Role of Managerial Economist

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2.

Making specific decisions General task of the managers Managerial economist gained an increasing importance in business in recent times. He can be very useful for successful management as his contribution can be substantial in solving the problems of decision making and forward planning

Specific decisions

Production scheduling DD Forecasting Market research Economic analysis of the industry Investment appraisal Security management analysis Advice on foreign exchange management Advice on trade Pricing and related decisions and Analysing and forecasting environmental factors.

General Tasks
a) External factors General economic condition of the economy Demand for the product Input cost of the firm Market conditions Firms share in the market Govts Economic policies and central banks monetary policies

b) Internal factors

To forecasts their future trend Investment decision Analysising the general factors

Fundamental concepts
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3. 4.

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Incremental concept Concept of time perspective The discounting principle The concept of opportunity cost The Equi- marginal principle

Incremental concept

Incremental cost : Change in the total cost Incremental revenue Change in total revenue

Incremental cost formula:

IC= C2-C1 =C

Marginal cost MC =C2 C1 Q2-Q1 C

IC-Incremental Concept C2-New total cost

C1-Old total cost

Revenues

Incremental Revenue IR= R2-R1 = R

Marginal Revenue R2-R1 MR= Q2-Q1

=R/Q

Example For Incremental Cost and Revenue

Price per unit=Rs.10 Sales in unit =1000 Price falls to =Rs.8 Increased sales =1500units IR =R2-R1 R2=(8x1500)=12000 R1=10x1000=10000 IR=2000 MR= R2-R1 /Q2-Q1 12000-10000/1500

1000 2000/500 =Rs.4 IR=Rs.2000 MR=Rs.4

Implication of Incremental Reasoning

Business men hold view :Make a profit on every job They refuse orders that do not cover full cost For eg: New order will bring Additional Revenue of Rs.50,000 The full cost estimated by the accountant is as follows

1.Labour cost: 15,000 2.Metarial cost: 20,000 3.Overhead cost : 18,000 4. Selling and administrative cost: 7000 Total 60,000

It is unfavourable because the firm incur loss of Rs.10,000 Suppose the firm makes incrementalcost as------

1.Labour cost: 10,000 2.Metarial cost: 20,000 3.Overhead cost : 5,000 Total 35,000 Absence of selling and administrative cost the firm will earn profit of Rs. 15,000 Because of two assumptions the firm earned profit The assumption is i) existence of idle capacity ii)absence of more profitablealternatives

2. Concept of time perspective

i) ii)

iii)
iv)

Time plays a crucial role in in the field of pricing Marshall introduced the element of time in value theory He introduced four market forms Very short period Short period Long period Very long period or secular period

3.Discounting principle

The concept of time value of money refers to the fact that the value value of money to be received at different point of time will not be the same today Therefore it is necessary to know the techniques for measuring the value today of money to be received or paid at different point of time

The equation for the future value of any amount S for n periods at an interest of r is FVn= S(1+r)n

4. Opportunity cost

It is a cost of displaced alternatives. It represents only sacrificed alternatives and is not recorded in any financial account. This means the cost of using something in a particular venture is the benefit foregone by not using it its best alternatives. In short, next best alternative commodity that is sacrificed. It requires measurement of sacrifices. It is applied in determining the factor prices ,price determination, consumption and public expenditure.

5. Equimarginal principle

An important proposition of economics is that an input should be allocated in such a way that the value added by the last unit is the same in all uses. For eg: Firm involves four activities, A,B,C and D. All these requires labour. The firm allocates labour for all activities in such a manner value of the marginal product is equal in all activities. VMPLA =VMPLB=VMPLC=VMPLD