1a. meaning and scope
TRANSCRIPT
-
8/7/2019 1A. Meaning and Scope
1/57
1
Managerial Economics
1 A. Meaning and Scope
Sources: SalvatoreGeetika et al
-
8/7/2019 1A. Meaning and Scope
2/57
76% of senior executives say that it isimportant they have the knowledge and
skills to respond to trends like resourcescarcity, the low carbon economy anddoing business in emerging markets
2
-
8/7/2019 1A. Meaning and Scope
3/57
What is Economics?
Unlimited wants and scarce resources
CHOICE
Science or Art?
3
-
8/7/2019 1A. Meaning and Scope
4/57
Basic Assumptions
Ceteris Paribus- Other things remainingequal
The existence of other tendencies is nordenied, but their disturbing effect isneglected for a time - Marshall
Easier to handle, if issue is narrowed, butless closely corresponds to real life
4
-
8/7/2019 1A. Meaning and Scope
5/57
Basic Assumptions
Rationality
Implies that consumers and producers
measure and compare costs and benefitsbefore taking decisions
Consumers: Maximising utility andminimising sacrifice
Producers : Maximising profits andminimising costs
5
-
8/7/2019 1A. Meaning and Scope
6/57
Types of Economic Analysis
A. Micro(individual consumers and firms)
Macro (Aggregates- Industry, not firm)
B. Positive (factual statements- What is)
Normative (Value judgments- Whatought to be)
6
-
8/7/2019 1A. Meaning and Scope
7/57
-
8/7/2019 1A. Meaning and Scope
8/57
Types of Economic Analysis
Marshall
Market Period- Prices adjust to clear market-perishable goods
Short Period- industry capacity is assumed to begiven
Long Period- Stock of equipment and machinery
(K) changeable Very Long Period-Tech, population, tastes etc
change
8
-
8/7/2019 1A. Meaning and Scope
9/57
Types of Economic Analysis:Partial and General Equilibrium
D. Equilibrium: State of balance
Partial: Looks at internal outcome of any policyaction in a single market or consumer (the one
that is directly affected) say, a single cementfirm in Indian cement industry may be inequilibrium, whereas others may not be-unrealistic
General Equilibrium: Explains economicphenomena like production, consumption andprices in the economy as a whole
9
-
8/7/2019 1A. Meaning and Scope
10/57
Types of Economic Analysis:
Partial and General Equilibrium A petroleum company may hike petroprices without considering the effects onprices of other commodities
Under general equilibrium, this wont beanalysed in isolation but taking intoaccount linkages with other sectors.
10
-
8/7/2019 1A. Meaning and Scope
11/57
Kinds of Economic Questions
1. What to Produce? (Micro)2. How to Produce? (Micro)
3. How much to produce? (Micro)
4. For Whom to Produce? (Micro)5. Are Resources Used optimally? (Micro)
11
-
8/7/2019 1A. Meaning and Scope
12/57
6. Are Resources fully employed? (Macro)
7. Is the economy Growing? (Macro)
8. In what phase of business cycle is theeconomy? (Macro)
12
-
8/7/2019 1A. Meaning and Scope
13/57
Managerial Economics-
Meaning & NatureApplication ofeconomic theory and tools ofanalysis of decision science to examinehow an organization can achieve itsobjectives most efficiently- Salvatore
13
-
8/7/2019 1A. Meaning and Scope
14/57
14
Meaning & Nature
Spencer and Siegelman: Integration ofeconomic theory with business practice forthepurpose of facilitating decision makingand forward planningby management
Evan Douglas: Application of economic
principles and methodologies to thedecision-making process within the firm ororganizationunder conditions ofuncertainty
-
8/7/2019 1A. Meaning and Scope
15/57
Decision Making Process
5 Stages of Decision making Process:
1. Define the problem2. Determine the objective
3. Identify possible solutions
4. Select the best possible solution5. Implement the decision
15
-
8/7/2019 1A. Meaning and Scope
16/57
16
Meaning & Nature
Importance of Quantitative Tools
Analysis of variables is a key procedure in
economic analysis.
Economic research andpolicy-makingrequireup-to-date data and extensive analysis.
Use of Mathematical tools
-
8/7/2019 1A. Meaning and Scope
17/57
17
Meaning & Nature
Use of Statistical Techniques
Time Series: For Demand forecasting
Regression: Two or multiple variablesused to study interrelationships, estimationand prediction
Measures of central tendency andvariation
-
8/7/2019 1A. Meaning and Scope
18/57
18
Meaning & Nature
Managerial Economics is essentially
- Applied economics
- Normative bias- Why?- Decision-making under partial equilibrium
-
8/7/2019 1A. Meaning and Scope
19/57
Role of Economics
What is the role of Economics in Business?
Costs, prices, output, compensation,
strategic behaviour, importantly, ethicsThe Big Picture- Whose job?
Economic theory forms the basis for
different management areas such asaccounts, finance, marketing, systems andoperations.
19
-
8/7/2019 1A. Meaning and Scope
20/57
20
Role of Economics
A manager has to deal with problemspertaining to the individual firm as well asdomestic and global environment.
Microeconomics: Deals with individual unit
Macroeconomics: Deals with aggregates
-
8/7/2019 1A. Meaning and Scope
21/57
21
Role of Economics
Microeconomics:
Theory of demand and supply- consumerbehaviour, demand theory, demand forecasting
and factors affecting individual and marketsupply- Helps in choice of commodities for
production
Theory of Production: Production function andlaws of returns to scale etc- gives an idea aboutI/O relations, input requirementsize of firm,technology choice of output. Helps producer to
plan production, cost and budget.
-
8/7/2019 1A. Meaning and Scope
22/57
22
Role of Economics
Market Analysis: helps understand degrees
of competition, pricing-output decisions,price discrimination, monopoly power,advertising
Profit Analysis: Provides logical analysis ofbreak-even point, emergence of profits,profit-maximising output, dealing with riskand uncertainty
-
8/7/2019 1A. Meaning and Scope
23/57
23
Role of Economics
Theory of capital: Along with quantitativetechniques enables investors to calculatecost of capital, efficiency of capital,efficient allocation of capital, and choice ofprojects as per risk-return analysis
-
8/7/2019 1A. Meaning and Scope
24/57
24
Role of Economics
Behaviour of macro economic indicators: GDP,GNP, GDCF, GDS, HDI etc.
Business Cycles Inflation- Employment
Fiscal PolicyMonetary Policy
Foreign Trade: Imports and exports, Exchangerate, trade policies and capital flows
Macro economic variables and policies impact
business
-
8/7/2019 1A. Meaning and Scope
25/57
25
Role of Economics in Business
Economics is a tool, means to an end
To help Efficient allocation and achieve
business objectives Optimising behaviour- Maximise goals,
minimize costs under constraint
Logic, tools and techniques of economics toanalyse business problems, evaluatebusiness options and opportunities with aview to arriving at an appropriate business
decision.
-
8/7/2019 1A. Meaning and Scope
26/57
Role of Economics in Business
The theory of Economics does not furnish a
body of settled conclusions immediatelyapplicable to policy. It is a methodratherthan a doctrine, an apparatus of the mind,a technique of thinking, which helps the
possessor to draw correct conclusions- J.M. Keynes
26
-
8/7/2019 1A. Meaning and Scope
27/57
27
Role of Economics in Business
3 main contributions of economic theory to businesseconomics, according to Baumol:
1. Analytical models: To recognize the structure ofmanagerial problems, eliminate minor details, and
concentrate on main issue2. Ascertaining relevant variables and specifying the
data- Even if the models are not directlyapplicable, they enhance capabilities of businessanalyst
3. Economic theories offerconceptual clarity to avoidconceptual pitfalls
Provides consistency to business analysis
-
8/7/2019 1A. Meaning and Scope
28/57
28
Role ofManagerial Economist
Role OfManagerial Economist: To decide
What to produce?
Where How
How much
Allocation of resources For whom to produce
At what price to sell
-
8/7/2019 1A. Meaning and Scope
29/57
29
Role ofManagerial Economist
Plan and control business operations-
Cost minimisation
Profit maximisation ?? Managing competition
Economic intelligence
Market research
-
8/7/2019 1A. Meaning and Scope
30/57
30
Role ofManagerial Economist
Uncertainty & Risk management
Forecast change in environment andpolicies- domestic and international
To manage change in global scenario
Everything comes at a price- quality is not
free
-
8/7/2019 1A. Meaning and Scope
31/57
31
Growing Challenges to the
Managerial EconomistA) Globalization
What is Globalization ?
People-goods-services- communication- Finance-Ideas
-
8/7/2019 1A. Meaning and Scope
32/57
Growing Challenges to the
Managerial EconomistGlobal corporations
- Research & production facilities acrosscountries
- Global markets- Global Finance- Employment Diversity
- Global work culture
32
-
8/7/2019 1A. Meaning and Scope
33/57
33
Growing Challenges to the
Managerial Economist
Resource base: Crossing boundaries
Global management practices
Outsourcing
-
8/7/2019 1A. Meaning and Scope
34/57
Growing Challenges to the
Managerial Economist Increased competition
Increased Opportunity Tastes converging internationally?
Customising to local tastes
Not merely exporters, but need to be
insiders in major markets
34
-
8/7/2019 1A. Meaning and Scope
35/57
Trans-nationality Index
UNs World Investment Report constructsTNI as the average of 3 Ratios:
Foreign sales to total sales Foreign assets to total assets
Foreign employment to total employment
35
-
8/7/2019 1A. Meaning and Scope
36/57
Global Corporations
Company Country TNI (%)
Vodafone Group UK 85
British Petroleum UK 82
Nestle Switzerland 74
Honda/ Shell Japan/UK 72
Sony, Volkswagen, IBM > 50
36
-
8/7/2019 1A. Meaning and Scope
37/57
37
Growing Challenges to the
Managerial EconomistB) Computerisation and Technology
Easiermodel-buildingand simulation
Quick and complicated data analysis
Rapid spread ofinformation
Internet changing both buyers and sellers
Videoconferencing- saving cost and time
Paperless administration
Speed of dispatch, lower inventories, less waste
-
8/7/2019 1A. Meaning and Scope
38/57
38
Growing Challenges to the
Managerial EconomistC. Dismantling of Traditional Hierarchies
Information today can be transmitted directly
from top management to workersMiddle managers are today increasingly
being used to shelter top managementfrom day-to-day activities
-
8/7/2019 1A. Meaning and Scope
39/57
39
Growing Challenges to the
Managerial EconomistD. Changing Basis for Value Creation
Peter Drucker:World is moving from
economy of goods to an economy ofknowledge
Creation of value increasingly based onknowledge and communications and notnatural resources and physical labour
-
8/7/2019 1A. Meaning and Scope
40/57
On eBay, ET, 30 Aug 2010
Gives tech edge to small entrepreneursfrom saddle makers of Kanpur to carpetmakers ofBenares
The Malad shopkeeper goes to HongKong to source products to sell on eBay
The $500-mn e commerce market in Indiais growing at 30% annually
With 3G and broadband rollout, the marketis expected to grow even more
40
-
8/7/2019 1A. Meaning and Scope
41/57
41
Growing Challenges to the
Managerial Economist
Bridging the gap between theory andPractice :
Real world is complex, chaotic,
interdependent as against simplifyingeconomic assumptions
Not tailor-made solutions but a framework
of logical thinking
-
8/7/2019 1A. Meaning and Scope
42/57
42
Growing Challenges to the
Managerial EconomistThe Global business Leader has to
Imbibe and inculcate essential qualities such as
Global outlook
Managing diversities
Flexibility with efficiency
Long-term goals with steps and migration path
Speed and stamina for transformation
-
8/7/2019 1A. Meaning and Scope
43/57
43
The Global Business Leader
Customer-centricNetworking and negotiating Interpersonal skills-managing multiple
simultaneous relationships Great communicatorUnderstanding technology Innovator
Problem SolverChange-maker- not threatened by changeEmpowering individual employers
-
8/7/2019 1A. Meaning and Scope
44/57
44
Growing Challenges to the
Managerial Economist Essentially, 3 sets of skills:
Human- understand, work with andmotivate with other people as individuals
as well as groups Technical- Ability to use tools, techniques
and processes that are specific to the field
Conceptual-Ability to analyse complexsituations and respond effectively tochallenges
-
8/7/2019 1A. Meaning and Scope
45/57
What are the Lessons?
1.Who sells the largest number of camerasin India?
2.W
ho has the biggest revenue from musicbusiness in India?
3.Who gained the most when business ofBritish Airways was affected due to the
2008 recession?
45
-
8/7/2019 1A. Meaning and Scope
46/57
What are the Lessons?
Ans 1: Nokia (whose main line of business isNOT cameras but cell phones)
Ans 2:Airtel (which is not in musicbusiness)- by selling caller tunes makesmore money than HMV etc
Ans 3:videoconferencing and telepresence
services ofHP and Cisco.
46
-
8/7/2019 1A. Meaning and Scope
47/57
What are the Lessons?
Nokia missed the Smartphone bus.Apple's I phone and Google's Android aremaking life difficult for Nokia.
ButGoogle is not a mobile company
Nokia is a global behemoth, with 35% ofthe worlds handset market. SiliconValleys finest may be good at high-end
innovation, BUT..
47
-
8/7/2019 1A. Meaning and Scope
48/57
What are the Lessons?(From Economist, Aug 18th)
.none of them knows much about runninga company with R&D facilities in 16countries and sales in more than 160.
Nokia has a vast distribution system inemerging markets: some 90,000 salesoutlets in China, 1,000 customer-service
centres and a huge army of sales people
48
-
8/7/2019 1A. Meaning and Scope
49/57
What are the Lessons?
But then, there are assaults from low-costlocal companies
According to Economist, One of thebiggest dangers for Nokia is that it willdevote so much energy to taking on Apple,Google and Research In Motion (the
maker of the BlackBerry) that it will lose itsedge in emerging markets
49
-
8/7/2019 1A. Meaning and Scope
50/57
What are the Lessons?
Products have vanished from the marketin the past 20 years:
B
lack & white TVs Fountain pens
Type writers
Alarm Clocks
50
-
8/7/2019 1A. Meaning and Scope
51/57
What are the Lessons?
51
-
8/7/2019 1A. Meaning and Scope
52/57
-
8/7/2019 1A. Meaning and Scope
53/57
Importance of speed & resilience
Keep eyes open- small can be big
Technology- adapt, innovate or perish Understand your customer
Anticipate
And many more.
53
-
8/7/2019 1A. Meaning and Scope
54/57
54
References
Text Books:
1. Managerial Economics in a Global EconomyDominick Salvatore
2. Managerial Economics Geetika, Piyali Ghoshand Roy Choudhury
3. Managerial Economics D. N. Dwivedi
4. The NewManagerial Economics -William
Boyes5. Managerial Economics R. L. Varshney and
K.L. Maheshwari
-
8/7/2019 1A. Meaning and Scope
55/57
55
Internet Sites for ManagerialEconomics
Current international economic news
http://www.economist.com
http://www.businessweek.com http://www.ft.com (Financial Times)
http://www.bloomberg.com
-
8/7/2019 1A. Meaning and Scope
56/57
56
Internet Sites for ManagerialEconomics
For international economic data
http://www.imf.org http://www.oecd.org
http://worldbank,org
http://www.wto.org
-
8/7/2019 1A. Meaning and Scope
57/57
Data
For authentic current Indian data:
CMIE database
For journals and other scholarly articles :ProQuest
Of course, our very own Economic Times or
Business Standard must become part of yourdaily diet.
57