships Great communicator Understanding technology Innovator Problem Solver Change-maker- not threatened by change Empowering individual employers

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• Essentially, 3 sets of skills:• Human- understand, work with and

motivate with other people as individuals as well as groups

• Technical- Ability to use tools, techniques and processes that are specific to the field

• Conceptual-Ability to analyse complex situations and respond effectively to challenges

What are the Lessons?

1.Who sells the largest number of cameras in India?

2. Who has the biggest revenue from music business in India?

3. Who gained the most when business of British Airways was affected due to the 2008 recession?

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Ans 1: Nokia (whose main line of business is NOT cameras but cell phones)

Ans 2: Airtel (which is not in music business)- by selling caller tunes makes more money than HMV etc

Ans 3:videoconferencing and telepresence services of HP and Cisco.

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• Nokia missed the Smartphone bus. Apple's I phone and Google's Android are making life difficult for Nokia.

• But Google is not a mobile company

• Nokia is a global behemoth, with 35% of the world’s handset market. Silicon Valley’s finest may be good at high-end innovation, BUT…..

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What are the Lessons? (From Economist, Aug 18th)

….none of them knows much about running a company with R&D facilities in 16 countries and sales in more than 160.

• Nokia has a vast distribution system in emerging markets: some 90,000 sales outlets in China, 1,000 customer-service centres and a huge army of sales people

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• But then, there are assaults from low-cost local companies …

• According to Economist, One of the biggest dangers for Nokia is that it will devote so much energy to taking on Apple, Google and Research In Motion (the maker of the BlackBerry) that it will lose its edge in emerging markets

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• Products have vanished from the market in the past 20 years:

• Black & white TVs

• Fountain pens

• Type writers

• Alarm Clocks

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• Lessons for the Managerial economist:

• Today's competitor is obvious. Tomorrow's is not- Think beyond conventional framework; think beyond the obvious

• Competition lurking in unknown places

• Need to identify competition (present)

• Need to foresee competition (Future)

• Need to beat competition- Strategise52

• Importance of speed & resilience

• Keep eyes open- small can be big

• Technology- adapt, innovate or perish

• Understand your customer

• Anticipate

• And many more….

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References

Text Books:1. Managerial Economics in a Global Economy –

Dominick Salvatore2. Managerial Economics – Geetika, Piyali Ghosh

and Roy Choudhury3. Managerial Economics –– D. N. Dwivedi 4. The New Managerial Economics -William

Boyes5. Managerial Economics – R. L. Varshney and

K.L. Maheshwari

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Internet Sites for Managerial Economics

Current international economic news

• http://www.economist.com

• http://www.businessweek.com

• http://www.ft.com (Financial Times)

• http://www.bloomberg.com

http://www.economist.com/

http://www.businessweek.com/

http://www.ft.com/

http://www.bloomberg.com/

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Internet Sites for Managerial Economics

For international economic data

• http://www.imf.org

• http://www.oecd.org

• http://worldbank,org

• http://www.wto.org

http://www.imf.com/

http://www.businessweek.com/

http://www.ft.com/

http://www.wto.org/

Data

For authentic current Indian data:

CMIE database

For journals and other scholarly articles : ProQuest

•Of course, our very own Economic Times or Business Standard must become part of your daily diet.

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1 Managerial Economics 1 A. Meaning and Scope Sources: Salvatore Geetika et al.

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