There are different methods for setting advertising budget: Percentage of Sales Approach, All You can Afford Approach, Competitive Parity Approach, Objective and Task Approach and Return on Investment Approach. Therefore, a clear understanding of economic theory helps managers make the right most profitable decisions. For example, some of the alternative capital investment projects may involve lines methods of production which are unknown to management. Theory of probability upon which numerous statistical methods are based provides the logic for dealing with uncertainty in decision-making. With respect to the last goal, viz.
It may be noted in this context that people like doctors, lawyers or other professionals are in business, too. Any model or theory must necessarily simplify. The determination of the best combination of price and quantity 4. The present title is perhaps the most comprehensive of all because it examines various aspects, topics and examples of managerial economics. But managerial theory studies only about individual firm. One, entirely by the market mechanism, two, entirely by the government or finally, and more reasonably by a combination of the first two approaches. But the scope of the former is broader than that of the latter.
While an understanding of the macro economic developments sensitizes the finance manager to the opportunities and threats in the environment, a firm grounding in micro economic principles sharpens his analysis of decision alternatives. We may now make a brief review of the relation between economics and other related disciplines such as psychology and sociology. An element of cost uncertainty exists because all the factors determining costs are not always known or controllable. Hence managerial economics is economics applied in decision making. Some writers have ventured to call it applied microeconomics or price theory in the service of business executives. He has to help the firm to plan product improvement, new product policy, and pricing and sales promotion strategy. Such decisions require an act of investment or capital expenditure which will yield a return in future periods.
An art that predicts the livelihood of economic activity on the basis of certain assumptions. For instance, a firm can take an appropriate pricing decision only when it uses statistical measurement of demand and cost functions. In fact, through the use of regression technique, managerial economics can make a positive contribution to marketing and sales functions. It should be noted that normative economics involves value judgments. Control of costs, proper pricing policies, break-evenanalysis, alternative profit policies are some of the important techniques in profitplanning for the firm which has to work under conditions of uncertainty. The structure of systems to evaluate the performance of individuals and units These three components are often referred to a stool with three legs.
Hence managerial economics is economics applied in decision making. More will be said about this in Unit 2. These also explain how managerial economics is an integral part of business. Even if one does not eventually become a managerial economist, he she can hope that at least he will be able to communicate with economists properly and recognize when help from them can prove useful for problem solving. Managerial economics makes use of correlation and multiple regression in business problems involving some kind of cause and effect relationship. Positive versus Normative Economics : Most of the managerial economists are of the opinion that managerial economics is fundamentally normative and prescriptive in nature.
It draws together and relates ideas from several functional fields of business administration, including accounting, production, marketing, finance, and business policy. Motivations, the relation of rewards and aspiration levels, and patterns of influence and authority all these are key factors in the theory of decision making. . Economics provides tools managerial economics applies these tools to the management of business. Operations research which is closely related to managerial economics is mathematical in character. In the short run, the firm does not enjoy sufficient plant flexibility. Write a note on importance of consumer behavior for a business firm.
When should a capital equipment be replaced? The objective of the sales and marketing managers may be to maximize sales revenue, not profit. Information: In some ways a special kind of externality, this deserves to be mentioned separately because of the emphasis placed upon it in recent economic theory. It may be noted that various institutional arrangements in a free market system which relies on supply and demand to allocate resources and commodities affect the various functional divisions of a business say, the marketing and production departments. To conclude, managerial economics, which is an offshoot traditional economics, has gained strength to be a separate branch of knowledge. Managerial economics is basically concerned with how individual economic units behave, make decisions, and respond to changes in the external macro environment of business.
But when the demand reaches, 180 or 200, the company may plan to invest in a new machinery. Managerial economics integrates concepts and methods from these disciplines and brings them to bear on managerial problems. Managerial Economics and Theory of Decision Making : The theory of decision making is a relatively new subject that has a significance for managerial economics. Managerial Economics and Economics : Managerial Economics has been described as economics applied to decision making. In rich countries, markets are too familiar to attract attention. There are three classes of accounts: i Personal account, ii Property accounts, and iii Nominal accounts.
In such a dynamic environment, a business firm has to take various strategic decisions and this, in turn, necessitates the integration of managerial economics into the business environment. Hence it is relatively more objective and certain. Decision making is both a managerial function and an organisational process. Likewise, giving necessary financial support to other departments is the headache of the financial manager. There are not enough resources to keep up with the demand for them. Large inventory of raw materials, intermediate goods and finished goods means blocking of capital.
Microeconomics is the study of the economic behavior of individuals, firms and other such micro organizations. These and various other diverse managerial decisions require the use of the fundamental principles of economics. The Environment of the Firm : One of the goals of this title is to get the reader to look at the world of microeconomics both through the looking glass of an economist and from the perspective of a business person. Economists in various government departments and public sector organizations are also concerned with project evaluation and cost-benefit analysis. The Ministry of Finance, for instance, may be required to allocate a fixed budget to attain the maximum benefit — in education, medical care, and so forth — permitted by the size of the budget. The managerial economist can play a very important role by assisting management in using the increasingly specialised skills and sophisticated techniques which are required to solve the different problems of successful decision making and forward planning.