Posted by Chetan Chitre in Introduction, Managerial Economics. trackback
Managerial Economics –
Managerial Economics is a branch of economics that studies application of principles of economics to various business situations. A Business organization is essentially a group of people who have come together for attaining certain common objectives. These objectives are largely material in nature – eg. profits, salaries, production for the purpose of consumption, etc. The behavior of this group of people is therefore a subject matter of study for economics. A Business Manager is responsible for leading this group of people in the direction of attainment of the objectives. In this capacity she has to take several decisions during the course of her day-to-day operations. An understanding and application of principles of economics would help the Business Manager to take appropriate decisions under various situations. Scope of Managerial Economics –
Principle of Economics can help a Manager in taking decisions in various business situations. These can be summarized with the help of the following diagram –
Business Decisions are primarily centered around Production and Sales. In addition to this, the environment in which a business organization operates has an impact on the Business Decisions. Various topics in Economic Theory help Business Managers in their functions. (i) Sales, Marketing and Advertising – Sales, marketing and advertising related decision need an in-depth understanding of the Consumer Behavior. We need to understand the reasons for consumption, factors affecting consumption, constraints faced by the consumers, the decision-making process of the consumer as regards price to be paid, quantity to be purchased, allocation of resources between different needs, etc. Theory of Demand helps in developing an understanding between Price and quantity demanded. Price Elasticity helps us understand the ability and willingness to pay of different categories of consumers. This also helps us in Market segmentation. Cross Price Elasticity helps in identifying competitors which may not be essentially within the same product category – eg. Should soft-drinks manufacturers be seen as competitors for Tea? Theory of Consumer’s Equilibrium helps in understanding how a consumer allocates his income between different needs. Having understood the various factors that affect demand for a product and the decision-making process of a consumer helps business managers in devising more effective sales, marketing and advertising strategies. (ii) Production – Production is perhaps the most important activity in a business organization. A Business Manager has to take several decisions regarding production – eg. What to produce, what should be the plant capacity, what should be the capacity utilization, which technology to use, etc. While organizing of production activity, Business Managers have to take several factors into consideration, such as – (a) Objective of the Firm – To begin with the firm has to decide its objective. A Firm could have various objectives such as profit maximization, sales maximization, maximization of market share, etc. Economics helps us to understand what impact these different objectives will have on key variables such as Sales, Production, Prices, Costs, Profits, etc. Organization Economics, a branch of economics helps us in understanding relationship between firm objectives and internal dynamics of an organization. (b) Profit Maximization – In traditional theory we examine a firm that has profit maximization as its central objective. In order to maximize profits a firm has to minimize costs and maximize its revenues. Thus, a deeper understanding of the Costs and Revenues is required for achieving this objective. (c) Revenues – Revenues of a firm depend on the demand scenario and the competitive scenario in the market. The understanding of the above two would be essential for a business manager...