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DEFINITION OF ECONOMICS:
PRELUDE:
Economics is a social science; a classified body of knowledge concerning human relationships clustered about
man’s effort to earn a living.conomics is quite an old discipline. That is why Prof.Samuelson remarks that
Economics is the “Oldest of the arts, newest of the sciences, indeed the Queen of the social sciences”.
The origin of the subject could be traced to the works of the Greek philosopher, Aristotle who confines the study
of economics to household management and acquiring and making proper use of wealth. It is important to note
that the word ‘Economics’ has been derived from the Greek words ‘Oikos’ (a house) and ‘nemine’ (to manage).
Thus economics means managing a household with limited funds. Adam Smith’s magnum opus book “ An
enquiry into the nature and causes of wealth of Nations” published in the year 1776, laid a strong foundation for
the growth of economics. So Adam Smith is rightly called as the “Father of Economics”. Although there is a
plethora of definitions, there is no concord among economists about a precise definition.
1. DEFINITION OF ECONOMICS:
The Various definitions can be classified broadly into three categories:
1. A science of wealth
3. A science of scarcity
Marshall in his definition, 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.
In Marshall’s own words, “political Economy or Economics, is a study of mankind in the ordinary business of
life; it examines that part of individual and social action which is most closely connected with the attainment and
with the use of the material requisites of well being”. He adds that economics “is on the one side a study of
wealth; and the other the more important side, a part of the study of man”.
Lionel Robbins led a frontal attack on the welfare definition in his immortal work, “An essay on the Nature and
significance of economic science” published in 1932.In the words of Robbins, “The material list definition of
economics misrepresents the science as we know it”.
“Ends” refer to human wants which are unlimited but the resources available to satisfy them are unlimited.
1.3.2SCARCITY OF MEANS
The resources(time or money or both) at the disposal of a person to satisfy his wants are limited. If things are
available in abundance just like free goods, the economic problem will not arise. But as Prof.Meyers says,
“Alladins lamps” exist only in Arabian fairy tales.
1.3.3ALTERNATIVE USES
Economic resources are scarce, but they can be put to alternayive uses. If we choose one thing, we must give up
others.
When the means at the disposal of a person are limited and the resources can be put to several uses, and when
wants can be graded on the basis of intensity, human behavior necessarily takes the form of choice.
Recently, Prof.Samuelson has given a definition based on Growth aspects which is known as the “Growth
Definition”.
MANAGERIAL ECONOMICS
MEANING
Managerial economics lies on the borderline of management and economics.It is a hybrid of the two disciplines
and is primarilyan applied branch of knowledge.The development of the science of managerial economics is of
recent origin. After the Second World War and particularly after 1950, with rapid expansion of international
trade, the Business Managers faced numerous delicate problems. As Professor Ansoff says, “since the early
1950s confronted with the growing variability and unpredictability of the business environment, business
managers have become increasingly concerned with rational and foresightful ways of adjusting to an exploiting
environmental change.”
There was a gap between economic theory and the correct procedure they have to employ to problems. The
problems of the business world attracted the attention of academicians and gave rise to a special treatment of
business problems. As a result managerial economics came into being.
Managerial economics has meant different things to different people. In simple terms managerial economic
means the application of economic theory to the problems of management.
Prof. Spencer and Siegelman defined managerial economics as “the integration of economic theory with
business practice for the purpose of facilitating decision making and forward planning by the management.”
It is clear from this definition that the problems of management are two fold. They are (i) decision making (ii)
forward planning. Decision making is a process of selecting a particular course of action from among a number
of alternative options. Forward planning means preparing plans for the future. Forward planning and decision
making goes hand in hand.
We may define managerial economics as application of economic theory and decision science tools to problem
of managerial decision.
Economics has both micro and macro analysis. The roots of managerial economics spring from micro
economic theory.
Economics is both positive and normative in character. Managerial economics is basically normative in
character.
Economics mainly deals with the theoretical aspects of Managerial economics is concerned with practical
the firm. problems of the firm.
Micro economics, as part of economics deals with Managerial economics deals with firms and not with
individual and firms. individuals.
Economics studies principles underlying wage, rent, Managerial economics studies mainly the principles of
interest and profit. profit only.
Economics deals only with economic aspects of the Managerial economics deals with both the economic
problem. and non-economic aspects of the problem.
The scope of economics is wide. The scope of managerial economics is narrow.
It analyses the various types of demand which enable the manager to arrive at a reasonable estimate of the
demand for the products of his firm. When the current demand is estimated, the next logical step is to ascertain
the future demand for his products. The main areas cover under demand analysis is demand determinants
demand distinctions and demand forecasting.
Cost and production analysis is vital for the efficient allocation of scare resources. This analysis is also useful for
profit planning, project planning, cost control and pricing of products. While cost analysis is done in monetary
terms, production analysis is done in physical units. The major areas cover under cost and production analysis
are cost concepts, and classification, cost output relationships, economies and diseconomies of scale and cost
control.
Pricing is an important area in managerial economics. While fixing the price of a commodity, a complete
knowledge of the price system is essential. The success or failure of a firm mainly depends upon its accurate
price decisions. Pricing policy has considerable significance for the management only when there is a
considerable degree of imperfection in the market. The main areas covered are price determination in various
market structures, pricing methods and price forecasting.
Profit is the life blood of any organization. An element of uncertainty exists about profit due to variations in cost
and revenues. If knowledge about the future were perfect, profit analysis would be much easier. The important
areas covered are profit planning, profit management, profit forecast and profit measurement.
Capital management means planning and control of capital expenditure. Capital measurement is done through
capital budgeting. Cost of capital, rate of return and selection of project are the important areas covered under
the capital management.
Managerial economics is a special branch of economics bridging the gap between theory and practice.”The
relation of managerial economics to economic theory is much like that of engineering to physics or of medicine
to biology or bacteriology”.
Managerial economics draws heavily on the propositions of micro economic theory. For eg., demand concepts
and theories of market structure are elements of micro economics which managerial economics uses. The other
concepts widely used are (i) elasticity of demand ,(ii) marginal cost,(iii) marginal revenue,(iv) opportunity cost
etc. But some of these concepts however provide only the necessary logical base and have to be modified in
actual practice to suit special circumstances.
Though, basically managerial economics is micro economics in nature, it uses macro economics forecasting. A
proper understanding of the functioning of the economic system is of immense importance to the managerial
economist in framing suitable policies. Concepts like business cycles, national income accounting etc are widely
used in managerial economics.
5.1.3 PRAGMATIC
Managerial economics is pragmatic and essentially an applied branch of knowledge. In economic theory many
abstract issues are analyzed on the basis of assumptions which are highly unrealistic. Managerial economics,
avoids difficult abstract issues. It is mainly concerned with analytical tools that are useful to firms.
5.1.5 NORMATIVE
Managerial economics is prescriptive in character. It recommends what should be done under various alternative
conditions. Managerial economists are generally preoccupied with the optimum allocation of resources among
completing ends wit h a view to obtaining the maximum benefit according to pre-determined criteria. To achieve
these objectives, they do not assume that all other things would remain equal,but try to introduce policies which
if implemented would achieve the desired results. Thus managerial economics is both light giving and a fruit-
bearing one.
Macro economics aids managerial economics in the area of forecasting. The aggregates of the economics system
such as Gross National Product, General Price Index and level of employment serve as a useful guide for
devising relevant business policies.
A managerial economist has a significant role to play in business by assisting the managements in their
successful decision making and forward planning goals. The factors which influence the business over a period
may lie within the firm or outside the firm. In general, these factors can be divided into two categories. (1)
External and (2) Internal
The external factors lie outside the control of the management because they are external to the firm and are said
to constitute the business environment. The internal factors lie within the scope and operations of a firm and
hence within the control of the management and they are known as business operations.
EXTERNAL FACTORS
The function of a managerial economist is to analyze the environmental factors and recommend suitable
policies. The following are the important external factors affecting the firm.
The most important external factor is the general economic conditions of the economy such as business cycles,
competitive conditions of the market, size and the rate of growth of the national income, the regional pattern of
income distribution, influence of globalization on the domestic economy etc. it is the duty of the managerial
economist to gather and analyze information with regard to these changes, and advise the management regarding
their likely effects on the operations of the firm and recommend suitable ways to pursue the organizational
goals.
Nature of Demand
The second important external factor relates to the nature of demand for the product. Since purchasing power is
an important variable influencing demand, the managerial economist has to study the purchasing power trend in
general an din the region concerned in particular. Moreover, it is his function to observe whether fashions, tastes
and preferences undergo any change and whether it is likely to have an impact on the demand for the product.
Input Cost
The third external factor influencing the firm is the input cost of the firm. The managerial economist has to
advise the management on labour market conditions i.e., the cost of labour in different occupations. He also
studies the money market conditions, the changing scenario in government’scredit policy and possible ways of
achieving the least-cost combination of factors and so on.
Marketing
Buying of raw materials and selling of finished goods are two important aspects of marketing. The managerial
economist has to study the markets from where the firm is buying its raw materials and selling its finished
goods. The understanding helps him to evolve and frame a suitable price policy for the firm.
Market share
Market share refers to the share of a firm in the industry for a particular product. Expansion of market share is a
good symptom of growth. Therefore, the managerial economist has to examine the opportunities and strategies
which help in the expansion of the firm’s share in the regional and international markets.
Economic policies
Last, but not the least, the managerial economist must keep in touch with the government’s monetary policy,
fiscal policy, industrial policy, budgetary policy trends
INTERNAL FACTORS
A managerial economist can also be helpful to the management in making decisions relating to the internal
operations of the firm. The analysis of cost structure, and forecasting of demand are very essential. Moreover, it
is his responsibility to bring about a synthesis of policies relating to production, investment, inventories and
price.
SPECIFIC FUCTIONS
It involves
I. Sales forecasting
II. Industrial market research
III. Economic analysis of competing companies
IV. Pricing problems of industry
V. Capital projects
VI. Production programmes
VII. Security management analysis
VIII. Advice on trade and public relations
IX. Advice on primary commodities
X. Advice on foreign exchange management
XI. Economic analysis of agriculture
XII. Analysis on underdeveloped countries
XIII. Environmental forecasting etc.
The following are the main theories in economics that help the firm in decision-making process.
THEORY OF DEMAND
Demand theory explains the consumer’s behavior. The theory helps to understand the behavior of
consumers when the determinants of demand such as income, taste and fashion, prices of substitutes, etc
change. A knowledge of demand theory is vital in the choice of commodities for production.
THEORY OF PRODUCTION
The BASIC function of a firm is to produce goods and services and sell them in the market. Production
requires employment of various factors of production. The factors are substitute among themselves to a
certain extend. To maximize production and profit, it is necessary to achieve the least-cost combination
of factors. Production theory is of immense use in determining the size of the firm, the size of the total
output and the optimum factor combination.
THEORY OF PRICE
Price theory explains price determination under various different market structures like perfect
competition, monopoly, oligopoly, etc. It is also useful to determine the optimal advertisement budget
that is necessary to maximize sales.
THEORY OF PROFIT
Profit making is the basic objective of business concerns. But, making a satisfactory level of profit is not
always certain, due to the presence of risk and uncertainty in business operations. Some of the factors
which influence profit are (i) nature of demand for the product (ii) prices of the inputs in the factor market
and (iii) the degree of competition in the factor market . An element of risk is always there, even if
business activities are systematically planned .Therefore, minimising risks is of paramount importance to
safeguard the welfare of the firms. Profit theory guides in the measurement of profit and in estimating a
reasonable return on the capital employed.
XIV.