So we can say that managerial economics plays a very big role and significance in the important decisions of the business. What are the best sizes and locations of new plants? The selection of a location, selection of a product line, and decision relating to manage the business are all basic decisions. More specifically, managerial economics is the use of the tools and techniques of economic analysis to analyse and solve management problems. Certain important correlation and association of attributes can be found with the help of statistics. In decision making, cost estimates are very essential.
Statistical approach is a quantitative micro-approach. Cash is paid to credit sellers. Introduction to Profit Analysis In managerial economics, profit analysis is a form of cost accounting used for elementary instruction and short run decisions. Production analysis: The managerial economics help in making cost-effective production, optimum use of the production cost. Therefore, it is essential to discover economic costs and measure them for effective profit planning, cost control and sound pricing practices. Economic theory deals with a study of individual firm as well as individual consumer.
To recall, a major role of a manager is obtaining and processing information. Thus we see that a firm has uncertainties to rock on with. Various concepts of managerial economics can be applied to non-business or non-profit institutions. It can be classified into three categories such as iconic, analogue and symbolic. Two primary tasks of managers are making decisions and processing information. The following Figure shows the profit volume analysis graph.
It is, therefore, also called prescriptive economics. Moreover, profit can be defined as the difference between benefits and costs at some given level of risk. The micro-economic analysis may be undertaken at three levels: i The equalisation of individual consumers and produces; ii The equalization of the single market; iii The simultaneous equilibrium of all markets. Linear cost-volume-profit charts are based on constant selling prices. Some of the new subject to be covered include various cost concepts, valuation of assets, labour and manpower planning, cost-benefit analysis, economic evaluation of projects, corporate planning and strategy, mathematical programming and operations research management science. Answer to these and similar questions will throw more light on the perspective business and these questions present some of the areas where a managerial economist can make effective contributions through scientific decision making. However, if different products have different contribution ratios, shift in the product-mix may cause a shift in the break-even point.
The profit-maximization goal hypothesis is based on the assumption that managers either voluntarily or of necessity behave in a manner consistent with the interests of shareholders because the amount of dividend that can be distributed by a firm depends on the amount of profit made by it. This goes on the daily routine work of the business. Managerial economists apply the models. Macroeconomics models and their estimates are used by the government to assist in the development of economic policy. In reality they are inseparable.
For instance: if the organization makes a large amounts of products, then the company must prefer to calculate the breakeven volume in the form of sales dollars while in case of one product company, the unit method might be a more effective calculation of sales volume. Profit forecasting is an essential function of any management. It is organisational in that many decisions transcend the individual manager and become the product of groups, teams, committees, etc. Economist are interested in the efficient use of scarce resources hence they are naturally interested in business decision problems and they apply economics in management of business problems. Secondly, statistical techniques provide the individual firm with methods of measuring the functional relationships vital to decision making. We shall also discuss in due course special pricing and production decisions such as those associated with the internal transfer of a product from one division of a firm to another, jointly produced products, and price discrimination differential pricing among different groups of buyers.
And whatever policies are made from this. The managerial economist has to undertake an economic analysis of competing firms. Its popularity is attributable to the growing applications of economic theory in the commercial organisations as also in non-profit organizations and government companies. Yet, at the end, the fact remains that no firm would exist for long unless it makes it makes profit. It also makes use of well known models in price theory such as the model for monopoly price, the kinked demand theory and the model of price discrimination. But measurement of productivity in practice is no doubt a complex exercise, if not totally impossible. To some extent, the descriptive method is also concerned with the interpretation of data.
The business economist plays an important role in capital budgeting decision which is concerned with allocation of capital expenditure over time. Relation of Managerial Economics to Other Areas of Management : It is possible to establish link of managerial economics to other areas of management. If the future were known with certainty, it would be very easy to take financial decisions. Computer is not only used for scientific or mathematical applications, it may also be used for some business applications, document generations and graphical solutions. These decisions aim at achieving the best interests of the organisation. For instance, the Tata group spends a huge amount of money on education and research.
Investment refers to expenditure on capital goods. The differences lies entirely in the way the theories are applied. This type of decision making involves using readily available information to carry out a course of action that furthers the goals of the organization. A business is started with the main aim of earning profit. No one can deny that the managerial economist contributes significantly to the profitable growth of the firm through his realistic attitude. We usually adopt an inductive as well as deductive approach in any analysis of managerial behaviour.