MANAGERIAL ECONOMICS MBA EXAM QUESTION AND ANSWER
Managerial Economics
1. Managerial Economics is the application of Economic Theory to business management. Discuss. [16]
The science of Managerial Economics has emerged only recently. With
the growing variability and unpredictability of the business environment,
business managers have become increasingly concerned with finding rational and
ways of adjusting to an exploiting environmental change.
The problems of the business world attracted the attentions of the
academicians from 1950 onwards. Managerial economics as a subject gained
popularity in the USA after the publication of the book “Managerial Economics”
by Joel Dean in 1951.
Managerial economics generally refers to the integration of economic
theory with business practice. Economics provides tools managerial economics
applies these tools to the management of business. In simple terms, managerial
economics means the application of economic theory to the problem of management.
Managerial economics may be viewed as economics applied to problem solving at
the level of the firm.
It enables the business executive to assume and analyse things.
Every firm tries to get satisfactory profit even though economics emphasises
maximizing of profit. Hence, it becomes necessary to redesign economic ideas
to the practical world. This function is being done by managerial economics.
Economic Theory is a system of inter-relationships. Among the social
sciences, economics is the most advanced in terms of theoretical orientations.
There are well defined theoretical structures in economics. One of the most
widely discussed structures is the postulational or axiomatic method of theory
formulation.
It insists that there is a logical core of theory consisting of
postulates and their predictions which forms the basis of economic reasoning
and analysis. This logical core of theory cannot easily be detached from the
empirical part of the theory. Economics has a logically consistent system of
reasoning. The theory of competitive equilibrium is entirely based on
axiomatic method. Both in deductive inferences and inductive generalisations,
the underlying principle is the interrelationships.
Managerial theory refers to those aspects of economic theory and application
which are directly relevant to the practice of management and the decision
making process. Managerial theory is pragmatic. It is concerned with those
analytical tools which are useful in improving decision making.
Managerial theory provides necessary conceptional tools which can
be of considerable help to the manager in taking scientific decisions. The
managerial theory provides the maximum help to a business manager in his
decision making and business planning. The managerial theoretical concepts and
techniques are basic to the entire gamut of 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 a firm.
Economic theory has the characteristics of both micro and macro
economics. But managerial theory has only micro characteristics.
Economic theory deals with a study of individual firm as well as
individual consumer. But managerial theory studies only about 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 aspect of the problem whereas
managerial theory studies both economic and non-economic aspects.
Managerial economics is supposed to enrich the conceptual and
technical skill of a manager. It is concerned with economic behaviour of the
firm. It concentrates on the decision process, decision model and decision
variables at the firm level. It is the application of economic analysis to
evaluate business decisions.
The primary function of a manager in business organisation is
decision making and forward planning under uncertain business conditions. Some
of the important management decisions are production decision, inventory
decision, cost decision, marketing decision, financial decision, personnel
decision and miscellaneous decisions. One of the hallmarks of a good executive
is the ability to take quick decision. He must have the clarity of goals, use
all the information he can get, weigh pros and cons and make fast decisions.
The decisions are taken to achieve certain objectives. Objectives
are the motivating factors in taking decision. Several acts are performed to
attain the objectives quantitative techniques are also used in decision making.
But it may be noted that acts and quantitative techniques alone will not
produce desirable results. It is important to remember that other variables
such as human and behavioural considerations, technological forces and
environmental factors influence the choices and decisions made by managers.
Managerial Economics is a developing subject. The scope of
managerial economics refers to its area of study. Managerial economics has its
roots in economic theory. The empirical nature of managerial economics makes
its scope wider. Managerial economics provides management with strategic planning
tools that can be used to get a clear perspective of the way the business world
works and what can be done to maintain profitability in an ever changing
environment.
Managerial economics refers to those aspects of economic theory and
application which are directly relevant to the practice of management and the
decision making process within the enterprise. Its scope does not extend to
macro-economic theory and the economics of public policy which will also be of
interest to the manager. While considering the scope of managerial economics we
have to understand whether it is positive economics or normative economics.
2. What are the needs for demand forecasting? Explain the various steps involved in demand forecasting. [16]
Demand forecasting is the art and science of forecasting customer
demand to drive holistic execution of such demand by corporate supply chain and
business management. Demand forecasting involves techniques including both
informal methods, such as educated guesses, and quantitative methods, such as
the use of historical sales data and statistical techniques or current data
from test markets. Demand
forecasting may be used in production planning, inventory management, and at
times in assessing future capacity requirements, or in making decisions on
whether to enter a new market
Demand forecasting is predicting future demand for the
product. In other words, it refers to the prediction of probable demand for a
product or a service on the basis of the past events and prevailing trends in
the present.
Organization needs demand forecasting in the following
ways
Distribution of resources:
We know that inputs are processed to result into output. These inputs include
resources like materials, machinery and of course human resources. The business
firm also has to take decisions regarding capital arrangement, manpower
planning and so on. These all could be done with a bit of ease if the firm has
idea about the demand for its product. In short the estimation of demand
enables the firm to undertake critical business decisions.
Helps in avoiding wastages of resources:
Demand forecasting is not an option but compulsion in today’s competitive
environment. Imagine a firm that does not undertake demand forecasting. As a
result it will have no clue as to where its product stands in the market and
how is the future demand for the same. This may result in wastage of resources.
So in order to avoid wastages it is always beneficial to have a sense of future
demand for the products and services.
Serves as a direction to production:
The production process is not confirmed to producing goods and services.
Producers need to ensure that there is continuous supply of goods and services
in the market. If there is proper prediction of the demand, then it serves as a
handy tool for the businesses to undertake future production activities. This
is but obvious because if there is strong demand expected in the future then
the firm can take steps accordingly. Also if the firm sees lack of demand in
the coming times, then too decisions regarding the future production could be
taken accordingly.
Pricing: The decision
regarding pricing of the goods and services is perhaps one of the most critical
business decisions. Demand forecasting is useful in this area too. If there are
sincere predictions about the future sales of the firm’s product then it could
serve as a good aid to devise pricing strategies.
Helps in devising sales policy:
Production is followed by sales. Demand forecasting is nothing but estimating
the sales of the product. The business firms can plan its sales policy
effectively on the backdrop of demand forecasting. This also implies that the
distribution of goods and services can be done appropriately depending upon the
predictions of the demand for the product.
Decrease of business risk: Where
there is business there is risk. Demand forecasting though does not completely remove
the business uncertainties, helps in reducing the risks and uncertainties to a
certain extent.
Inventory management: Inventories is one
of those aspects which is closely associated with demand. This is because
inventories are kept by the producers to meet the demand in the coming times.
Demand forecasting helps in devising appropriate inventory management policies
3. Define production function. How is it helpful while taking output decisions? [16]
Production function, in economics, equation that expresses the relationship between the
quantities of productive factors (such as labour and capital) used and the
amount of product obtained. It states the amount of product that can be
obtained from every combination of factors, assuming that the most efficient
available methods of production are
used.
The production
function can thus answer a variety of questions. It can, for example, measure
the marginal productivity of a
particular factor of production (i.e., the change in output from one additional
unit of that factor). It can also be used to determine the cheapest combination
of productive factors that can be used to produce a given output.
A production function is
a mathematical and sometimes graphical way to measure the efficiency of
production by considering the relationships between two or more variables, meaning two or more factors that are relevant when
producing a good or service, such as raw materials and labor. Once a business
has determined the factors for production, it can begin building the production
function. For our castaway Carl, his factors of production would be his labor
compared to the number of coconuts he collects.
The basic production
function is:
Q = f(KL)
Q = output, or the amount of goods or
services produced
f is shorthand for function
K = capital or fixed resources (meaning they don't change)
L = labor, referring to the human
resources a business uses to produce its good or service.
Labor can be variable,
meaning it's a factor that can be changed by the business (by hiring more
people). The actual formula used to calculate production could be any variety
of the following:
Q = KL (Output = Capital times Labor)
Q = K + L (Output = Capital plus Labor)
Or output could just be a
function of the variable factor, so Q = L (Output = Labor).
Once the function is
calculated, it can be graphed, and a company can see where its inefficiencies
are and how much the variables can or should be changed to maximize output in
relation to the raw materials.
Carl's production
function would be Q = L (number of coconuts collected = amount
of time Carl labors to collect them). This is a pretty simple example; let's
look at some other possible scenarios.
In economics, a production function relates
physical output of a production process to physical inputs or factors of production. The production
function is one of the key concepts of mainstream
neoclassical theories, used to define marginal product and to distinguish allocative efficiency, the defining
focus of economics. The primary purpose of the production function is to
address allocative efficiency in the use of factor inputs in production and the
resulting distribution of income to those factors, while abstracting away from
the technological problems of achieving technical efficiency, as an engineer or
professional manager might understand it.
In macroeconomics, aggregate production
functions are estimated to create a framework in which to distinguish how much
of economic growth to attribute to changes in factor allocation (e.g. the
accumulation of capital) and how much to attribute to advancing technology.
Some non-mainstream economists, however, reject the very concept of an
aggregate production function.
We might
propose a production function for a good y of the following general form, first
proposed by Philip Wicksteed (1894):
y = ¦(x1, x2, ..., xm)
which
relates a single output y to a series of factors of production x1, x2,
..., xm. Note that in writing production functions in this form, we
are excluding joint production, i.e. that a particular
process of production yields more than one output (e.g. the production of wheat
grain often yields a co-product, straw; the production of omelettes yields the
co-product broken egg shells). Using Ragnar Frisch’s
(1965) terms, we are concentrating on "single-ware" rather than
"multi-ware" production.
For
heuristic purposes, the production technology for the one-output/two-inputs
case is (imperfectly) depicted in Figure 2.1. Output (Y) is measured on the
vertical axis. The two inputs, which we call L and K which, for mnemonic
purposes, can be called labor and capital, , are depicted on the horizontal
axes. We ought to now warn that henceforth, throughout all our sections on the
theory of production, all capital is assumed to be endowed,
i.e. there are no produced
means of production. The hill-shaped structure depicted in Figure 2.1 is the production
set. Notice that it includes all the area on the surface and in the
interior of the hill. The production set is essentially the set of technically
feasible combinations of output Y and inputs, K and L.
Figure - Production function for one-output/two-inputs.
A production
decision -- a feasible
choice of inputs and output - is a particular point on or in this
"hill". It will be "on" the hill if it is technically
efficient and "in" the hill if it is technically inefficient.
Properly speaking, the production function Y = ¦ (K, L) is only the surface (and not the interior) of
the hill, and thus denotes the set of technologically efficient points of the production set (i.e. for
a given configuration of inputs, K, L, output Y is the maximum feasible
output).
Obviously,
the hill-shape of the production function indicates that the more we use of the
factors, the greater output is going to be (at least up to the some maximum,
the "top" of the hill). The round contours along the production hill
can be thought of as topographic contours as seen on maps and will serve as
isoquants in our later analysis. The slope of the hill viewed from the origin
captures the notion of returns to scale.
DR.
PRASANTH BE BBA MBA PH.D. MOBILE / WHATSAPP: +91 9924764558 OR +91 9447965521
EMAIL: prasanththampi1975@gmail.com WEBSITE: www.casestudyandprojectreports.com
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