Thursday, February 20, 2014

Scope of Managerial / Business Economics

Scope of Managerial / Business Economics

The scope of managerial economics refers to its area of study. Scope of Managerial Economics is wider than the scope of Business Economics in the sense that while managerial economics dealing the decisional problems of both business and non business organizations, business economics deals only the problems of business organizations. Business economics giving solution to the problems of a business unit or profit oriented unit. Managerial economics giving solution to the problems of non profit organizations like schools, hospital etc., also. The scope covers two areas of decision making (A) operational or internal issues and (B) Environmental or external issues.

A) Operational/internal issues

These issues are those which arise within the business organization and are under the control of the management. They pertains to simple questions of what to produce, when to produce, how much to produce and for which category of consumers. The following aspects may be said to be fall under internal issues.

1.        Demand analysis and Forecasting: - The demands for the firms product would change in response to change in price, consumer‟s income, his taste etc. which are the determinants of demand. A study of the determinants of demand is necessary for forecasting future demand of the product.

2.        Cost analysis: - Estimation of cost is an essential part of managerial problems. The factors causing variation of cost must be found out and allowed for it management to arrive at cost estimates. This will helps for more effective planning and sound pricing practices.

3.        Pricing Decisions: - The firms aim to profit which depends upon the correctness of pricing decisions. The pricing is an important area of managerial economics. Theories regarding price fixation helps the firm to solve the price fixation problems.

4.        Profit Analysis: - Business firms working for profit and it is an important measure of success. But firms working under conditions of uncertainty. Profit planning become necessary under the conditions of uncertainty.

5.        Capital budgeting: - The business managers have to take very important decisions relating to the firms capital investment. The manager has to calculate correctly the profitability of investment and to properly allocate the capital. Success of the firm depends upon the proper analysis of capital project and selecting the best one.

6.        Production and supply analysis: - Production analysis is narrower in scope than cost analysis. Production analysis is proceeds in physical terms while cost analysis proceeds in monitory term. Important aspects of supply analysis are; supply schedule, curves and functions, law of supply, elasticity of supply and factors influencing supply…

B)  Environmental or external issues

It refers to the general business environment in which the firm operates. A study of economic environment should include:

1.        The types of economic system in the country.
2.        The general trend in production, employment, income, prices, savings and investments

3.        Trends in the working of financial institutions like banks, financial corporations, insurance companies etc..

4.        Magnitude and trends in foreign trade.
5.        Trends in labour and capital market.

6.        Government economic policies viz., industrial policy, monitory policies, fiscal policy, price policy etc… 
Functions and Responsibilities of managerial economist

A managerial economist can play an important role by assisting the management to solve the difficult problems of decision making and forward planning. Managerial economists have to study external and internal factors influencing the business while taking the decisions. The important questions to be answered by the managerial economists include:

1.      Is competition likely to increase or decrease?
2.      What are the population shifts and their influence in purchasing power?
3.      Will the price of raw materials increase or decrease? Etc...

4. .managerial economist can also help the management in taking decisions regarding internal operation of the firm. Following are the important specific functions of managerial economist;

  1. Sales forecasting.
  1. Market research.
  1. Production scheduling
  1. Economic analysis of competing industry.
  1. Investment appraisal.
  1. Security management analysis.
  1. Advise on foreign exchange management.
  1. Advice on trade.
  1. Environmental forecasting.
  1. Economic analysis of agriculture Sales forecasting

The responsibilities of managerial economists are the following;

1.      To bring reasonable profit to the company.
2.      To make accurate forecast.
3.      To establish and maintain contact with individual and data sources.
4.      To keep the management informed of all the possible economic trends.
5.      To prepare speeches for business executives.
6.      To participate in public debates
7.      To earn full status in the business team.

Chief Characteristics of Managerial or Business economics.

Following are the important feature of managerial economics

1)      Managerial economics is Micro economic in character. Because it studies the problems of a business firm, not the entire economy.

2)      Managerial economics largely uses the body of economic concepts and principles which is known as “Theory of the Firm” or “Economics of the firm”.

3)      Managerial economics is pragmatic. It is purely practical oriented. So Managerial economics considers the particular environment of a firm or business for decision making.

4)      Managerial economics is Normative rather than positive economics (descriptive economics). Managerial economics is prescriptive to solve particular business problem by giving importance to firms aim and objectives.

5)      Macro economics is also useful to managerial economics since it provides intelligent understanding of the environment in which the business is operating.

6)      It is management oriented.