Name: Cyril James Roll Number: 09 Assignment of Managerial Economics

Definition:
Mansfields: - Managerial Economics is concerned with the application of economic concepts and economic analysis to the problems of formulating rational managerial decisions. Spencer and Siegelman: - The integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management.

Description:
Economic theory is helpful to managers for three reasons. First, it helps in recognizing managerial problems, eliminating minor details which might obstruct decision-making and in concentrating on the main issue. A manager is able to ascertain the relevant variables and specify relevant data. Second, it offers them a set of analytical methods to solve problems. Economic concepts like consumer demand, production function, economies of scale and marginalism help in analysis of a problem. Third, it helps in clarity of concepts used in business analysis, which avoids conceptual pitfalls by logical structuring of big issues. Understanding of interrelationships between economic variables and events provides consistency in business analysis and decisions. For example, profit margins may be reduced despite an increase in sales due to an increase in marginal cost greater than the increase in marginal revenue. Economics is divided in two broad categories Macro and Micro. Macroeconomics is the study of economy as a whole. It deals with questions relating to national income, unemployment, inflation, fiscal policies and monetary policies. Microeconomics is concerned with the study of individuals like a consumer, a commodity, a market and a producer. Managerial Economics is micro-economics in nature because it deals with the study of a firm, which is an individual entity. It analyses the supply and demand in a market, the pricing of specific input, the cost structure of individual goods and services and the like. The macroeconomic conditions of the economy definitely influence working of the firm, for instance, a recession has an unfavorable impact on the sales of companies sensitive to business cycles, while expansion would be beneficial. But Managerial Economics encompasses variables, concepts and models that constitute micro-economic theory, as both the manager and the firm where he works are individual units. Decision Making: The best way to become acquainted with Managerial Economics is to come face to face with real world decision problems. Many companies have applied established principles of Managerial Economics to improve their profitability. In the past decade, a number of known companies have experienced successful changes in the economics of their business by using economic tools and techniques. Some cases have been discussed below. Example 1: Reliance Industries has maintained top position in polymers by building a world-scale plant and upgrading technology. This has resulted in low operating costs due to economies of scale. Reliance Petroleum Ltd. registered a net profit of Rs. 726 crores on sales

of Rs. 14,308 crores for the six months ended September 30, 2000. Of these, exports amounted to Rs 2,138 crores, which make RPL Indias largest manufacturer and exporter. The overall economies of scale are in favour of expansion. This expansion will further consolidate the position of RPL in the sector and help in warding off rivals.

Example 2: In late 1990s, HLL earned supernormal profits by selling low-priced branded products in the rural areas. This was a result of market segmentation policy adopted by the company. The company considers the rural market as a separate market. It is now developing packages for the rural market with products, packaging,
and pricing tailor made for the rural consumers. To ward off rivals and to make it a better competitor the company resorted to mergers and acquisitions. Merger of BBIL with HLL in 1996 made it the largest conglomerate in the consumer goods market in India. Over the years HLL has acquired Kissan and Dipys from UB group; Dollops from Cadburys in 1993; and International Best foods in 2000, to achieve economies of scope. Example 3: Apple, the company that began the PC revolution, had always managed to maintain its market share and profitability by differentiating its products from the IBM PC compatibles. However, the introduction of Microsofts Windows operating system gave the IBM and IBM compatible PCs the look feel, and ease of use of the Apple Macintosh. This change in the competitive environment forced Apple to lower its prices to levels much closer to IBM compatibles. The result has been an erosion of profit margins. For example, between 1991 and 1993, Apples net profit margins fell from 5 to 1 per cent. In all the above examples, decision making has primarily been economic in nature as it involves an act of choice. The decision of Reliance Industries to build a plant of international scale and to further expand capacity was made on the basis of the law of returns to scale and economies of scale. Likewise, Apple had always managed to maintain market share due to product differentiation. Fast moving consumer goods (FMCG) companies, HLL took concepts of consumer demand analysis, namely, consumer preferences and market segmentation respectively, to maintain their dominant position in various product categories. HLL strategy to earn supernormal profits by catering to rural areas is an economic decision based on selection of an expanding market segment. The objective of HLL of being the largest firm in the industry was achieved by economies of scope acquired through mergers and acquisitions. Managerial Economics hence has evolved as a discipline of choice making. The essence of managerial economics is determination of optimal behavior which is subject to constraints arising basically due to scarcity of resources. The objective of all the firms has been to maximize the output level or minimize the cost of production. Thus, the primary role of managerial economics in decision-making is evaluating the implications of alternative course of actions and choosing the best among several alternatives. Preferably I would refer to the Managerial Economics definition by Spencer and Seigelman. I feel Managerial Economics is the mixture of Management and Economics together. Management deals with the principles which help in decision making under uncertainty and Improve effectiveness of the organization. Economics on the other hand provides a set of proposition for the optimum allocation of the scarce resources to achieve the desired objectives. It is really important to take the proper decision and select the best alternative

among the alternatives available. Economic theory as described earlier helps managers to identify the problems and obstructions which is really helpful to take the proper relevant decisions. It helps managers in logical structuring of the problems and provides adequate solutions to the economic problems. Lastly, as we know the important aspect of the business is to Maximize the output level and to minimize the cost or the use of resources is considered to be the optimal solution to economic problem. Hence, I feel it is important to integrate economic theory with best business practice in order to facilitate decision making and future planning by the management.