Page 14 - DECO405_MANAGERIAL_ECONOMICS

Unit 1: Introduction to Managerial Economics

1.5 Relationship of Managerial Economics with Decision Sciences Notes

Manageral eco helps the managers in taking various strategic decision. Demand analysis and
forecasting help a manager in the earliest stage in choosing the product and in planning output
levels. A study of demand elasticity goes a long way in helping the firm to fix prices for its
products. The theory of cost also forms an essential part of this subject. Estimation is necessary
for making output variations with fixed plants or for the purpose of new investments in the
same line of production or in a different venture. The firm works for profits and optimal or near
maximum profits depend upon accurate price decisions. Theories regarding price determination
under various market conditions enable the firm to solve the price fixation problems. Control
of costs, proper pricing policies, break-even point analysis, alternative profit policies are some
of the important techniques in profit planning for the firm which has to work under conditions
of uncertainty. Thus managerial economics tries to find out which course is likely to be the best
for the firm under a given set of conditions.

Economics and other Disciplines

Economics is linked with various other fields of study like:
1. Operation Research: This field is used in economics to find out the best of all possibilities.
Operation Research is a great aid in decision making in business and industry as it can
help in solving problems like determination of facilities on machine scheduling,
distribution of commodities, optimum product mix, etc.
2. Theory of Decision Making: Decision theory has been developed to deal with problems of
choice or decision making under uncertainty, where the applicability of figures required
for the utility calculus are not available. Economic theory is based on assumptions of a
single goal whereas decision theory breaks new grounds by recognising multiplicity of
goals and persuasiveness of uncertainty in the real world of management.
3. Statistics: Statistics helps in empirical testing of theory. With its help better decisions
relating to demand and cost functions, production, sales or distribution are taken.
Economics is heavily dependent on statistical methods.
4. Management Theory and Accounting: Maximisation of profit has been regarded as a central
concept in the theory of the firm in microeconomics. In recent years, organisation theorists
have talked about “satisficing” (a decision-making strategy that attempts to meet criteria
for adequacy, rather than to identify an optimal solution) instead of “maximising” as an
objective of an enterprise. Accounting data and statements constitute the language of
business. In fact, the link is so close that “managerial accounting” has developed as a
separate and specialised field in itself.
Scope of economics expands to the frontiers of big companies, both- Indian and International.
Some of the real world examples are discussed below:

Example: Birla Yamaha - Shriram Honda and Ensuing Competition: With Honda
acquiring a majority in Shriram Honda, arch rival Birla Yamaha now has a strong opponent to
tackle. As the two companies enjoy a virtual duopoly in the potable generator set market,
Honda’s move to acquire management control in its Indian venture was enough to rush Birla’s
executives back into a huddle. RS Sharma, MD, Birla Yamaha points out, “Our competitors are
now witnessing a change of management. As fresh funds are infused in the company, we will be
up against stronger competition.”

It is obvious that it will be difficult to understand and tackle this problem without the knowledge
of concepts like duopoly, competition, etc., which are a part of micro economics.

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