Tea by Musadiq

8/9/2019 Tea by Musadiq

1/12

Assignment on MANAGERIAL ECONOMICS

Subject : WHAT MANAGERS NEEDS TO KNOW AS AN ECONOMIST

Submitted to: Dr. Resham Chopra

Group Name The One

GROUP MEMBERS: Roopa Shukla, Archita Garg, Rajan Singh Yadav, Jitendra Kanade, Abhishek Suneri, Mohd. Musadeq peerzada

INTRODUCTION

MANAGERIAL ECONOMICS

Managerial economics may be defined as the study of economictheories logics and methodology which are generally applied toseek solution to the practical problems of business. Managerialeconomics thus constitute of that part of economic knowledgeand economic theories which is used as a tools of analyzingbusiness problems for rational business decisions. The managerialeconomics is defined by many great economists. Some definitions

are as follows which will make us more clearly about managerialeconomics.According to Mansfield, Managerial economics is concerned withthe application of economic analysis and economic concepts tothe problems of formulating rational managerial decision.According to Spencer and Seigelman, Managerial economics isan integration of economic theories with business practice for thepurpose of facilitating decision making and forward planning bymanagement. By Douglas, Managerial economics is concernedwith the applications of economic principles and methodology tothe decision making process within the firm or organization. Itseeks to establish rules and principles to facilitate the attainmentof the desired economic goals of management.

So by above the definitions it is clear that managerialeconomics is playing a great role in managerial functions because


2/12

manager has to take number of decisions in conformity with thegoals of the firm, in performing his functions.

HOW DOES ECONOMICS CONTRIBUTES TO MANAGERIAL

FUNCTIONS

Business decision making is essentially a process of selecting thebest out of alternative opportunities open to the firm. Manybusiness decisions are taken under the condition of uncertaintyand therefore involve risk. Uncertainty arise mainly due to theuncertain behavior of the market forces i.e. demand and supply,changing business environment, government policy , externalinfluences on the domestic market and social and politicalchanges in the country. The complexity of the modern business

world adds complexity to the business to decision making.However the degree of uncertainty and risk can be greatlyreduced if market conditions could be predicted with a highdegree of reliability. The prediction of future course of businessenvironment alone is not sufficient.What is equally important is to take appropriate businessdecisions and to formulate business strategy conforming to thegoals of the firms. Taking appropriate business and to formulatebusiness strategy conforming to the goals of the firms. Taking

appropriate decision requires clear understanding of technicaland environmental condition under which business decision aretaken. Applications of economic theories to explain and analyzethe technical condition and the economic environment in which abusiness undertaking operate, contributes a good deal to therational decision making process. Economic theories have,therefore, gained a wide application in the analysis of practicalproblems of business.

WHAT MANAGER NEEDS TO KNOW AS AN ECONOMIST

Most of the time managers have to face so many problemsso he takes some important decisions to come out from theproblems. To take appropriate decisions he must have a clearunderstanding of problems. So given below are some topics whicha manager needs to know as an economist.


3/12

DEMANDANALYSIS

A managerial economist can serve management best only if heknow about the demand of the market as well as individualdemand. Thats why he needs to forecast the demand andmake an analysis.

Definition of demand analysis- Study ofsales generated by a goodor service to determine the reasons for its success or failure, andhow its sales performance can be improved is known as demandanalysis.

The Demand Analysis Relationship

The Determinants

Economists approach the analysis of demand for a product

by considering the following determinants. Thesedeterminants are

1. Price of the good2. Taste or level of desire for the product by the buyer3. Income of the buyer4. Prices of related products:

substitute products (directly competes with the good in theopinion of the buyer)

complementary products (used with the good in theopinion of the buyer)5. Future expectations:

expected income of the buyerexpected price of the good.

6. For the total market demand the number of buyers in themarket is also a determinant of the amount purchased.
http://www.businessdictionary.com/definition/study.htmlhttp://www.businessdictionary.com/definition/sales.htmlhttp://www.businessdictionary.com/definition/final-good-service.htmlhttp://www.businessdictionary.com/definition/failure.htmlhttp://www.businessdictionary.com/definition/performance.htmlhttp://www.businessdictionary.com/definition/sales.htmlhttp://www.businessdictionary.com/definition/final-good-service.htmlhttp://www.businessdictionary.com/definition/failure.htmlhttp://www.businessdictionary.com/definition/performance.htmlhttp://www.businessdictionary.com/definition/study.html


4/12

To allow us to think about all of this logically and simply, weimagine each determinant by turn changing while the othersdo not change. We analyze, for example, a price change byassuming that the other determinants are "given" or fixed.

The Role of Price

Economists give prices a special place in this analysis. The

DEMAND CURVE is defined as the relationship between theprice of the good and the amount or quantity the consumeris willing and able to purchase in a specified time period,given constant levels of the other determinants--tastes,income, prices of related goods, expectations, and numberof buyers.

Demand Forecasting

The activity of estimating the quantity of a product orservice that consumers will purchase. Demand forecastinginvolves techniques including both informal methods, suchas educated guesses, and quantitative methods, such as theuse of historical sales data or current data from testmarkets. Demand forecasting may be used in making pricingdecisions, in assessing future capacity requirements, or inmaking decisions on whether to enter a new market.

Forecasting in a logistics system include dozens of differentforecasting algorithms that the analyst can use to generatealternative demand forecasts. While scores of differentforecasting techniques exist, almost any forecastingprocedure can be broadly classified into one of the followingfour basic categories based on the fundamental approach


5/12

towards the forecasting problem that is employed by thetechnique.

1. Judgmental Approaches. The essence of the judgmentalapproach is to address the forecasting issue by assumingthat someone else knows and can tell you the right answer.

That is, in a judgment-based technique we gather theknowledge and opinions of people who are in a position toknow what demand will be. For example, we might conduct asurvey of the customer base to estimate what our sales willbe next month.

2. Experimental Approaches. Another approach to demandforecasting, which is appealing when an item is "new" and

when there is no other information upon which to base aforecast, is to conduct a demand experiment on a smallgroup of customers and to extrapolate the results to a largerpopulation. For example, firms will often test a newconsumer product in a geographically isolated "test market"to establish its probable market share. This experience isthen extrapolated to the national market to plan the newproduct launch. An experimental approach are very usefuland necessary for new products, but for existing productsthat have an accumulated historical demand record it seemsintuitive that demand forecasts should somehow be basedon this demand experience.

3. Relational/Causal Approaches. The assumption behind acausal or relational forecast is that, simply put, there is areason why people buy our product. If we can understandwhat that reason (or set of reasons) is, we can use thatunderstanding to develop a demand forecast. For example, ifwe sell umbrellas at a sidewalk stand, we would probably

notice that daily demand is strongly correlated to theweather we sell more umbrellas when it rains. Once wehave established this relationship, a good weather forecastwill help us order enough umbrellas to meet the expecteddemand.


6/12

4. "Time Series" Approaches. A time series procedure isfundamentally different than the first three approaches wehave discussed. In a pure time series technique, no

judgment or expertise or opinion is sought. We do not look

for "causes" or relationships or factors which somehow"drive" demand. We do not test items or experiment withcustomers. By their nature, time series procedures areapplied to demand data that are longitudinal rather thancross-sectional. That is, the demand data representexperience that is repeated over time rather than acrossitems or locations. The essence of the approach is torecognize (or assume) that demand occurs over time inpatterns that repeat themselves, at least approximately. Ifwe can describe these general patterns or tendencies,

without regard to their "causes", we can use this descriptionto form the basis of a forecast.

Supply chain management

Supply chain management (SCM) is the oversight of materials,information, and finances as they move in a process fromsupplier to manufacturer to wholesaler to retailer to consumer.Supply chain management involves coordinating and

integrating these flows both within and among companies. It issaid that the ultimate goal of any effective supply chainmanagement system is to reduce inventory (with theassumption that products are available when needed).

Supply chain management flows can be divided into three mainflows:

The product flow The information flow The finances flow

The product flow includes the movement of goods from asupplier to a customer, as well as any customer returns orservice needs. The information flow involves transmittingorders and updating the status of delivery. The financial flow


7/12

consists of credit terms, payment schedules, and consignmentand title ownership arrangements.

The objective of supply chain management is to meet customer

demand for guaranteed delivery of high quality and low costwith minimal leadtime.To achieve this objective, companiesneed to have better visibility into the entire supply chain oftheir own plans as well as those of their suppliers andcustomers. Managers today should be agile enough to adjustand rebuild plans in real time, to take care of unexpectedevents in the supply chain.

Diagram showing supply chain management

Profit Maximization

Economic theory is based on the reasonable notion that peopleattempt to do as well as they can for themselves, given theconstraints facing them. For example, consumers purchase thingsthat they believe will make them feel more satisfied, but theirpurchases are limited (at least in the long run) by the amount ofincome they earn. A consumer can borrow to finance currentpurchases but must (if honest) repay the loans at a later date.


8/12

Business owners also attempt to manage their businesses so as toimprove their well being. Since the real world is a complicatedplace, a business owner may improve his well being in a numberof ways. For example, if the business doesn't lack customers, the

owner could respond by reducing operating hours and enjoyingmore leisure. Or, the business owner may seek satisfaction byearning as much profit as possible. This is the alternative we willfocus on in class - for a very good reason. If a business facestough competition, the only way the business can survive is topay attention to revenues and costs. In many industries, profitmaximization is not simply a potential goal; it's the only feasiblegoal, given the desire of other businesspeople to drive theircompetitors out of business.

In economic terms, profit is the difference between a firm's totalrevenue and its total opportunity cost. Total revenue is theamount of income earned by selling products. In our simplifiedexamples, total revenue equals P x Q, the (single) price of theproduct multiplied times the number of units sold. Totalopportunity cost includes both the costs of all inputs into theproduction process plus the value of the highest-valuedalternatives to which owned resources could be put. For example,a firm that has $100,000 in cash could invest in new, more

efficient, machines to reduce its unit production costs. But thefirm could just as well use the $100,000 to purchase bonds payinga 7% rate of interest. If the firm uses the money to buy newmachinery, it must recognize that it is giving up $7000 per year inforgone interest earnings. The $7000 represents the opportunitycost of using the funds to buy the machinery.

We will assume that the overriding goal of the managers of firmsis to maximize profit: = TR - TC . The managers do this byincreasing total revenue (TR) or reducing total opportunity cost

(TC) so that the difference rises to a maximum.

Foreign Trade


9/12

The economy of a country is directly dependent on its

relations with other countries, hence, the economy of particular

company gets affected by its trade relations with other countries.

If a company establishes its foreign trade with other country, then

a manager should be able to know about the competitors which

are operating their business in the country. In such situations a

proper decision should be made by a manager that how to

operate the business in these conditions. Also, the manager will

have to focus on the range of brands in which it has greatest

competitive advantage. It enables the companies to sell anarrower range of leading brands into more and more

geographical markets.

Secondly, economy of the host country plays a major role in

foreign trade. If the economy of the country is weak, then a

manager should be able to decide not to invest the capital in that

particular country and if the economy of the country is good, then

it is better to invest the capital in that country. Also, a manager

should be able to know about the Government support of the

country in which the company is investing its capital. A manager

should respect the laws of the country.

A manager should, therefore, know the fluctuations in the

international market, exchange rate, prices and prospects in the

international market. He should also think about various future

aspects of the company otherwise the situations like market

failure, incomplete markets, macroeconomic instabilities etc. may

arise.


10/12

Government Policies

Governments create the rules and frameworks in which

businesses are able to compete against each other. The

Government can change rules and frameworks from time to time

forcing business to change the way they operate. In this way, the

business gets affected by the Government policy. The firms work

in such a way that their attempt is to maximize their profits which

lead to social issues like environmental pollution, congestion in

the cities etc.. Social issues not only bring a firms interest in

conflict with those of the society, but also impose a social

responsibility on the firms. After that the Government may frame

certain laws so as these conflicts can be minimized. The manager

should, therefore, be able to know the ambitions or aspirations of

the people. After knowing the aspirations he should give a due

preference towards the decisions of the people about theseconflicts.

National Economy

A manager should be aware of the national economy of thecountry sothat he may ascertain his customer group, demand inthe market, positive and negative movement of the economy etc.Here are some important concepts about national economy that amanger should acquaint him with

National Income:National income is the money value of the end result of all theeconomic activities from the nation. Economic activities generatea large number of goods and services.


11/12

There are certain measures of national income of a country suchas

Gross Domestic Product (GDP)

It is one of the measures of national income and output for agiven country's economy. GDP is defined as the total marketvalue of all final goods and services produced within the countryin a given period of time generally one year.

GDP = consumption + gross investment + government spending+ (exports imports),

Gross National Product (GNP):GNP is defined as the value of all the final goods and services

produced during a specific period, (usually one year) plus thedifference between foreign receipt and payment.

Economic growthIt is the increase in the amount of the goods and servicesproduced by an economy over time. It is conventionally measuredas the percent rate of increase in real gross domestic product, or

real GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on theprice of the goods and services produced.

Per Capita Income:

Per capita income is often used as a measure of the wealth of thepopulation of a nation, particularly in comparison to other nations.It is usually expressed in terms of a commonly-used international

currency such as US dollar. Per capita income gives no indicationof the distribution of that income within the country.

InflationIt is a rise in the general level of prices of goods and services inan economy over a period of time. The term "inflation" oncereferred to increases in the money supply (monetary inflation);


12/12

however, economic debates about the relationship betweenmoney supply and price levels have led to its primary use today indescribing price inflation.Inflation can also be described as a decline in the real value of

moneya loss of purchasing power. When the general price levelrises, each unit of currency buys fewer goods and services.Inflation can cause adverse effects on the economy. For example,uncertainty about future inflation may discourage investment andsaving. Inflation may widen an income gap between those withfixed incomes and those with variable incomes. High inflation maylead to shortages of goods as consumers begin hoarding them outof concern their prices will increase in the future.

So these were some topics which a manager needs to know as an

economist.

References:1. www.wikipedia.com

Managerial economics by1. D. N. Dwivedi2. Varshney.
http://www.wikipedia.com/http://www.wikipedia.com/

Documents

Tea by Musadiq