role of managerial economist

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Role of Managerial Economist

1. Making specific decisions2. General task of the managers

Managerial economist gained anincreasing importance in businessin recent times. He can be veryuseful for successful managementas his contribution can besubstantial in solving the problemsof decision making and forwardplanning



Specific decisions

Production schedulingDD ForecastingMarket researchEconomic analysis of the industryInvestment appraisalSecurity management analysisAdvice on foreign exchange managementAdvice on tradePricing and related decisions andAnalysing and forecasting environmentalfactors.



General Tasks

a) External factorsGeneral economic condition of theeconomyDemand for the productInput cost of the firmMarket conditions

Firm’s share in the market Govt’s Economic policies and centralbank’s monetary policies



b) Internal factors

To forecasts their future trendInvestment decision

Analysising the general factors



Fundamental concepts

1. Incremental concept2. Concept of time perspective

3. The discounting principle4. The concept of opportunity

cost

5. The Equi- marginal principle



Incremental concept

Incremental cost:

Change in

the total costIncrementalrevenue

Change intotal revenue



Incremental cost formula:

IC= C2-C1 = Δ C

IC-Incremental Concept

C2-New total cost

C1-Old total cost

Marginal cost

MC =C2 – C1Q2-Q1

Δ CΔ Q



Revenues

IncrementalRevenueIR= R2-R1

= Δ R

MarginalRevenue

R2-R1

MR= Q 2-Q1

= Δ R/ Δ Q



Example For Incremental Costand RevenuePrice per unit=Rs.10Sales in unit =1000Price falls to =Rs.8

Increased sales=1500unitsIR =R 2-R1

R2=(8x1500)=12000

R1=10x1000=10000IR=2000

MR= R2-R1 /Q2-Q 1

12000-10000/1500-

10002000/500 =Rs.4

IR=Rs.2000

MR=Rs.4



Implication of IncrementalReasoning

Business men hold view :”Makea profit on every job” They refuse orders that do notcover full costFor eg : New order will bringAdditional Revenue of

Rs.50,000The full cost estimated by theaccountant is as follows

Business men hold view :”Makea profit on every job” They refuse orders that do not

cover full costFor eg: New order will bringAdditional Revenue of

Rs.50,000The full cost estimated by theaccountant is as follows



2. Concept of time perspective

Time plays a crucial role in in thefield of pricingMarshall introduced the element of

time in value theoryHe introduced four market forms

i) Very short period

ii) Short periodiii) Long periodiv) Very long period or secular period



3.Discounting principle

The concept of time value of moneyrefers to the fact that the value valueof money to be received at different

point of time will not be the sametodayTherefore it is necessary to know thetechniques for measuring the valuetoday of money to be received orpaid at different point of time



The equation for the future valueof any amount ‘S’ for ‘n’ periodsat an interest of ‘r’ is

FVn= S(1+r) n



4. Opportunity cost

It is a cost of displaced alternatives.It represents only sacrificed alternativesand is not recorded in any financialaccount.

This means the cost of using something ina particular venture is the benefit foregoneby not using it its best alternatives.In short, next best alternative commoditythat is sacrificed.

It requires measurement of sacrifices.It is applied in determining the factor prices,price determination, consumption andpublic expenditure.



5. Equimarginal principle

An important proposition of economics isthat an input should be allocated in such away that the value added by the last unit isthe same in all uses.

For eg: Firm involves four activities, A,B,Cand D. All these requires labour.The firm allocates labour for all activities insuch a manner value of the marginalproduct is equal in all activities.VMPLA =VMP LB=VMP LC=VMP LD

role of managerial economist

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