Managerial Economics

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Question 1: Discuss the Functions & Responsibilities of Managerial Economists in a Firm
INTRODUCTION:
A close interrelationship between management and economics had led to the development of
managerial economics. Economic analysis is required for various concepts such as demand,
profit, cost, and competition. In this way, managerial economics is considered as economics
applied to “problems of choice’’ or alternatives and allocation of scarce resources by the firms.
Managerial economics is a discipline that combines economic theory with managerial practice. It
helps in covering the gap between the problems of logic and the problems of policy. The subject
offers powerful tools and techniques for managerial policy making.
Functions and objectives of Managerial Economists in a Firm:
 Estimating economic relationships: Managerial Economists estimate economic
relationships between different business factors such as income, elasticity of demand,
cost volume, profit analysis etc. of a firm.
 Predicting relevant economic quantities: Managerial economists assist the
management in predicting various economic quantities such as cost, profit, demand,
capital, production, price etc. As a business manager has to function in an environment of
uncertainty, it is imperative to anticipate the future working environment in terms of the
said quantities. This is possible with the help of Managerial Economists
 Understanding significant internal and external forces: The management has to
identify all the important factors that influence a firm. These factors can broadly be
divided into two categories; external and Internal Factors.
(a) External factors: A firm has no control over these factors. The plans, policies and
programs of the firm should be formulated in the light of these factors. Significant
external factors impinging on the decision-making process of a firm are economic
system of the country, business cycles, fluctuations in national income and national
production, industrial policy of the government, trade and fiscal policy of the
government, taxation policy, licensing policy, trends in foreign trade of the country,
general industrial relation in the country and so on.

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(b) ) Internal factors: These factors fall under the control of a firm. These factors are
associated with business operation. Knowledge of these factors aids the management
in making sound business decisions. Hence importance of expertise of a managerial
Economist.
 Basis of business policies: Managerial economics is the founding principle of business
policies. Business policies are prepared based on studies and findings of managerial
economists, which cautions the management against potential upheavals in national as
well as international economy. Thus, managerial economist is helpful to the management
in its decision-making process.
 It accommodates traditional theoretical concepts to the actual business behavior and
conditions Managerial economics amalgamates tools, techniques, models and theories of
traditional economics with actual business practices and with the environment in which a
firm has to operate.
 Managerial economist helps management in making decisions that aim at earning
maximum proceeds. A sound decision requires fair knowledge of the aspects of economic
theory and the tools of economic analysis, which are directly involved in the process of
decision-making.

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Question 2: “Examine the Features/Chief Characteristics of a Managerial Economist in a
Firm”
A managerial economist helps the management by using his analytical skills and highly
developed techniques in solving complex issues of successful decision-making and future
advanced planning
Characteristics of Managerial Economist
a) Managerial economist is pragmatic in nature. Its tries to solves managerial problems in
their day to day functioning and avoids difficult issues of economic theory.
b) He/ She focuses on Microeconomics. This is because it is concerned with smaller units
of the economy. The study of the problems and principles of an individual business firm
assist management in forecasting and evaluating the market trends. such as forecasting
demand, cost of production, pricing, profit, planning and capital management.
c) Managerial economics belongs to normative economics. It is concerned with what
management should do under particular circumstances. It determines the goals of the
enterprise and then develops the ways to achieve these goals. It deals with future
planning, policy making, decision making and making full utilization if available
resources of enterprise
d) It is Prescriptive rather than descriptive. Managerial economist has a normative and
applied discipline mind-set. He/ She suggests the application of economic principles with
regard to policy formulation, decision making and future planning. It not only describes
the goals of an organization but also prescribes the means of achieving these goals.
e) They take in to account macroeconomics, that is the environment under which an industry
or frim operates. This includes Business cycles, Taxation policies, Industrial Policy of the
government, Price and distribution policies, Wage policies and anti- monopoly policies etc.
f) Managerial economist uses a scientific art, it helps the management in the best and
efficient utilization of scares economic resources. It assists the management in finding out
the most feasible alternative. Managerial economics facilitates good and result orientated
decisions under conditions of uncertainty.

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g) Choice and Allocation, Managerial economist is concerned with decision-making of
economic nature. This implies that managerial economics deals with identification of
economic choices and allocation of scarce resources.
h) Conceptual and Metrical, an intelligent application of quantitative techniques to business
presupposes considered judgment and careful thinking about the nature of the particular
problem to be solved. Managerial economist provides necessary conceptual tools to
achieve this. Moreover, it helps the decision-maker by providing measurement of various
economic entities and their relationships. This metrical dimension of managerial
economics is complementary to its conceptual framework.
i) Managerial economist employs economic concepts and principles, which are known as
the theory of Firm or commonly known as Economics of the Firm. Thus, its scope is
narrower than that of pure economic theory.

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Question 3. “Managerial Economics as Tool for Decision Making” Discuss
INTRODUCTION
The primary function of management executive in a business organization is decision-making
and forward planning. Decision making and forward planning go hand in hand with each
other. Decision-making means the process of selecting one action from two or
more alternative courses of action. Forward planning means establishing plans for the
future to carry out the decision so taken. The problem of choice arises because resources
at the disposal of a business unit (land, labor, capital, and managerial capacity) are
limited and the firm has to make the most profitable use of these resources. The decision-
making function is that of the business executive, he takes the decision which will ensure the
most efficient means of attaining a desired objective, say profit maximization. After taking
the decision about the particular output, pricing, capital, raw-materials and power etc., are
prepared. Forward planning and decision-making thus go on at the same time. A business
manager’s task is made difficult by the uncertainty which surrounds business
decision-making. Nobody can predict the future course of business
conditions. He prepares the best possible plans for the future depending on past
experience and future outlook and yet he has to go on revising his plans in the light of new
experience to minimize the failure.
Managers are thus engaged in a continuous process of decision-making through an
uncertain future and the overall problem confronting them is one of adjusting to
uncertainty. In fulfilling the function of decision-making in an uncertainty framework, economic
theory can be, pressed into service with considerable advantage as it deals with a number of
concepts and principles which can be used to solve or at least throw some light upon the
problems of business management. E.g. are profit, demand, cost, pricing, production,
competition, business cycles, national income etc. The way economic analysis can be used
towards solving business problems, constitutes the subject-matter of Managerial Economics

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o Managerial economics helps in determining the opportunity Cost
This is the cost involved in any decision that consists of the sacrifices of alternatives
required by that decision. opportunity costs are measured by the sacrifices in terms of
goods and services involved in the decision. The opportunity cost of the funds employed
in one’s own business is the amount of interest income which could be earned had that
been employed in other ventures. For example, the opportunity cost of using a machine to
produce one product is measured as the income which could have been obtained by
renting it out to somebody else.
o Managerial economics aids in determining the Incremental Principle:
This principle guides managers while making decisions on expansion, that he should only
expand his business so long as the incremental benefit to his firm is more than the
incremental costs. It is used in the theories of consumption, production pricing and
distribution. In price-determination, this principle states that a firm would maximize its
profits if it equates its marginal costs to its marginal revenue.
o Principle of Time Perspective both long run and short run
Managerial economics helps in ensuring that decisions made take into account both the
short run and the long run effects on revenues and costs. This ensures a right balance
between the long run and the short run perspectives. They take into perspective on output,
pricing, advertising and expansion of the business.
o The Discounting Principle
Managerial economics take into account the discounting principle. This means that a
shilling today is worth more than a shilling tomorrow. Any organization will prefer to
receive Kshs.1,000 today and invest for one year earn interest at a discounted rate. If a
decision affects costs and revenues at future dates, it is necessary to discount those costs
and revenues to obtain the present values of both before a valid comparison of
alternatives can be made.

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o Equi – Marginal Principle
Managerial economics use the Equi-marginal principle to ensure that an input is allocated
in such a way that the value added by the last unit of the input is the same in all its uses.
For example, suppose a firm has 4 workers employed in production of bottled milk,
butter, cheese and ghee, the firm should allocate these workers in such a way that the
marginal productivity of the last worker is the activities is the same. However, Equi-
marginal principle only operates under ideal situation. A business enterprise may also
work under some non-economic pressures and pulls. For example, an activity may be
carried on simply because of inertia on the part of management arising from well-set
routines even though activities add less to the revenues of a firm than others which have
to be started for the first time. Other activities may be just continued because the
managers have a sentimental attachment to them.
Doing business with knowledge and skill of behavioral economics can be a rewarding experience
for most firms and governments today. There is some on-going research on how behavior
economics could solve the woes of social sector spending (e.g. insurance, education etc.)
REFERENCE;
Salvatore, D. (2012). Managerial Economics: Principles and Worldwide Applications. Seventh
Edition, Adapted Version (Ravikesh Srivastava), New Delhi: Oxford University Press
Website; http://economics.ezinemark.com/characteristics-of-managerial-economics