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Managerial Economics
1 A. Meaning and Scope
Sources: Salvatore
Geetika et al
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76% of senior executives say that it is
important they have the knowledge and
skills to respond to trends like resource
scarcity, the low carbon economy and
doing business in emerging markets
2
What is Economics?
Unlimited wants and scarce resources
CHOICE
Science or Art?
3
Basic Assumptions
Ceteris Paribus- Other things remaining
equal
• “ The existence of other tendencies is nor
denied, but their disturbing effect is
neglected for a time “- Marshall
• Easier to handle, if issue is narrowed, but
less closely corresponds to real life
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Basic Assumptions
Rationality
• Implies that consumers and producers
measure and compare costs and benefits
before taking decisions
• Consumers: Maximising utility and
minimising sacrifice
• Producers : Maximising profits and
minimising costs
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Types of Economic Analysis
A. Micro(individual consumers and firms)
Macro (Aggregates- Industry, not firm)
B. Positive (factual statements- “What is”)
Normative (Value judgments- “What
ought to be”)
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Types of Economic Analysis
C. Time period
Short run -A time period not long enough
for consumers and producers to adjust to
a new situation- K/L
Long run- Planning horizon- A time period
long enough for consumers and producers
to adjust to a new situation- All inputs can
be varied- K and L- Whether to change
product lines, build new plant etc
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Types of Economic Analysis
Marshall
• Market Period- Prices adjust to clear marketperishable goods
• Short Period- industry capacity is assumed to be
given
• Long Period- Stock of equipment and machinery
(K) changeable
• Very Long Period-Tech, population, tastes etc
change
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Types of Economic Analysis:
Partial and General Equilibrium
D. Equilibrium: State of balance
Partial: Looks at internal outcome of any policy
action in a single market or consumer (the one
that is directly affected) – say, a single cement
firm in Indian cement industry may be in
equilibrium, whereas others may not beunrealistic
General Equilibrium: Explains economic
phenomena like production, consumption and
prices in the economy as a whole
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Types of Economic Analysis:
Partial and General Equilibrium
• A petroleum company may hike petro
prices without considering the effects on
prices of other commodities
• Under general equilibrium, this won’t be
analysed in isolation but taking into
account linkages with other sectors.
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Kinds of Economic Questions
1.
2.
3.
4.
5.
What to Produce? (Micro)
How to Produce? (Micro)
How much to produce? (Micro)
For Whom to Produce? (Micro)
Are Resources Used optimally? (Micro)
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6. Are Resources fully employed? (Macro)
7. Is the economy Growing? (Macro)
8. In what phase of business cycle is the
economy? (Macro)
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Managerial EconomicsMeaning & Nature
“Application of economic theory and tools of
analysis of decision science to examine
how an organization can achieve its
objectives most efficiently”- Salvatore
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Meaning & Nature
Spencer and Siegelman: “… Integration of
economic theory with business practice for
the purpose of facilitating decision making
and forward planning by management”
Evan Douglas: “Application of economic
principles and methodologies to the
decision-making process within the firm or
organization…under conditions of
uncertainty”
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Decision Making Process
5 Stages of Decision making Process:
1.
2.
3.
4.
5.
Define the problem
Determine the objective
Identify possible solutions
Select the best possible solution
Implement the decision
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Meaning & Nature
Importance of Quantitative Tools
• Analysis of variables is a key procedure in
economic analysis.
• Economic research and policy-making require
up-to-date data and extensive analysis.
• Use of Mathematical tools
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Meaning & Nature
Use of Statistical Techniques
• Time Series: For Demand forecasting
• Regression: Two or multiple variables
used to study interrelationships, estimation
and prediction
• Measures of central tendency and
variation
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Meaning & Nature
Managerial Economics is essentially
- Applied economics
- Normative bias- Why?
- Decision-making under partial equilibrium
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Role of Economics
What is the role of Economics in Business?
Costs, prices, output, compensation,
strategic behaviour, importantly, ethics
The Big Picture- Whose job?
Economic theory forms the basis for
different management areas such as
accounts, finance, marketing, systems and
operations.
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Role of Economics
A manager has to deal with problems
pertaining to the individual firm as well as
domestic and global environment.
• Microeconomics: Deals with individual unit
• Macroeconomics: Deals with aggregates
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Role of Economics
Microeconomics:
Theory of demand and supply- consumer
behaviour, demand theory, demand forecasting
and factors affecting individual and market
supply- Helps in choice of commodities for
production
Theory of Production: Production function and
laws of returns to scale etc- gives an idea about
I/O relations, input requirement size of firm,
technology choice of output. Helps producer to
plan production, cost and budget.
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Role of Economics
Market Analysis: helps understand degrees
of competition, pricing-output decisions,
price discrimination, monopoly power,
advertising
Profit Analysis: Provides logical analysis of
break-even point, emergence of profits,
profit-maximising output, dealing with risk
and uncertainty
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Role of Economics
• Theory of capital: Along with quantitative
techniques enables investors to calculate
cost of capital, efficiency of capital,
efficient allocation of capital, and choice of
projects as per risk-return analysis
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Role of Economics
 Behaviour of macro economic indicators: GDP,
GNP, GDCF, GDS, HDI etc.
 Business Cycles – Inflation- Employment
 Fiscal Policy
 Monetary Policy
 Foreign Trade: Imports and exports, Exchange
rate, trade policies and capital flows
Macro economic variables and policies impact
business
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Role of Economics in Business
• Economics is a tool, means to an end
• To help Efficient allocation and achieve
business objectives
• Optimising behaviour- Maximise goals,
minimize costs under constraint
Logic, tools and techniques of economics to
analyse business problems, evaluate
business options and opportunities with a
view to arriving at an appropriate business
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decision.
Role of Economics in Business
“The theory of Economics does not furnish a
body of settled conclusions immediately
applicable to policy. It is a method rather
than a doctrine, an apparatus of the mind,
a technique of thinking, which helps the
possessor to draw correct conclusions”
- J.M. Keynes
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Role of Economics in Business
3 main contributions of economic theory to business
economics, according to Baumol:
1. Analytical models: To recognize the structure of
managerial problems, eliminate minor details, and
concentrate on main issue
2. Ascertaining relevant variables and specifying the
dataEven if the models are not directly
applicable, they enhance capabilities of business
analyst
3. Economic theories offer conceptual clarity to avoid
conceptual pitfalls
Provides consistency to business analysis
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Role of Managerial Economist
Role Of Managerial Economist: To decide
• What to produce?
• Where
• How
• How much
• Allocation of resources
• For whom to produce
• At what price to sell
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Role of Managerial Economist
Plan and control business operations• Cost minimisation
• Profit maximisation ??
• Managing competition
• Economic intelligence
• Market research
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Role of Managerial Economist
Uncertainty & Risk management
• Forecast change in environment and
policies- domestic and international
• To manage change in global scenario
• Everything comes at a price- quality is not
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free
Growing Challenges to the
Managerial Economist
A) Globalization
What is Globalization ?
People-goods-services- communication- FinanceIdeas
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Growing Challenges to the
Managerial Economist
Global corporations
- Research & production facilities across
countries
- Global markets
- Global Finance
- Employment Diversity
- Global work culture
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Growing Challenges to the
Managerial Economist
 Resource base: Crossing boundaries
 Global management practices
 Outsourcing
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Growing Challenges to the
Managerial Economist




Increased competition
Increased Opportunity
Tastes converging internationally?
Customising to local tastes
 Not merely exporters, but need to be
insiders in major markets
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Trans-nationality Index
UN’s World Investment Report constructs
TNI as the average of 3 Ratios:
• Foreign sales to total sales
• Foreign assets to total assets
• Foreign employment to total employment
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Global Corporations
Company
Country
TNI (%)
Vodafone Group
UK
85
British Petroleum
UK
82
Nestle
Switzerland
74
Honda/ Shell
Japan/UK
72
Sony, Volkswagen, IBM
> 50
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Growing Challenges to the
Managerial Economist
B) Computerisation and Technology
 Easier model-building and simulation
 Quick and complicated data analysis
 Rapid spread of information
 Internet changing both buyers and sellers
 Videoconferencing- saving cost and time
 Paperless administration
 Speed of dispatch, lower inventories, less waste
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Growing Challenges to the
Managerial Economist
C. Dismantling of Traditional Hierarchies
Information today can be transmitted directly
from top management to workers
Middle managers are today increasingly
being used to shelter top management
from day-to-day activities
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Growing Challenges to the
Managerial Economist
D. Changing Basis for Value Creation
Peter Drucker: World is moving from
“economy of goods” to an “economy of
knowledge”
Creation of value increasingly based on
knowledge and communications and not
natural resources and physical labour
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On eBay, ET, 30 Aug 2010
• Gives tech edge to small entrepreneurs
from saddle makers of Kanpur to carpet
makers of Benares
• The Malad shopkeeper goes to Hong
Kong to source products to sell on eBay
• The $500-mn e commerce market in India
is growing at 30% annually
• With 3G and broadband rollout, the market
is expected to grow even more
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Growing Challenges to the
Managerial Economist
Bridging the gap between theory and
Practice :
• Real world is complex, “chaotic”,
interdependent as against simplifying
economic assumptions
• Not tailor-made solutions but a framework
of logical thinking
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Growing Challenges to the
Managerial Economist
The Global business Leader has to
Imbibe and inculcate essential qualities such as
 Global outlook
 Managing diversities
 Flexibility with efficiency
 Long-term goals with steps and migration path
 Speed and stamina for transformation
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The Global Business Leader
 Customer-centric
 Networking and negotiating
 Interpersonal skills-managing multiple
simultaneous relationships
 Great communicator
 Understanding technology
 Innovator
 Problem Solver
 Change-maker- not threatened by change
 Empowering individual employers
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Growing Challenges to the
Managerial Economist
• Essentially, 3 sets of skills:
• Human- understand, work with and
motivate with other people as individuals
as well as groups
• Technical- Ability to use tools, techniques
and processes that are specific to the field
• Conceptual-Ability to analyse complex
situations and respond effectively to
challenges
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What are the Lessons?
1.Who sells the largest number of cameras
in India?
2. Who has the biggest revenue from music
business in India?
3. Who gained the most when business of
British Airways was affected due to the
2008 recession?
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What are the Lessons?
Ans 1: Nokia (whose main line of business is
NOT cameras but cell phones)
Ans 2: Airtel (which is not in music
business)- by selling caller tunes makes
more money than HMV etc
Ans 3:videoconferencing and telepresence
services of HP and Cisco.
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What are the Lessons?
• Nokia missed the Smartphone bus.
Apple's I phone and Google's Android are
making life difficult for Nokia.
• But Google is not a mobile company
• Nokia is a global behemoth, with 35% of
the world’s handset market. Silicon
Valley’s finest may be good at high-end
innovation, BUT…..
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What are the Lessons?
(From Economist, Aug 18th)
….none of them knows much about running
a company with R&D facilities in 16
countries and sales in more than 160.
• Nokia has a vast distribution system in
emerging markets: some 90,000 sales
outlets in China, 1,000 customer-service
centres and a huge army of sales people
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What are the Lessons?
• But then, there are assaults from low-cost
local companies …
• According to Economist, One of the
biggest dangers for Nokia is that it will
devote so much energy to taking on Apple,
Google and Research In Motion (the
maker of the BlackBerry) that it will lose its
edge in emerging markets
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What are the Lessons?
• Products have vanished from the market
in the past 20 years:
• Black & white TVs
• Fountain pens
• Type writers
• Alarm Clocks
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What are the Lessons?
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What are the Lessons?
• Lessons for the Managerial economist:
• Today's competitor is obvious. Tomorrow's
is not- Think beyond conventional
framework; think beyond the obvious
• Competition lurking in unknown places
• Need to identify competition (present)
• Need to foresee competition (Future)
• Need to beat competition- Strategise
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•
•
•
•
•
•
Importance of speed & resilience
Keep eyes open- small can be big
Technology- adapt, innovate or perish
Understand your customer
Anticipate
And many more….
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References
Text Books:
1. Managerial Economics in a Global Economy –
Dominick Salvatore
2. Managerial Economics – Geetika, Piyali Ghosh
and Roy Choudhury
3. Managerial Economics –– D. N. Dwivedi
4. The New Managerial Economics -William
Boyes
5. Managerial Economics – R. L. Varshney and
K.L. Maheshwari
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Internet Sites for Managerial
Economics
Current international economic news
• http://www.economist.com
• http://www.businessweek.com
• http://www.ft.com (Financial Times)
• http://www.bloomberg.com
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Internet Sites for Managerial
Economics
For international economic data
• http://www.imf.org
• http://www.oecd.org
• http://worldbank,org
• http://www.wto.org
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Data
For authentic current Indian data:
CMIE database
For journals and other scholarly articles :
ProQuest
• Of course, our very own Economic Times or
Business Standard must become part of your
daily diet.
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