EBD Notes
EBD Notes
EBD Notes
Definition:
2. “The integration of economic theory and business practice for the purpose of facilitating
A managerial economist helps the management by using his analytical skills and highly
developed
business operates. Proper study of all external factors that affect the functioning of
organization
is must for proper functioning. He studies various factors like growth of national income,
competition level, price trends, phase of the business cycle and economy and updates the
He analyses the internal operation of business and helps management in making better
decisions in regard to internal workings. Managerial economist through his analytical and
forecasting skills provides advice to managers for formulating policies regarding internal
Proper estimation and forecasting of future trends helps the business in achieving desired
profitability and growth. Managerial economist through proper study of all internal and
external
Production Planning
Managerial economist is responsible for scheduling all production activities of business.
He evaluates the capital budgets of organizations and accordingly helps in deciding timing
and locating of various actions.
Economic Intelligence
economic trends so that they can confidently talk in seminars and conferences.
A managerial economist analyzes various investment avenues and chooses the most
appropriate one. He studies and discovers new possible fields of business for earning better
returns.
The theory of the firm is the microeconomic concept founded in neoclassical economics that
states that a firm exists and makes decisions to maximize profits. The theory holds that the
overall nature of companies is to maximize profits meaning to create as much of a gap
between revenue and costs. The firm's goal is to determine pricing and demand within the
market and allocate resources to maximize net profits.
Theory of the firm is related to comprehending how firms come into being, what are their
objectives, how they behave and improve their performance and how they establish their
credentials and standing in society or an economy and so on.
According to traditional theories, the firm is controlled by its owners and thus wishes to
maximise short run profits. The more contemporary managerial theories of the firm examine
the possibility that the firm is controlled not by its owners, but by its managers, and therefore
does not aim to maximise profits. Although profit plays an important role in these theories as
well, itis no longer seen as the sole or dominating goal of the firm. The other possible aims
might be sales revenue maximisation or growth.
Baumol’s Model: Baumol's theory of sales revenue maximization was created by American
economist William Jack Baumol. It's based on the theory that, once a company has reached
an acceptable level of profit for a good or service, the aim should shift away from increasing
profit to focus on increasing revenue from sales. W.J.Baumol suggested Sales Revenue
maximisation as an alternative goal to profit maximisation. Managers only ensure acceptable
level of profit, pursuing a goal which enhances their own utility.
2. The firm aims at maximizing its total sales revenue in the long run subject to a profit
constraint.
3. The firm’s minimum profit constraint is set competitively in terms of the current market
value of its shares.
4. The firm is oligopolistic whose cost curves are U-shaped and the demand curve is
downward sloping. Its total cost and revenue curves are also of the conventional type.
1. If the sales of a firm are declining then the banks, creditors and the capital market are not
prepared to provide finance to the firm anymore.
2. Its own distributors and dealers might stop showing interest on the firm’s product in future.
3. Consumers might not buy its product because of its unpopularity and there is a more
chance of competitors acquiring the consumers.
4. Firm reduces its managerial and other staff with fall in sales.
5. But if firm’s sales are large, there are economies of scale and the firm expands and earns
large profits.
6. Salaries of workers and management also depend to a large extent on more sales and the
firm gives them bonus and other facilities.
Robin Marris in his book The Economic Theory of ‘Managerial’ Capitalism (1964) has
developed a dynamic balanced growth maximising theory of the firm. He concentrates on the
proposition that modern big firms are managed by managers and the shareholders are the
owners who decide about the management of the firms. The managers aim at the
maximisation of the growth rate of the firm and the shareholders aim at the maximisation of
their dividends and share prices. To establish a link between such a growth rate and the share
prices of the firm, Marris develops a balanced growth model in which the manager chooses a
constant growth rate at which the firm’s sales, profits, assets, etc., grow.
The Marris’s model is based on the following assumptions:
• All major variables such as profits, sales and costs are assumed to increase at the same rate.
Oliver E. Williamson found (1964) that profit maximization would not be the
objective of
the managers of a company.
This theory assumes that utility maximisation is a manager’s sole objective. However
it is only in a corporate form of business organisation that a self-interest seeking
manager maximise his/her own utility, since there exists a separation of ownership
and control.
The managers can use their ‘discretion’ to frame and execute policies which
wouldmaximise their own utilities rather than maximising the shareholders’ utilities.
This is essentially the principal–agent problem. This could however threaten their job
security, if a minimum level of profit is not attained by the firm to distribute among
the shareholders.
Utility function or "expense preference"[8] of a manager can be given by:
U=U(S,M,Id)
U denotes the Utility function,
S denotes the “monetary expenditure on the staff”(not only the manager's salary and
other
forms of monetary compensation received by him from the business firm )
M stands for "Management Slack“(non-essential management perquisites such as
entertainment expenses, lavishly furnished offices, luxurious cars, large expense
accounts, etc. which are above minimum to retain the managers in the firm) and
ID stands for amount of "Discretionary Investment".( the amount of resources left at a
manager's disposal, to be able to spend at his own discretion. For example, spending
on latest equipment, furniture, decoration material, etc.)
Theory of Demand
Theory of Demand, tells the relationship between the price of goods and its quantity
demanded. If the price of any good or service increases then its demand decreases and
vice versa.
Determinants of Demand
There are many determinants of demand, but the top five determinants of demand are
as follows:
Product cost: Demand of the product changes as per the change in the price of the
commodity. People deciding to buy a product remain constant only if all the factors
related to it remain unchanged.
The income of the consumers: When the income increases, the number of goods
demanded also increases. Likewise, if the income decreases, the demand also
decreases.
Costs of related goods and services: For a complimentary product, an increase in the
cost of one commodity will decrease the demand for a complimentary product.
Example: An increase in the rate of bread will decrease the demand for butter.
Similarly, an increase in the rate of one commodity will generate the demand for a
substitute product to increase. Example: Increase in the cost of tea will raise the
demand for coffee and therefore, decrease the demand for tea.
Consumer expectation: High expectation of income or expectation in the increase in
price of a good also leads to an increase in demand. Similarly, low expectation of
income or low pricing of goods will decrease the demand.
Buyers in the market: If the number of buyers for a commodity are more or less,
then there will be a shift in demand.
1. Statistical Method
2. Market Research/Surveying
4. Expert Opinion
A collective opinion is valuable, but let’s face it, sometimes you need advice from an
expert. Companies engaging in this demand forecasting method may hire an outside
contractor to predict future activity. It usually begins with a brainstorming session
between the company and the contractor(s) in which assumptions are made that can
inform leadership on what to expect in the coming weeks, months, or even years.
5. Delphi Method
Often used in conjunction with an expert opinion, the Delphi Method was developed
by the RAND Corporation in the 1950s and still popular today. The Delphi method of
forecasting leverages the opinion of industry experts to make a demand forecast.
Here’s how it works, in a nutshell:
A panel of industry experts is compiled.
A questionnaire is sent to each expert on the panel.
Results of the questionnaire are summarized by a facilitator who returns the summary
to each member of the panel.
The panel is re-questioned on their forecasts and encouraged to revise their earlier
answers in light of the replies of other members of their panel.
This may continue for another round or two.
Because the Delphi method allows the experts to build on each other’s knowledge and
opinions, the end result is considered a more informed consensus.
6. Barometrics
7. Econometric Method
In the short period, the firm can change its output without changing its size. In the long
period, the firm can change its output by changing its size. In the short period, the output of
the industry is fixed because the firms cannot change their size of operation and they can vary
only variable factors. In the long period, the output of the industry is likely to be more
because the firms have enough time to increase their sizes and also use both variable and
fixed factors.
Equi-Marginal Concept:
One of the widest known principles of economics is the equi-marginal principle. The
principle states that an input should be allocated so that value added by the last unit is the
same in all cases. This generalisation is popularly called the equi-marginal.
An optimum allocation cannot be achieved if the value of the marginal product is greater in
one activity than in another. It would be, therefore, profitable to shift labour from low
marginal value activity to high marginal value activity, thus increasing the total value of all
products taken together.
Discounting Concept:
This concept is an extension of the concept of time perspective. Since future is unknown and
incalculable, there is lot of risk and uncertainty in future. Everyone knows that a rupee today
is worth more than a rupee will be two years from now. This appears similar to the saying
that “a bird in hand is more worth than two in the bush.” This judgment is made not on
account of the uncertainty surrounding the future or the risk of inflation.
Managerial decisions are actions of today which bear fruits in future which is unforeseen.
Future is uncertain and involves risk. The uncertainty is due to unpredictable changes in the
business cycle, structure of the economy and government policies.
This means that the management must assume the risk of making decisions for their
institution in uncertain and unknown economic conditions in the future. Firms may be
uncertain about production, market prices, strategies of rivals, etc. Under uncertainty, the
consequences of an action are not known immediately for certain.
The production possibilities curve (PPC) is a graph that shows all of the different
combinations of output that can be produced given current resources and technology.
Sometimes called the production possibilities frontier (PPF), the PPC illustrates scarcity and
tradeoffs.
Module 2
DEMAND ANALYSIS:
Demand analysis is the process of understanding the customer demand for a product or
service in a target market. Companies use demand analysis techniques to determine if they
can successfully enter a market and generate expected profits to expand their business
operations.
It also gives a better understanding of the high-demand markets for the company’s offerings,
using which businesses can determine the viability of investing in each of these markets.
Market identification
Business cycle
Product Niche
Evaluate competition
LAW OF DEMAND:
The Law of demand explains the functional relationship between price of a commodity and
the quantity demanded of the commodity. It is observed that the price and the demand are
inversely related which means that the two move in the opposite direction.
An increase in the price leads to a fall in quantity demanded and vice versa. This relationship
can be stated as “Other things being equal, the demand for a commodity varies inversely as
the price”.
The response of the consumers to a change in the price of a commodity is measured by the
price elasticity of the commodity demand. The responsiveness of changes in quantity
demanded due to changes in price is referred to as price elasticity of demand. The price
elasticity of demand is measured by dividing the percentage change in quantity demanded by
the percentage change in price.
It measures the responsiveness of demand of one product, after a change in price level of
other product. “It is the ratio of percentage change in quantity demanded of any one product
(X) over the percentage change in price level of other product (Y)”. The cross elasticity of
demand for substitute goods and complimentary goods is always positive because the demand
for one good increases when the price for the substitute goods and complimentary goods
increases.
In the modern competitive or partial competitive market economy, advertising has a great
significance. Under advertising, various visible or verbal activities are done by the firm for
the purpose of creating or increasing demand for its goods or services. Informative
advertising is very helpful for the consumer in making rational purchase decisions.
“It is a ratio of percentage change in quantity demanded of any goods and services over the
percentage change in expenses incurred for advertising and promotion”.