|| JAI SRI GURUDEV ||

Sri Adichunchanagiri Shikshana Trust(R)

SJB Institute of Technology

(Affiliated to Visvesvaraya Technological University, Belagavi & Approved by AICTE New
Delhi)

No. 67, BGS Health & Education City, Dr. Vishnuvardhan

Road, Kengeri, Bengaluru-560060

Department of MBA

MANAGERIAL ECONOMICS 22MBA26

 Course Title: Managerial Economics Course Code: 22MBA26
Semester: II “B” Sec Academic Year:2022-23 Total hrs.:50 Hrs./Week: 05
Int. Exam Hrs.:
Internal Evaluation Max. Marks: 50
01.30
Ext. Exam Hrs.: 03 Ext. Exam Max.Marks:50
Lesson Plan Author / Desgn. /Dr. Roopa Temkar V / Associate. Professor / MBA
Course Objectives:
1. To understand the application of economic principles in management decision making.
2. To make students learn microeconomic concepts and apply them for effective functioning of a
firm and industry
3. To understand, assess and forecast demand.
4 To apply the concepts of production and cost for optimization of production.
5. To design competitive strategies like pricing, product differentiation etc., and marketing
according to the market structure.
6. To understand macroeconomic concepts.

Course Outcomes:
At the end of the course, the students will be able to:

1. The student will understand the application of Economic Principles in Management decision
making.
2. The student will learn the micro economic concepts and apply them for effective functioning
of a Firm and Industry.
3. The Student will be able to understand, assess and forecast Demand.
4. The student will apply the concepts of production and cost for optimization of production.
5. The student will design Competitive strategies like pricing, product differentiation etc. and
marketing according to the market structure.
6. The student will be able to understand macroeconomic concepts.
Syllabus
Course Title: Managerial Economics Coursecode: 22MBA26
Teaching
Unit: I
Hours
Managerial Economics: Meaning, Nature, Scope, & Significance, Uses of Managerial
Economics, Role and Responsibilities of Managerial Economist. Theory of the Firm: Firm 07
and Industry, Objectives of the firm, alternate objectives of firm. Managerial theories:
Baumol’s Model, Marris’s Hypothesis, Williamson’s Model.

RECOMMENDED BOOKS:
Sl.No. Title of Book Author Publication Edition
 Managerial Economics Geethika, Ghosh and Tata McGraw Hill 2/E
1
Chowdhary
Managerial Economics Dominic Salvotore Oxford
2
Publications
Managerial Economics P.Panneerselvam, Cengage
3 P.Sivasankaran, Learning.
P.SenthilKumar
Managerial Economics Samuelson & Marks Wiley 5/e
4
Indian Economy K P M Sundharam and Dutt S. Chand 64th
5
Edition
Indian Economy Misra and Puri Himalaya
6
Publications

INDEX

Module No. Contents Page Number

1 Managerial Economics 4

2 Law of Demand and Supply 23

3 Production ad Cost Concept 57

4 Market Structure 124

5 Indian Economic Environment 161

6 Industrial Policies and Structure 197

 Module 1
Managerial Economics: Meaning, Nature, Scope, & Significance, Uses of Managerial
Economics, Role and Responsibilities of Managerial Economist. Theory of the Firm: Firm and
Industry, Objectives of the firm, alternate objectives of firm. Managerial theories: Baumol’s
Model, Marris’s Hypothesis, Williamson’s Model.

Introduction to Managerial Economics:

It is widely accepted fact that business decision making process has become increasingly
complicated due to ever growing complexities in the business world. There was a time when
business units were set up, owned and managed by individuals or business families. Big
industries were few and scale of business operations was relatively small. Small and medium
scale business units were managed by the skills acquired by traditional family training and
experience. The business world has changed drastically in size nature and content. The
complexity of business world is due to the growth of large variety of industries, diversification
of industrial products, expansion and diversification of business activities of corporate firms,
growth of multinational corporations and mergers and takeovers. These factors have
contributed to a great deal to the recent increase in inter-firm inter-industry and international
rivalry, competition, risk and uncertainty. The family training and experience is no longer
sufficient to meet the complex business challenges.

The growing complexity of business decision making has inevitably increased the application
of economic concepts, theories and tools of economic analysis in this area. It is necessary to
have a clear understanding of market conditions, the nature and degree of competition, market
fundamentals and the business environment to make appropriate business decisions. This
requires an extensive and intensive analysis of market conditions in the product market, input
market and financial market. On the other hand, economic theories, logic and tools of analysis
have been developed to analyze and predict market behavior. The application of economic
concepts, tools in the assessment and prediction of market conditions and business
environment has proved to be of great help in business decision making. The contribution of
economics to business decision making has been widely recognized. Also, economic theories
and analytical tools which are widely used in business decision making have crystallized into a
separate branch of management studies, called managerial economics or business economics.

What is Economics?

One standard definition for economics is the study of the production, distribution, and
consumption of goods and services. A second definition is the study of choice related to the
allocation of scarce resources. The first definition indicates that economics includes any business,
nonprofit organization, or administrative unit. The second definition establishes that economics is
at the core of what managers of these organizations do.
Micro Economics and Macro Economics

The two different conceptual approaches to the study of economics: microeconomics and
macroeconomics. Microeconomics studies phenomena related to goods and services from the
perspective of individual decision-making entities—that is, households and businesses.
Macroeconomics approaches the same phenomena at an aggregate level, for example, the total
consumption and production of a region. Microeconomics and macroeconomics each have their
merits. The microeconomic approach is essential for understanding the behavior of atomic entities
in an economy. However, understanding the systematic interaction of the many households and
businesses would be too complex to derive from descriptions of the individual units. The
macroeconomic approach provides measures and theories to understand the overall systematic
behavior of an economy.

Distinction between microeconomics and Macroeconomics

Microeconomics is the study of individual economic units of an economy whereas

macroeconomics is the study of aggregates of an economy as a whole. For example, when we
study of an individual sugar mill manufacturing sugar, our study is micro analysis but if we study
the entire sugar manufacturing sector of the economy, our study is macro analysis.

Also please note if we study the problem of production of a firm, our analysis is micro study but
if we study the problems of production of the whole economy, our analysis is macro study. Both
Microeconomics and Macroeconomics are inter-dependent and complementary.
The main difference between the Microeconomics and Macroeconomics are as follows:

Microeconomics Macroeconomics

1. It is the study of individual economic units of It is the study of economy as a whole and its
an economy aggregates.

2. It deals with individual income, individual It deals with aggregates like national income,
prices and individual output, etc. general price level and national output, etc.

3. Its Central problem is price determination and Its central problem is determination of level
allocation of resources. of income and employment.

4. Its main tools are demand and supply of a Its main tools are aggregate demand and
particular commodity/factor. aggregate supply of economy as a whole.

5. It helps to solve the central problem of what,

how and for whom to produce in the economy It helps to solve the central problem of full
employment of resources in the economy.
It is concerned with the determination of
6. It discusses how equilibrium of a consumer, a
equilibrium level of income and employment
producer or an industry is attained.
of the economy.

7. Price is the main determinant of Income is the major determinant of

microeconomic problems. macroeconomic problems.

Examples are: National income, national

8. Examples are: individual income, individual
savings, general price level, aggregate
savings, price determination of a commodity,
demand, aggregate supply, poverty,
individual firm's output, consumer's equilibrium.
unemployment etc.
Micro Economics

Pros:

 It helps in the determination of prices of a particular product and also the prices of various factors
of production, i.e. land, labor, capital, organization and entrepreneur.

 It is based on a free enterprise economy, which means the enterprise is independent to take
decisions.

Cons:

 The assumption of full employment is completely unrealistic.

 It only analyses a small part of an economy while a big part is left.

Macro Economics

Pros:

 It is helpful in determining the balance of payments along with the causes of deficit and surplus of
it.

 It makes decision regarding economic and fiscal policies and solves the issues of public finance.

Cons:

 Its analysis says that the aggregates are homogeneous but it is not so because sometimes they are
heterogeneous.

 It covers only aggregate variables which avoids the welfare of the individual.

Similarities

As micro economics focuses on the allocation of limited resources among individual while the
macroeconomics examines that how the distribution of limited resources is to be done among many
people so that it will make the best possible use of scarce resources. As micro economics studies about
individual units at the same time macroeconomics studies about the aggregate variables. In this way we
can say that they are interdependent on each other.

Managerial Economics: Definition, Nature, Scope

Managerial economics is a discipline which deals with the application of economic theory to
business management. It deals with the use of economic concepts and principles of business
decision making. Formerly it was known as “Business Economics” but the term has now been
discarded in favour of Managerial Economics.
Managerial Economics may be defined as the study of economic theories, logic and methodology
which are generally applied to seek solution to the practical problems of business. Managerial
Economics is thus constituted of that part of economic knowledge or economic theories which is
used as a tool of analysing business problems for rational business decisions. Managerial
Economics is often called as Business Economics or Economic for Firms.

Definition of Managerial Economics:

“Managerial Economics is economics applied in decision making. It is a special branch of
economics bridging the gap between abstract theory and managerial practice.” – Haynes,
Mote and Paul.
“Business Economics consists of the use of economic modes of thought to analyse business
situations.” - McNair and Meriam
“Business Economics (Managerial Economics) is the integration of economic theory with
business practice for the purpose of facilitating decision making and forward planning by
management.” – Spencer and Sieegelman.
“Managerial economics is concerned with application of economic concepts and economic
analysis to the problems of formulating rational managerial decision.” – Mansfield

Nature of Managerial Economics

 It involves an application of Economic theory – especially, micro economic analysis to
practical problem solving in real business life. It is essentially applied micro economics.
 It is a science as well as art facilitating better managerial discipline. It explores and
enhances economic mindfulness and awareness of business problems and managerial
decisions.
 It is concerned with firm’s behaviour in optimum allocation of resources. It provides tools
to help in identifying the best course among the alternatives and competing activities in
any productive sector whether private or public.

For the sake of clear understanding of the nature and subject matter of managerial economics, the
main characteristics of managerial economics is given below:

 Micro economic analysis: The main part of the study of managerial economics is the
behavior of business firm/s, which is micro economic unit. Therefore, managerial
economics is essentially a micro economic analysis. Under the study of managerial
economics, the problems of firm are analyzed and solved through the application of
economic methods and tools. It does not study the whole economy.
 Economics of the firm: According to Norman F. Dufty, Managerial Economics includes,
that portion of “Economics known as the theory of firm, a body of the theory which can be
of considerable assistance to the businessman in his decision-making”. For instance, the
study of managerial economics includes the study of the cost and revenue analysis, price
and output determination, profit planning, demand analysis and demand forecasting of a
 firm. As already stated earlier, another name of managerial economics is ‘Economics of
the Firm.’

 Science as well as an Art: Managerial Economics is both knowledge acquiring and

knowledge applying discipline. Thus, it can be concluded that managerial economics is
science and arts both.

 Managerial economics a positive and normative science both:It is positive when it is

confined to statements about causes and effects and to functional relationships of
economic variables. It is normative when it involves norms and standards, mixing them
with cause and effect analysis. Managerial economics is not only a tool making, but also a
tool using science. It not only studies facts of an economic problem, but also suggests its
optimum solution.

Positive Science is a systematic knowledge of a particular subject wherein we study the cause and
effect of an event. In other words, it explains the phenomenon as: What is, what was and what
will be. Under the study of positive science, principles are formulated and they are tested on the
yardstick of truth. Forecasts are made on the basis of them. From this point of view, managerial
economics is also a positive science as it has its own principles/theories/laws by which cause and
effect analysis of business events/activities is done, forecasts are made and their validities are also
examined. For instance, on the basis of various methods of forecasting, demand forecasts of a
product is made in managerial economics and the element of truth in forecast is also
examined/tested.
Normative Science studies things as they ought to be. Ethics, for example, is a normative science.
The focus of study is ‘What should be’. In other words, it involves value judgment or good and
bad aspects of an event. Therefore, normative science is perspective rather than descriptive. It
cannot not be neutral between ends.
Managerial economics is also a normative science as it suggests the best course of an action after
comparing pros and cons of various alternatives available to a firm. It also helps in formulating
business policies after considering all positives and negatives, all good and bad and all favours
and a disfavours. Besides conceptual/theoretical study of business problems, practical useful
solutions are also found. For instance, if a firm wants to raise 10% price of its product, it will
examine the consequences of it before raising its price. The hike in price will be made only after
ascertaining that 10% rise in price will not have any adverse impact on the sale of the firm. On the
basis of the above arguments and facts, it can be said that managerial economics is a blending of
positive science with normative science.

 It is pragmatic and realistic in nature. It is concerned with analytical tools which are
useful and helpful for decision making.
 It is both conceptual and metrical. It studied theory and applies to a particular problem .
It applies quantitative techniques to achieve at “decision making” and forward planning.

 Acceptance of use & utility of macroeconomic variables: In understanding the overall

economic environment of an economy and its influence on a particular firm, the study and
knowledge of macroeconomic variables or macro economics is a must. For example, the
study of Monetary, Fiscal, Industrial, Labor and Employment and EXIM policy, National
Income, Inflation etc. is done in managerial economics as to know the influences of these
on the business of a firm. The study of macroeconomic variables helps in understanding
the influence of exogenous factors on business activities of a firm. Without the study of
important macro economic variables, proper environmental scanning is not possible.
 Normative approach: Managerial Economics is basically concerned with value
judgment, which focuses on ‘what ought to be’. It is determinative rather than descriptive
in its approach as it examines any decision of a firm from the point of view of its good and
bad impact on it. It means that a firm takes only those decisions which are favorable to it
and avoids those which are unfavorable to it. The emphasis is on ‘Prescriptive’ models
rather than on ‘Descriptive’ models.
 Emphasis on case study: In place of purely theoretical and academic exercise,
managerial economics lays more emphasis on case study method. Hence, it is a practical
and useful discipline for a business firm. It diagnoses and solves the business problems.
Therefore, it serves as lamp post of knowledge and guidance to business professionals /
organizations in arriving at optimum solutions.
 Sophisticated and developing discipline: Managerial Economics is more refined and
sophisticated discipline as compared to Economics because it uses modern scientific
methods of statistics and mathematics. Not only this, the methods of Operational
Research and Computers are also used in it for building scientific and practical models for
analyzing and solving the real business problems under uncertain and risky environment.
 Applied Business Economics: Managerial Economics is an application of economics into
business practices and decision-making process; therefore, it is an applied
economics/business economics. The concepts of economic theory that are widely used in
managerial economics are the following:

 Demand and Elasticity of demand

 Demand forecasting

 Production Theory

 Cost Analysis

 Revenue Analysis
 Price determination under different market conditions/structures

 Pricing methods in actual practice

 Break-even analysis

 Linear Programming

 Game Theory

 Product and Project Planning

 Capital Budgeting and Management

 The primary function of management executive in a business organization is decision

making and forward planning.Decision making and forward planning go hand in hand
with each other. Decision making means the process of selecting one action from two or
more alternative courses of action. Forward planning means establishing plans for the
future to carry out the decision so taken. The problem of choice arises because resources
at the disposal of a business unit (land, labour, capital, and managerial capacity) are
limited and the firm has to make the most profitable use of these resources. A business
manager’s task is made difficult by the uncertainty which surrounds business decision-
making. Nobody can predict the future course of business conditions. He prepares the best
possible plans for the future depending on past experience and future outlook and yet he
has to go on revising his plans in the light of new experience to minimise the failure.
Managers are thus engaged in a continuous process of decision-making through an
uncertain future and the overall problem confronting them is one of adjusting to
uncertainty.

Scope of Managerial Economics

Managerial Economics plays a vital role in managerial decision making and prescribes
specific solutions to the problems of the firm.
ME – helps in the following:
1. Estimation of product demand
2. Analysis of product demand
3. Planning of production schedule
4. Deciding the input combination
5. Estimation of cost of product
6. Achieving economies of scale
7. Determination of price of product
 8. Analysis of price of product
9. Analysis of market structures
10. Profit estimation and planning
11. Planning and control of capital expenditure

1. Estimation & Analysis of product demand: basis for planning how production has to be
carried out.
i. EX: deciding what quantities of goods have to be produced i.e. how
capacity utilization has to be achieved.

2. Planning of production schedule: Excess production beyond reasonable level could cause
the firm to incur wastage and unnecessary cost.
3. Deciding the input combination: A product may be manufactured using different
combinations of input factors- land, labor, capital and technology – than cloth produced on
an automatic power loom.
i. EX: handloom produced cloth will require a different combination of
inputs
4. Estimation of cost & determination of product: Managerial Economics and its cost
concepts can be employed to analyze the cost of a product. Profits can be maximized
either by increasing the revenues or decreasing the costs. Revenue depends on the market,
cost is basically a function of the firm.
5. Achieving economies of scale: Managerial Economics enables one to calculate the optimal
level of output where minimum average cost can be obtained.

6. Analysis and Determination of price of product : Important aspect of managerial decision-

making is the price of a product. It is essential to understand the market structure within
which product is being sold.
7. Analysis of market structures: calls for knowledge of the nature of the product, number of
buyers and sellers, entry/exit barriers etc.,
8. Profit estimation and planning: Managerial Economics helps one to understand the nature
of profit, & represents the logical basis for the various theories that explain reasons for the
emergence of profit.
9. Planning and control of capital expenditure: Managerial Economics provides a framework
for planning the capital expenditure decisions of a firm. It gives the criteria to appraise
capital budgeting decisions and choose the best out of the available investment
alternatives.

The scope of managerial economics is not yet clearly laid out because it is a developing science.
Even then the following fields may be said to generally fall under Managerial Economics:
 1. Demand Analysis and Forecasting
2. Cost and Production Analysis
3. Pricing Decisions, Policies and Practices
4. Profit Management
5. Capital Management

These divisions of business economics constitute its subject matter.

Recently, managerial economists have started making increased use of Operation Research
methods like Linear programming, inventory models, Games theory, queuing up theory etc., have
also come to be regarded as part of Managerial Economics.

1. Demand Analysis and Forecasting: A business firm is an economic organisation which is

engaged in transforming productive resources into goods that are to be sold in the market. A
major part of managerial decision making depends on accurate estimates of demand. A forecast
of future sales serves as a guide to management for preparing production schedules and
employing resources. It will help management to maintain or strengthen its market position and
profit base. Demand analysis also identifies a number of other factors influencing the demand
for a product. Demand analysis and forecasting occupies a strategic place in Managerial
Economics.

2. Cost and production analysis: A firm’s profitability depends much on its cost of production. A
wise manager would prepare cost estimates of a range of output, identify the factors causing are
cause variations in cost estimates and choose the cost-minimising output level, taking also into
consideration the degree of uncertainty in production and cost calculations. Production processes
are under the charge of engineers but the business manager is supposed to carry out the
production function analysis in order to avoid wastages of materials and time. Sound pricing
practices depend much on cost control. The main topics discussed under cost and production
analysis are: Cost concepts, cost-output relationships, Economics and Diseconomies of scale and
cost control.
3. Pricing decisions, policies and practices: Pricing is a very important area of Managerial
Economics. In fact, price is the genesis of the revenue of a firm ad as such the success of a
business firm largely depends on the correctness of the price decisions taken by it. The important
aspects dealt with this area are: Price determination in various market forms, pricing methods,
differential pricing, product-line pricing and price forecasting.
4. Profit management: Business firms are generally organized for earning profit and in the long
period, it is profit which provides the chief measure of success of a firm. Economics tells us that
profits are the reward for uncertainty bearing and risk taking. A successful business manager is
one who can form more or less correct estimates of costs and revenues likely to accrue to the firm
at different levels of output. The more successful a manager is in reducing uncertainty, the higher
 are the profits earned by him. In fact, profit-planning and profit measurement constitute the most
challenging area of Managerial Economics.
5.Capital management: The problems relating to firm’s capital investments are perhaps the most
complex and troublesome. Capital management implies planning and control of capital
expenditure because it involves a large sum and moreover the problems in disposing the capital
assets off are so complex that they require considerable time and labour. The main topics dealt
with under capital management are cost of capital, rate of return and selection of projects.

Difference between Economic Theory Vs Managerial Theory

 Economic theory deals with the body of principles. But managerial theory deals with
the application of certain principles to solve the problem of the firm.

 Economic theory has the characteristics of both micro and macroeconomics. But
managerial theory has only micro characteristics.

 Economic theory deals with the study of individual firm as well as individual consumer.
But managerial theory studies only individual firm.

 Economic theory deals with a study of distribution theories of rent, wages interest and
profits. But managerial theory deals with a study of only profit theories.

 Economic theory is based on certain assumptions. But in managerial theory these

assumptions disappear due to practical situations.

 Economic theory is both positive and normative in character but managerial theory is
essentially normative in nature.

 Economic theory studies only economic aspects of the problem whereas managerial theory
studies both economic and non economic aspects.

Significance of Managerial Economics

 It enables to learn practical implications of concepts in micro- and macro-economic theory

–such as demand, supply, price, profit, income, output employment, sales etc.,
 It is also helpful in making short term and long term decisions such as – what to produce?
How to produce? How much to produce? & How to price the product?etc

 It provides the management with a strategic planning tool that can be fruitfully utilized to
gain mileage in the market.
  It also teaches the managers as to what can be done to maintain profitability in an ever
changing environment.
 It offers decision makers a way of thinking about changes in a framework for analyzing
the consequences of strategic options.
 It helps the managers to take appropriate policy decisions in all types of business
enterprises like
o a) Selection of the product or service to be offered for sale.
o b) Choice of production methods and optimum combination of the substitutable
resources.
o c) Determination of the best combination of price and quantity
o d) Promotional strategy and activities (determination of optimum advertising
budget.
o e) Selection of plant location and distribution centers-from which to sell the
goods or services
 Forward Planning: It helps in continuous decision making and forward planning is
required to overcome uncertainties.

 In the real world situation, business manager comes across many changes
which causes uncertainty and it therefore, changes in his forward planning
is needed from time to time.

 EX: Uncertainties- Govt. Policy might change, Consumer taste and

preference might change.

 Decision making is integral part of today’s business management. Making a decision is

one of the most difficult tasks faced by a professional manager. Managerial decisions are
based on the flow of information. Decision making is both managerial function and
organizational process. A good decision is one that is based on logic, considers all
available data and possible alternatives and applies the quantitative approach.

Uses of Managerial Economics

Managerial economics applies to:

o Businesses (such as decisions in relation to customers including pricing and advertising;
suppliers; competitors or the internal workings of the organization), nonprofit
organizations, and households.
o The old economy and new economy in essentially the same way except for two distinctive
aspects of the new economy: the importance of network effects and scale and scope
economies.
 o Network effects in demand – the benefit provided by a service depends on the total
number of other users, e.g., when only one person had email, she had no one to
communicate with, but with 100 mm users on line, the demand for Internet
services mushroomed.
o Scale and scope economies – scalability is the degree to which scale and scope of a
business can be increased without a corresponding increase in costs, e.g., the
information in Yahoo is eminently scalable (the same information can serve 100 as
well as 100 mm users) and to serve a larger number of users, Yahoo needs only
increase the capacity of its computers and links.
o Both global and local markets.

Functions: Role and Responsibilities of a Managerial Economist

A managerial economist in a business firm may carry on a wide range of duties, such as:
• Demand estimation and forecasting.
• Preparation of business/sales forecasts.
• Analysis of the market survey to determine the nature
and extent of competition.
• Analysing the issues and problems of the concerned
industry.
• Assisting the business planning process of the firm.
• Discovering new and possible fields of business endeavour
and its cost-benefit analysis as well as feasibility studies.
• Advising on pricing, investment and capital
budgeting policies.
• Evaluation of capital budgets.
• Building micro and macro-economic models
• Directing economic research activity.
• Briefing the management on current domestic and global
economic issues and emerging challenges.
• Interpretation, analysis and reporting of current economic
matters, upcoming developments in business, government
and foreign or global sectors.

ROLE OF MANAGERIAL ECONOMIST

1. A firm or businessman, in the course of his business operations, has to take a number of
decisions which are vital to the survival and growth of business.

2. In modern business, managers constantly face the major problem of choice among
alternative ways of producing goods and allied business policies.

3. Managerial Economist assists them in making a rational choice.

4. “Managerial Economists” have become universal creatures in Modern Business

Enterprises.
 5. They are called by various names: “Business Economists” ,“Company Economists”,
“Economic advisers”

6. They act as operations researchers and Systems analysts in management services

department of large business Firms.

7. To identify various business problems – their causes, consequences and suggest remedial
measures.
a. E.g. pricing problem, labor problem

8. To provide quantitative base for decision making and forward planning.

9. He serves as storehouse of knowledge, reservoir of experience, and a think- tank of a

firm

10. To act as friend and philosopher and a guide to the businessman

11. To quickly respond to the dynamic changes

12. To conduct various types of research studies

13. To have complete information about the environmental factors

Responsibilities of Managerial Economist:

• The term “Responsibility” refers to the obligations to perform the assigned activities for
attaining certain objectives.

• Specific responsibility – person is accountable and answerable for it.

• There is some sort of general, moral, ethical and legal binding on a person.

• Responsibilitiesof Managerial economist has increased enormously with rapid expansion of

business and its diversification.

Responsibilities of Managerial Economist Specific responsibilities of a business are:

1. To ensure reasonable amount of profit to a business.

2. To make successful forecasts

3. He should establish & maintain contacts with various Experts, Market consultants, and data
sources to
Collect latest and valuable information to take right Decisions at right time.
4. To interpret and explain economic literature to Management.

5. To prepare speeches for business executives.

6. To participate in Seminars, conferences, workshops, debates, etc., conducted by various

organizations and institutions.

You would recall from our discussion in Chapter 1 that Managerial Economics as a subject is
applicable to all types of organisations, though it finds special application in business firms.
This brings forth some pertinent questions like: what is a firm; who identifies the factors of
production; who collects the factors and puts them to productive use; and so on. A firm is an
entity that draws various types of factors of production in different amounts from the
economy, and converts them into desirable output(s),through a process with the help of
suitable technology. Economists have identified five factors of production, namely land,
labour, capital, enterprise and organisation, of which, enterprise and organization are relatively
new entrants. It is obvious that factors of production cannot produce unless they are given
proper direction and a system to operate in. The process of identifying

Firm and Industry

Firm refers to a business unit – an enterprise undertaking the production of a commodity.
A firm may be small or large one. A small firm refers to a single plant, factory, business or
retailing unit which has capital investment, producing small quantities of a product per
unit of time. A large firm – has a number of plants under a complex managerial
organization, with a diversity of financial capital investments which may produce wide
variety of products and in large quantities per unit of time. The term ‘industry’ refers to a
group of firms engaged in the Production of homogeneous goods. Homogeneity implies
 similarity of productive activity, results, and satisfaction of similar wants by similar kinds
of goods. Ex: FMCG industry. In short, a firm is an individual unit. An industry is a set of
all such firms, big or small, engaged in Identical productive activity.

Objectives of the firm

There are a multiple of objectives of a business firm, such as:
• Profits,
• Sales maximisation,
• Increasing market-shares,
• Building a good business reputation,
• Financial stability and liquidity,
• Maintenance of good labour relations,
• Job-satisfaction,
• Leisure and peace of mind, etc.

BAUMOL’S MODEL OF SALES MAXIMIZATION

Prof. Baumol (1982) argues that managers are more concerned with the maximization
of sales or sales Revenue rather than profits.
This is because:
 Manager’s salaries or remuneration are tied to sales and not profits.
 Larger sales revenue, i.e. bigger size of sales causes a firm to expand. When the size
of the firm increases, it provides better opportunities in the managerial cadre for
promotion and higher status.
 Increasing sales enables the firm to capture more market and earn business reputation

There are many economists who have examined the objectives of the firms. According
Baumol’s model of most managers will try to maximize sales revenue. There are many
reasons for this like an example.

(1) The salary and other earnings of managers are more closely related to sales revenue
than to profits.
(2) Banks and financers’ looks at sales revenue while financing the corporation.

But according to Baumol’s model of sales revenue maximization, firm can increase his
sale though increase in sales revenue most firms have sidelined short-term profit as their
objective firms are often found to sacrifice their short-term profit for increasing the future
long-term profit. Thus, for example, firms undertake research and development
expenditure, expenditure on new capital equipment or major marketing programs which
require expenditure initially but are meant to generate future profits. The objectives of the
firm is this to maximize the present of discounted value of all future profits

A careful inspection of the equation suggests how a firms manages and workers can
influence its value for example, in representatives work hard to increase its total revenues,
 while its production managers and manufacturing engineers strive to reduce its total costs.
At the same time, its financial managers play a major role in obtaining capital, and hence
influence the equation, while its research and development personal invent and reduce its
total cost.

In banking sectors variety of loan and financial help[s provided to the various customers.
But Banks provide it only those where, they can earn maximum returns of p0rofit by
selling their loans. So Banks and financers look at sales revenue while financing the
corporations.

From maximizing of sales revenue, there will be increase in the strength of the firm. So,
sales revenue trend is a readily available indicator of performance of the firm. Growth in
sales increases the competitive strength of the firm.

Y Axis measures the annual profit rate- ROI

X Axis measures the size of sales.
OA is the trade off curve between the size of sales and annual profit rate
OQ1 is the optimum sales that causes maximum profit rate NQ1. At this point, the indifference
curve for the manager IC1 (utility function of manager) intersects the trade off curve.
The managers’ utility function is the highest when it is tangent to the trade-off curve.
IC2 curve tangent at point E gives minimum profit OM that has been decided.
Thus the firm produces output OQ2 giving the maximum sales.
This means the managerial decision favours sales maximizing rather than profit maximizing level
of equilibrium output.