Objectives and Uses (importance) of managerial Economics

Objectives and Uses (importance) of Managerial Economics 

Objectives: The basic objective of managerial economics is to analyze the economic problems faced by the business. The other objectives are:

1. To integrate economic theory with business practice.
2. To apply economic concepts and principles to solve business problems.
3. To allocate the scares resources in an optimal manner.
4. To make all-round development of a firm.
5. To minimize risk and uncertainty
6. To helps in demand and sales forecasting.
7. To help in profit maximization.
8. To help to achieve the other objectives of the firm like industry leadership, expansion implementation of policies etc...

Importance: In order to solve the problems of decision making, data are to be collected and analyzed in the light of business objectives. Managerial economics provides help in this area. The importance of managerial economics maybe relies in the following points:

1. It provides tool and techniques for managerial decision making.
2. It gives answers to the basic problems of business management.
3. It supplies data for analysis and forecasting.
4. It provides tools for demand forecasting and profit planning.
5. It guides the managerial economist.
6. It helps in formulating business policies.
7. It assists the management to know internal and external factors influence the business.

Following are the important areas of decision making; 

a) Selection of product.
b) Selection of suitable product mix.
c) Selection of method of production.
d) Product line decision.
e) Determination of price and quantity.
f) Decision on promotional strategy.
g) Optimum input combination.
h) Allocation of resources.
i) Replacement decision.
j) Make or buy decision.
k) Shut down decision.
l) Decision on export and import.
m) Location decision.
n) Capital budgeting. 

INTRODUCTION TO ECONOMICS

 INTRODUCTION TO ECONOMICS.

The term “economics” has been derived from a Greek Word “Oikonomia” which means „household‟. Economics is a social science. It is called „social‟ because it studies mankind of society. It deals with aspects of human behavior. It is called science since it studies social problems from a scientific point of view. The development of economics as a growing science can be traced back in the writings of Greek philosophers like Plato and Aristotle. Economics was treated as a branch of politics during early days of its development because ancient Greeks applied this term to the management of citystate, which they called „Polis‟. Actually economics broadened into a full fledged social science in the later half of the 18th century.

Definition of Economics 

Classical economists like Adam Smith, Ricardo, Mill Malthus and others; socialist economist like Karl Marx; neo-classical economists like Alfred Marshall, AC Pigou and Lionel Robbins and modern economists like JM Keynes, Samuelson and others have made considerable contribution to the development of Economics. Hence a plethora of definitions are available in connection with the subject matter of economics. These are broadly divided into 

A. Wealth Definition, 

B. Welfare Definition, 

C. Scarcity Definition and 

D. Growth Definition 

A. Wealth Definition 

Really the science of economics was born in 1776, when Adam Smith published his famous book “An Enquiry into the Nature and Cause of Wealth of Nation”. He defined economics as the study of the nature and cause of national wealth. According to him, economics is the study of wealth- How wealth is produced and distributed. He is called as “father of economics” and his definition is popularly called “Wealth definition”. But this definition was severely criticized by highlighting the points like; Too much emphasis on wealth, Restricted meaning of wealth, No consideration for human feelings, No mention for man‟s welfare Silent about economic problem etc… 

B. Welfare Definition 

It was Alfred Marshall who rescued the economics from the above criticisms. By his classic work “Principles of Economics”, published in 1890, he shifted the emphasis from wealth to human welfare. According to him wealth is simply a means to an end in all activities, the end being human welfare. He adds, that economics “is on the one side a study of the wealth; and the other and more important side, a part of the study of man”. Marshall gave primary importance to man and secondary importance to wealth. Prof. A C Pigou was also holding Marshall‟s view. This definition clarified the scope of economics and rescued economics from the grip of being called “Dismal science”, but this definition also criticized on the grounds that welfare cannot be measured correctly and it was ignored the valuable services like teachers,lawyers,singers etc (non-material welfare)

C. Scarcity Definition 

 After Alfred Marshall, Lionel Robbins formulated his own conception of economics in his book “The Nature and Significance of Economic Science” in 1932. According to him, “Economics is the science which studies human behavior as a relationship between ends and scares means which have alternative uses”. He gave importance to four fundamental characters of human existence such as; 

1. Unlimited wants- In his definition “ends” refers to human wants which are boundless or unlimited. 2. Scarcity of means (Limited Resources) – the resources (time and money) at the disposal of a person to satisfy his wants are limited. 

3. Alternate uses of Scares means- Economic resources not only scarce but have alternate uses also. So one has to make choice of uses. 

4. The Economic Problem –when wants are unlimited, means are scarce and have alternate uses, the economic problem arises. Hence we need to arrange wants in the order of urgency. 

The merits of scarcity definition are; this definition is analytical, universal in application, a positive study and considering the concept of opportunity cost. But this also criticized on the grounds that; it is too narrow and too wide, it offers only light but not fruit, confined to micro analysis and ignores Growth economics etc.. 

D. Modern Definition 

 The credit for revolutionizing the study of economics surely goes to Lord J.M Keynes. He defined economics as the “study of the administration of scares resources and the determinants of income and employment”. 

Prof. Samuelson recently given a definition based on growth aspects which is known as Growth definition. “Economics is the study of how people and society end up choosing, with or without the use of money to employ scarce productive resources that could have alternative uses to produce various commodities and distribute them for consumption, now or in the future, among various persons or groups in society. Economics analyses the costs and the benefits of improving patterns of resources use”. Main features of growth definition are; it is applicable even in barter economy, the inclusion of time element makes the scope of economics dynamic and it is an improvement in scarcity definition.

Meaning and Definition of Managerial Economics.

Meaning and Definition of Managerial Economics. 

Managerial Economics as a subject gained popularity in U.S.A after the publication of the book “Managerial Economics” by Joel Dean in 1951. Joel Dean observed that managerial Economics shows how economic analysis can be used in formulating policies.

Managerial economics bridges the gap between traditional economic theory and real business practices in two ways. Firstly, it provides a number of tools and techniques to enable the manager to become more competent to take decisions in the real and practical situation. Secondly, it serves as an integrating course to show the interaction between various areas in which the firm operates.

According to Prof. Evan J Douglas, Managerial economics is concerned with the application of business principles and methodologies to the decision making process within the firm or organization under the conditions of uncertainty. It seeks to establish rules and principles to facilitate the attainment of the desired economic aim of management. These economic aims relate to costs, revenue and profits and are important to both business and non-business institutions.

Spencer and Siegleman defined managerial Economics as “the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning of management” managerial economics helps the managers to analyze the problems faced by the business unit and to take vital decisions. They have to choose from among a number of possible alternatives. They have to choose that course of action by which the available resources are most efficiently used. Cristopor I Savage and John R Small opinioned that “managerial economics is something that concerned with business efficiency”.

In the words of Michael Baye,”Managerial Economics is the study of how to direct scares resources in a way that most effectively achieves a managerial goal”.