ROLE OF BUSINESS ECONOMIST

ROLE OF BUSINESS ECONOMIST

PRESENTED BY:

Tajinder Singh Purthi

Saurabh Gupta

Sahil Bhojwani

Divya Bawa

Musharraf Farooq

SOME GREAT ECONOMISTS

Adam Smith

AmartyaSen

Muhammad Yunus

Wassily Leontiff

CONTENTS:• ECONOMICS

• DISTINCTION BETWEEN ECONOMICS AND MANEGERIAL ECONOMICS

• WHO IS AN ECONOMIST?

• WHO IS A BUSINESS ECONOMIST?

• ROLES AND RESPONSIBILITIES• DECISION MAKING• FORWARD PLANNING

• CONCLUSION

ECONOMICS• The discipline of economics, as we understand it today,

emerged in the 17th and 18th centuries as the western world began its transformation from an agrarian to an industrial society.

• Despite the enormous differences between then and now, the economic problems with which society struggles remain the same:

• How do we decide what to produce with limited resources?• How do we ensure stable prices and full employment of resources?• How do we provide a rising standard of living today and in the future?

Economics is the study of the production, distribution, and consumption of goods and services - indicates that economics includes any business, nonprofit organization, or administrative unit.

A second definition is Economics is the science of making decisions in the presence of scarce resources

It is at the core of what managers of the organizations do referred as “managerial economics,” which is a subfield of economics that places special emphasis on the choice aspect .

ECONOMICS

ECONOMICS MANAGERIAL ECONOMICS

Comprehensive & wider scope Narrow & limited scope

Both Macro & Micro Micro in nature & Macro in analysis

Both positive & normative science Mainly Normative

Formulation of theories and principles Application of theories & principles

Discuss general problems Discuss individual problems

- behavior of a firm.

- optimal utilization of resources.

ECONOMICS MANAGERIAL ECONOMICS

Comprehensive & wider scope Narrow & limited scope

Both Macro & Micro Micro in nature & Macro in analysis

Both positive & normative science Mainly Normative

Formulation of theories and principles Application of theories & principles

Discuss general problems Discuss individual problems

- behavior of a firm.

- optimal utilization of resources.

TYPE OF ANALYSIS

Positive vs. Normative analysis

• Positive statements• Attempt to describe the world as it is• Descriptive • Confirm or refute by examining evidence

• Normative statements• Attempt to prescribe how the world should be• Prescriptive

10

Decision Problem

Managerial EconomicsTraditionalEconomics

Decision Sciences(Tools and

techniques of analysis)

Optimal Solution to Business Solution

“Managerial Economics is economics applied in decision making. It is a special branch of economics bridging the gap between abstract theory and managerial practice.” – Haynes, Mote and Paul.

The Economist as a Scientist

• Economics = science – conceptual

• Economists = scientists – practice / personal level.

• Devise theories• Collect data• Analyze these data

• Verify or refute their theories

WHO IS BUSINESS ECONOMIST ?

Business Economist is the practitioner of the science of managerial economics.

Companies employ business economists to guide them in making appropriate economic decisions – present and future (forecasting – short & long run)

They astutely scan the competitive environment in which a firm functions and suggest suitable policies for solution of problems.

TYPES OF ECONOMISTS

• Business Economic Advisers:

They do research, collect information and evaluate the business economic aspects that influence the growth and development of the organization. directly answerable to the top management and act in an advisory capacity

• Business economists as full-time professional managers:

Often appointed as financial managers, marketing managers, production managers and general managers.

Academic economists:

Business economists at universities - involved in the activities such as applied business economic research, continuous literary study, advise / liaison with business economists in practice, attending seminars and conferences, presenting short courses and lectures and training students in Business Management.

Techno-economists:

They are particularly research-orientated. Apart from formal training in Business Management, they also have a qualification in a technical or scientific field

RESPONSIBILITIES OF BUSINESS ECONOMISTS

To bring reasonable profit to the company. To study external and internal factors influencing the business To make accurate forecast. To establish and maintain contact with individual and data sources. To keep the management informed of all the possible economic

trends. To participate in public debates To earn full status in the business team.

Assisting the management towards facilitating effective decision making and forward planning.

IMPORTANT AREAS OF DECISION MAKING - INTERNAL

• Selection of product.

• Selection of suitable product mix.

• Selection of method of

production.

• Product line decision.

• Determination of price and quantity.

• Decision on promotional

strategy. • Optimum input combination.

• Allocation of resources

INTERNAL

Replacement decision. Make or buy decision. Shut down decision. Decision on export and import. Location decision. Capital budgeting.

IMPORTANT AREAS OF DECISION MAKING - External

The Organisation

Technology

Economic

Legal Media

Demographic

Climatic

Market

Political

DECISION MAKING PROCESS:ESTABLISHING OBJECTIVES

DEFINING THE PROBLEM

IDENTIFYING POSSIBLE ALTERNATIVE SOLUTIONS

EVALUATING ALTERNATIVE COURSES OF ACTION

SELECTION OF THE BEST ALTERNATIVE

IMPLEMENTING AND MONITORING THE DECISION

ESTABLISHING OBJECTIVES:

• First step in decision making process

• The objective of the Decision Making must be in sync with the overall objective of the company

• The most important objective of a business is to maximise profits







DEFINING A PROBLEM

In this step, the problem is thoroughly analysed. There are a couple of questions one should ask when it comes to identifying the purpose of the decision

• What exactly is the problem? For e.g. decreasing profits

• Why the problem should be solved?

• Who are the affected parties of the problem?

• Does the problem have a deadline or a specific time-line?







IDENTIFYING THE POSSSIBLE ALTERNATIVE SOLUTIONS

• Requires considering of variables that have impact on the problem

• Alternative courses of actions are identified to solve the problem

• For e.g.

Problem: Declining profits

Updating and replacing Building entirely new

old machinery plant







EVALUATING THE ALTERNATIVE COURSES OF ACTION

• It requires collection and analysis of data

• The collected data can be analysed using basic principles of economics and quantitative techniques

• Methods of data collection

METHODS OF DATA COLLECTION

Census:

A census is a study that obtains data from every member of a population. In most studies, a census is not practical, because of the cost and/or time required.

Sample survey:

A sample survey is a study that obtains data from a subset of a population, in order to estimate population attributes.

Experiment:

An experiment is a controlled study in which the researcher attempts to understand cause-and-effect relationships. The study is "controlled" in the sense that the researcher controls

(1) How subjects are assigned to groups and

(2) Which treatments each group receives?

Observational study:

Like experiments, observational studies attempt to understand cause-and-effect relationships. However, unlike experiments, the researcher is not able to control

(3) how subjects are assigned to groups and/or

(4) which treatments each group receives.

BASIC PRINCIPLES OF MANEGERIAL ECONOMICS

Marginalism Principle

Incremental Principle

Equi-Marginalism Principle

Time Perspective Principle

Discounting Principle

Opportunity Cost Principle

INCREMENTAL PRINCIPLEThe two major concepts in this principle are incremental cost and incremental revenue.

Incremental cost denotes change in total cost, whereas incremental revenue means change

in total revenue resulting from a decision of the firm.

The incremental principle may be stated as follows:

A decision is clearly a profitable one if

(i) It increases revenue more than costs.

(ii) It decreases some cost to a greater extent than it increases others.

(iii) It increases some revenues more than it decreases others.

(iv) It reduces costs more than revenues.

TIME PERSPECTIVE PRINCIPLE

• The time perspective concept states that the decision maker must give due consideration both to the short run and long run effects of his decisions. He must give due emphasis to the various time periods.

• Managerial economists are also concerned with the short run and long run effects of decisions on revenues as well as costs. The main problem in decision making is to establish the right balance between long run and short run.

OPPORTUNITY COST PRINCIPLE

• Choice involves sacrifices

• Opportunity cost refers to the value forgone by pursuing one course of action rather than another.

• For the production of one commodity, we have to forego the production of another commodity in case of scarce resources.

• For e.g. Jill decides to drive to work instead of taking the bus. It takes her 90 minutes to get there and the bus ride would have been 40, so her opportunity cost is 50 minutes.

DISCOUNTING PRINCIPLE• 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.

• The mathematical technique for adjusting for the time value of money and computing present value is called ‘discounting’.

•

where PV = Present Value

FV = Future Value

= Rate of interest

= no. of years

The concept of discounting is found most useful in managerialeconomics in decision problems pertaining to investment planning or capital budgeting.

MARGINALISM PRINCIPLE• Marginal Cost:

Cost incurred to produce an extra unit of output.

• Marginal Revenue:

Revenue generated by selling an extra unit of output.

MC = TCn – TC(n-1)

MR = TRn – TR(n-1)

Decision rule for profit maximisation: MR = MC

EQUI MARGINALISM PRINCIPLE

• 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.

• MPA = MPB = MPC = MPD =MPE

QUANTITATIVE TECHNIQUES

• Variables • Functions• Schedules• Graphs• Differentiation• Integration etc.







SELECTING THE BEST ALTERNATIVE

• After analysing the data and information using various techniques the optimum solution will be selected

• The optimum solution will be one that helps to achieve the established objectives

• Alternatives are evaluated using various quantitative techniques and based on the principles of managerial economics







IMPLEMENTING THE DECISION

• Implementation of the decision requires constant monitoring so that the expected results are obtained from the optimal course of action

• If at all the expected results are not forth coming corrective measures should be taken.

FORWARD PLANNING

DEMAND FORECASTING

• Process of finding out likely demand for a firm’s product at various prices over a stipulated time period

• Also known as Business Forecasting

TYPES OF FORECASTING

• Short term- period of 1 year

• Long term- production for a year or more

Methods of Forecasting

Consumer Survey

Expert Opinion

Market Experiment Time Series

Analysis

ConclusionTo sum up-

• Economics is the science of making decisions in the presence of scarce resources

• Understood the basic distinction between Economics and Managerial Economics

• We understood who is a Business Economist

• Roles of a Business Economist

• How a managerial economist helps in decision making and future planning.

ROLE OF BUSINESS ECONOMIST

Economy & Finance

scientist economics

economics distinction

subfield of economics

manegerial economics

discipline of economics

special branch of economics

business economists

positive normative science