Economics has two major branches namely Microeconomics and Macroeconomics and both are applied to business analysis and decision-making directly or indirectly. Managerial economics comprises all those economic concepts, theories, and tools of analysis which can be used to analyze the business environment and to find solutions to practical business problems. In other words, managerial economics is applied economics The areas of business issues to which economic theories can be applied may be broadly divided into the following two categories: •Operational or Internal issues; and • Environmental or External issues Micro Economics Applied to Operational Issues
Operational problems are of internal nature. They arise within the business organization and fall within the perview and control of the management. Some of the important ones are: • Choice of business and nature of product, i.e., what to produce; • Choice of the size of the firm, i.e., how much to produce; • Choice of technology, i.e., choosing the factor combination; • Choice of price, i.e. ,how to price the commodity; • How to promote sales, i.e., sales promotion measures; • How to face price competition; • How to decide on new investment; • How to manage profit and capital; • How to manage inventory, i.e., stock of both finished goods and raw material The above mentioned issues fall within the ambit of micro economics; therefore, the following constitute the scope of managerial economics: Theory of demand
• Consumer behaviour- maximization of satisfaction • Utility analysis • Indifference curve analysis • Demand analysis and elasticity of demand • Demand forecasting and its techniques/methods Theory of production and production decisions
• Production function [Inputs and output relationship] in short-run and long-run • Cost and output relationship in short-run and long-run • Economies and diseconomies of scale 7
• Optimum size of firm and determining the size of firm. • Deployment of resources [labour and capital] for having optimum combination of factors of production. Analysis of market structure and pricing theory
• Determination of price under different market conditions • Price discrimination • Multiple pricing policy • Advertising in competitive markets • Different pricing policies and practices Profit analysis and profit management
• Nature and types of profit • Profit planning and policies • Different theories of profit Theory of capital and investment decisions
• Cost of capital and return on capital-choice of investment projects • Assessing the efficiency of capital • Most efficient allocation of capital • Capital budgeting Macro Economics Applied to Business Environment
Environmental issues relate to general environment in which business operates. They are related to overall economic, social and political environment of the country. The following are the main ingredients of economic environment of a country : • The type of economic system- capitalist, socialist or mixed economic system. • General trends in production, employment, income, prices, saving and investment. • Volume, composition and direction of foreign trade. • Structure of and trends in the working of financial institutions- Banks, NBFCs, insurance companies an other financial institutions.
• Trends in labour and capital market. • Economic policies of the government- Fiscal policy, Monetary policy, EXIM- policy, Industrial policy, Price policy etc.
• Social factors- value system, property rights, customs and habits. • Social organizations- Trade unions, consumer unions and consumer co-operatives and producers unions. • Political environment is constituted of the following factors: • Political system-democratic, socialist, communist, authoritarian or any other type. • State’s attitude towards private sector • Policy, role and working of public sector • Political stability. • The degree of openness of the economy and the influence of MNCs on domestic markets- Integrations of nation’s economy with rest of the world (Policy of globalization) 8
The environmental factors have a far reaching influence on the functioning and performance of firm/s. Therefore, business managers have to consider the
changing economic, social and political environment before taking any decision. Managerial economics is however, concerned with only the economic environment and in particular with those which form the business climate. The study of social and political factors falls out of the perview of managerial economics. It should, however, be borne in mind that economic, social and political factors are inter-dependent and interactive. The environmental issues mentioned above fall within fourwalls of macro economics, therefore the following constitute the scope of managerial economics: Issues related to Macro Variables
• General trends in economic activities of the country • Investment climate • Trends in output • Trends in price – level (state of inflation) • Consumption level and its pattern • Profitability in business expansion Issues related to Foreign Trade
• Trade relation with other countries • Sector and firms dealing in exports and imports • Exchange rate fluctuations • Inflow and outflow of capital • Trends in international trade- volume, composition, and direction • Trends in international prices of various goods and services • International monetary mechanism • Rules, regulations and policies of WTO Issues related to Government Policies
• Regulation and control of economic activities of private sector business enterprises • Enforcing the government rules and regulations for imposing of social responsibility • Striking balance between firm’s objective of profit maximization and society’s interest • Policy and regulatory measure for reducing social costs in terms of environmental pollution, congestion and slums in cities, basic amenities of life such as means of transportation and communication, water, electricity supply etc.