1A. Meaning and Scope

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Managerial Economics

1 A. Meaning and Scope

Sources: SalvatoreGeetika et al


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76% of senior executives say that it isimportant they have the knowledge and

skills to respond to trends like resourcescarcity, the low carbon economy anddoing 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 remainingequal

The existence of other tendencies is nordenied, but their disturbing effect isneglected for a time - Marshall

Easier to handle, if issue is narrowed, butless closely corresponds to real life

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Basic Assumptions

Rationality

Implies that consumers and producers

measure and compare costs and benefitsbefore taking decisions

Consumers: Maximising utility andminimising sacrifice

Producers : Maximising profits andminimising 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- Whatought to be)

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Types of Economic Analysis

Marshall

Market Period- Prices adjust to clear market-perishable goods

Short Period- industry capacity is assumed to begiven

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 policyaction in a single market or consumer (the one

that is directly affected) say, a single cementfirm in Indian cement industry may be inequilibrium, whereas others may not be-unrealistic

General Equilibrium: Explains economicphenomena like production, consumption andprices in the economy as a whole

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Types of Economic Analysis:

Partial and General Equilibrium A petroleum company may hike petroprices without considering the effects onprices of other commodities

Under general equilibrium, this wont beanalysed in isolation but taking intoaccount 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 theeconomy? (Macro)

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Managerial Economics-

Meaning & NatureApplication ofeconomic theory and tools ofanalysis of decision science to examinehow an organization can achieve itsobjectives most efficiently- Salvatore

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Meaning & Nature

Spencer and Siegelman: Integration ofeconomic theory with business practice forthepurpose of facilitating decision makingand forward planningby management

Evan Douglas: Application of economic

principles and methodologies to thedecision-making process within the firm ororganizationunder conditions ofuncertainty


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Decision Making Process

5 Stages of Decision making Process:

1. Define the problem2. Determine the objective

3. Identify possible solutions

4. Select the best possible solution5. 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 andpolicy-makingrequireup-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 variablesused to study interrelationships, estimationand prediction

Measures of central tendency andvariation


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Meaning & Nature

Managerial Economics is essentially

- Applied economics

- Normative bias- Why?- Decision-making under partial equilibrium


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Role of Economics

What is the role of Economics in Business?

Costs, prices, output, compensation,

strategic behaviour, importantly, ethicsThe Big Picture- Whose job?

Economic theory forms the basis for

different management areas such asaccounts, finance, marketing, systems andoperations.

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Role of Economics

A manager has to deal with problemspertaining to the individual firm as well asdomestic 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- consumerbehaviour, demand theory, demand forecasting

and factors affecting individual and marketsupply- Helps in choice of commodities for

production

Theory of Production: Production function andlaws of returns to scale etc- gives an idea aboutI/O relations, input requirementsize 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 ofbreak-even point, emergence of profits,profit-maximising output, dealing with riskand uncertainty


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Role of Economics

Theory of capital: Along with quantitativetechniques enables investors to calculatecost of capital, efficiency of capital,efficient allocation of capital, and choice ofprojects 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 PolicyMonetary Policy

Foreign Trade: Imports and exports, Exchangerate, 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 toanalyse business problems, evaluatebusiness options and opportunities with aview to arriving at an appropriate business

decision.


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The theory of Economics does not furnish a

body of settled conclusions immediatelyapplicable to policy. It is a methodratherthan 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 businesseconomics, according to Baumol:

1. Analytical models: To recognize the structure ofmanagerial problems, eliminate minor details, and

concentrate on main issue2. Ascertaining relevant variables and specifying the

data- Even if the models are not directlyapplicable, they enhance capabilities of businessanalyst

3. Economic theories offerconceptual clarity to avoidconceptual pitfalls

Provides consistency to business analysis


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Role ofManagerial Economist

Role OfManagerial 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 andpolicies- 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 EconomistA) Globalization

What is Globalization ?

People-goods-services- communication- Finance-Ideas


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Managerial EconomistGlobal corporations

- Research & production facilities acrosscountries

- Global markets- Global Finance- Employment Diversity

- Global work culture

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Managerial Economist

Resource base: Crossing boundaries

Global management practices

Outsourcing


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Managerial Economist 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

UNs World Investment Report constructsTNI 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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Managerial EconomistB) Computerisation and Technology

Easiermodel-buildingand simulation

Quick and complicated data analysis

Rapid spread ofinformation

Internet changing both buyers and sellers

Videoconferencing- saving cost and time

Paperless administration

Speed of dispatch, lower inventories, less waste


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Managerial EconomistC. Dismantling of Traditional Hierarchies

Information today can be transmitted directly

from top management to workersMiddle managers are today increasingly

being used to shelter top managementfrom day-to-day activities


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Managerial EconomistD. Changing Basis for Value Creation

Peter Drucker:World is moving from

economy of goods to an economy ofknowledge

Creation of value increasingly based onknowledge and communications and notnatural resources and physical labour


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On eBay, ET, 30 Aug 2010

Gives tech edge to small entrepreneursfrom saddle makers of Kanpur to carpetmakers ofBenares

The Malad shopkeeper goes to HongKong to source products to sell on eBay

The $500-mn e commerce market in Indiais growing at 30% annually

With 3G and broadband rollout, the marketis expected to grow even more

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Managerial Economist

Bridging the gap between theory andPractice :

Real world is complex, chaotic,

interdependent as against simplifyingeconomic assumptions

Not tailor-made solutions but a framework

of logical thinking


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Managerial EconomistThe 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-centricNetworking and negotiating Interpersonal skills-managing multiple

simultaneous relationships Great communicatorUnderstanding technology Innovator

Problem SolverChange-maker- not threatened by changeEmpowering individual employers


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Managerial Economist Essentially, 3 sets of skills:

Human- understand, work with andmotivate 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 complexsituations and respond effectively tochallenges


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What are the Lessons?

1.Who sells the largest number of camerasin India?

2.W

ho has the biggest revenue from musicbusiness in India?

3.Who gained the most when business ofBritish Airways was affected due to the

2008 recession?

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Ans 1: Nokia (whose main line of business isNOT cameras but cell phones)

Ans 2:Airtel (which is not in musicbusiness)- by selling caller tunes makesmore money than HMV etc

Ans 3:videoconferencing and telepresence

services ofHP and Cisco.

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

ButGoogle is not a mobile company

Nokia is a global behemoth, with 35% ofthe worlds handset market. SiliconValleys 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 runninga company with R&D facilities in 16countries and sales in more than 160.

Nokia has a vast distribution system inemerging markets: some 90,000 salesoutlets 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-costlocal companies

According to Economist, One of thebiggest dangers for Nokia is that it willdevote so much energy to taking on Apple,Google and Research In Motion (the

maker of the BlackBerry) that it will lose itsedge in emerging markets

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Products have vanished from the marketin the past 20 years:

B

lack & white TVs Fountain pens

Type writers

Alarm Clocks

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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 EconomyDominick Salvatore

2. Managerial Economics Geetika, Piyali Ghoshand Roy Choudhury

3. Managerial Economics D. N. Dwivedi

4. The NewManagerial Economics -William

Boyes5. Managerial Economics R. L. Varshney and

K.L. Maheshwari


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Internet Sites for ManagerialEconomics

Current international economic news

http://www.economist.com

http://www.businessweek.com http://www.ft.com (Financial Times)

http://www.bloomberg.com


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Internet Sites for ManagerialEconomics

For international economic data

http://www.imf.org http://www.oecd.org

http://worldbank,org

http://www.wto.org


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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 yourdaily diet.

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1A. Meaning and Scope

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