Managerial Economics:Managerial economics is comparatively a new subject which was developed in the early part of 1950s.

It was known as business economics in the beginning. It is closely related to traditional economics that is based on the theories and principle such as demand analysis, production analysis, price theories, theory of profit and market structure which are the subject matters of micro economics theories. But unlike traditional economics, managerial economics seeks the help of other discipline such as accounting, management, statistics, and mathematics to get optimal solution to the decision problems. Managerial economics uses the tools and techniques of economic analysis to solve the managerial problems or to achieve the firms desired objectives. Hence, managerial economics is very important to entrepreneurs in decision making and forward planning of business. It is based on economic analysis for identifying problems, organizing information, evaluating and comparing alternatives and taking the decision to solve the managerial problems. In short, managerial economics is economics applied in decision making. According to D.C. Hague, managerial economics is a fundamental academic subject which seeks to understand and analyze the problems of business decision making. According to Spencer and Siegelman, managerial economics is the integration of economic theory with business practice for the propose of facilitating decision making and forward planning by the management. Characteristics of managerial economics:1) Micro-economic character:Managerial economics is microeconomics in character because it is related with the study of individual firm. It only deals with the problems of a firm but not deals with the entire economy as a whole. Hence, managerial economics basically uses the principles of microeconomics in order to analyses and interpreter the managerial problems. However, managerial economics uses some parameter and indicator of macro-economics e.g. wages, pricing policies, industrial policy, business cycle, investment policy as well as tax policy while dealing with managerial problems. 2) Choice and allocation:Managerial economics is concerned with decision making of economic nature. This implies that managerial economics deals with identification of economic choices and allocation of scarce resources. 3) Conceptual and metrical:Managerial economics is both Conceptual and metrical. it is based on the theories and principles of traditional economics such as demand analysis, production analysis, price theory, theory of profit and market structure which constitute the conceptual part where as there is also the use of tools and techniques of accounting, statistics ,management ,mathematics to arrive at a conclusion quantitatively . This metrical dimension of managerial economics is complementary to its conceptual framework. 4) Pragmatic:The managerial economics is more pragmatic (practical or applied) but not dogmatic (theoretical) for our life. It is also called applied micro economics. It takes into account the statistical tools and techniques which are useful in improving decision making. 5) Normative in character:Managerial economics is normative science and is prescriptive in nature. It recommends what should be done under alternate conditions. The positive science states the propositions without commenting upon what should be done. For example, if the distribution of income is uneven, the normative science recommends what should be done to correct it whereas positive science simply states the phenomenon.

Scope and subject matters of managerial economics The scope of managerial economics means the fields of study which it covers. They are: Demand analysis and forecasting:Demand analysis theory is a source of many useful insights for business decision-making. The fundamental objective of demand theory is to identify and analyze the basic determinants of consumer needs and wants. An understanding of the forces behind demand is a powerful tool for managers. Such knowledge provides the background needed to make pricing decisions, forecast sales and formulate marketing strategies. A forecast of future sales is essential for making production schedules of employing resources. It basically includes: determinants of demand, types of demand, elasticity of demand, and various statistical and non-statistical methods of demand forecasting.

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2) Cost and production analysis:The cost estimates are helpful for managerial economics. It is required to find out the economic costs and measure them for profit planning, cost control and sound pricing practices. The factors of production are scarce and have alternative uses. The factors of production may be allocated in a particular way to get maximum output. Due to this, the production analysis is also important in managerial economics. The major topics studied under cost and production analysis are: concept of cost and classification, production function, least-cost combination of inputs, factor productivity, returns to scale etc. 3) Pricing decisions and techniques:Pricing decisions take up an important place in managerial economics because the main objective of a firm is the maximization of profits that depends on the correctness of the pricing decisions. The main topics included under it are: price determination under different market structures, pricing objectives, pricing methods, price discrimination, and price of joint products. 4) Profit and capital management(investment decisions):Profit provides the index of success of a business firm. So, the business firms are organized for making profits. The important aspects covered under the topics are nature, theories and measurements of profit, profit policies and techniques of profit planning. And capital management as an important aspect of managerial economics means planning and controlling of capital expenditures. The main topics covered are: cost of capital, types of investment decisions and evaluation of selection of projects. 5) Objective of business firm:A firm should fix its objective at the initiation of business. The objective may be many ranging from profit maximizing to sales maximizing to utility maximizing. How the business objectives are determined and achieved, are also the subject matters of managerial economics. 6) Business environment:The business environment has significant influence on business firms. Hence, managerial economics also studies about business environment. The phase of business cycle, situation of money and capital market, market structure, business policy and so on affect the business houses, which are also studied under managerial economics.

Relationship of managerial economics with traditional economics: The relationship between managerial economics and traditional economics is very much like the relation of engineering to physics and of medicine to biology. It is in fact the relation of an applied field to its more fundamental and conceptual counterpart. Economics provides certain basic concepts and analytical tools, which are applied suitably to a business situation. The structure of traditional economics includes: a) Micro-economics: - It focuses on individual consumer and firm. b) Macro-economics: - It focuses on aggregative units or economy as a whole. c) Specified area: - It consists of agricultural economics, econometrics, economic development, foreign trade, industrial organization, labour economics, money & banking, public finance etc. d) Emphasis: - It includes the positive science & normative science. Since all the above areas of traditional economics are useful for business firms, managerial economics has been drawn from all these areas. But in practice, managerial economics is more relevant to some specific parts of traditional economics. Although both micro and macro-economics are important in managerial economics, the micro-economic theory of the firm is more significant in management decisions. The subject matters of managerial economics lies within the broad areas of micro-economics. Micro-economic concepts such as elasticity of demand, marginal cost, various market structures etc are of great significance to managerial economics. However, since a firm operates in an economy, the macro-economic variables such as economic condition of a country, business lifecycle, public policies etc also have a bearing effect on the performance of it. Similarly, the emphasis of managerial economics is on the normative theory. Hence, it forms a part of normative economics. It tries to present the solutions or it is concerned with what decisions ought to be made. Since each area of economics has some bearing on managerial decision making, managerial economics is closely related with traditional economics. Managerial economics provides a link between traditional economic theories and decision sciences for the analysis of managerial decision-making.

Value maximization model/objective

This objective is also referred as the long term profit maximization objective. According to Solomon and Pringle, when the time period is short and uncertainty is not much, profit maximization and value maximization are almost same. If the financial manager is able to receive more return on the fund invested than the cost of fund acquired, the value of the firms ordinary stock increases. The increased value multiplies the shareholders wealth. Hence, it is the obligation of the firm to maximize the shareholders wealth. Since the share price depends upon the time factor, interest rate, cash flows, risk etc., the manager should undertake all those activities which increase the share price. The objective of the firm is not merely profit maximization in short run, rather the managers should decide to abandon profit of the current year to increase profit for the future years. For example, research and development, new capital equipments, huge marketing programs etc may reduce profit in the beginning but they increase profit remarkably in the subsequent years. Since both the present and future profits are important, the objective of the firm should be to maximize the discounted value of the future profits. Therefore, the long term objective of profit maximization is called maximization of shareholders wealth or value maximization objective of the firm. Value can be defined as the present value of the firms expected future cash flows. The cash flows can be compared with profit. Hence, the forms present value means the firms expected future profits, discounted to the present at an appropriate rate of interest. The present value of the firm can be calculated from the following formula:

Here, pv( ) means the present value of expected future profits. mean profit of each year. r means appropriate discount rate of interest. denotes summation and t represents the time period. And TR and TC represent the total revenue and total cost respectively. The present value of all future profits may also be interpreted as the value of the firm. Hence, the maximization of the discounted value of all future profits is equivalent to the maximization of the value of the firm. In this way, profit maximization and value maximization may be used in the same sense in long run. If the profits earned in each short period are independent of each other, the profit maximization in each period maximizes the shareholders wealth. But if the profit of one period depends on the profit of another period, the shareholders wealth can not be maximized in long run. For example, the monopoly form may earn maximum profit in short run. But by doing so, it may attract the entry of new firms or may invite the government intervention. This reduces the profit in the future period. Hence, it may be desirable to abandon present profit to maximize shareholders wealth or to maximize the value of the firm. In conclusion, according to this objective, the manager tries to maximize the value of the firm in long run. Appropriateness of value maximization objective 1) It considers time value of money and uncertainty associated with the future returns. 2) It is consistent with the objective of maximizing the owners economic welfare. 3) It is required for the continuous success of the form in long run 4) It is useful to increase the goodwill of the firm.

Simons Theory of Satisfying Economist H. A. Simon invented his own theory Satisfying Behavioral Theory in 1955 A.D. He said that instead of maximizing profit, the business firms must have their aim of satisfying. In other words, they want to achieve satisfactory level of profit. He argued that the real business world is full of uncertainties and in reality, the businessman can never know whether they are maximizing profit or not. The manager can not find complete and relevant informations about his business. Even if the datas are available, the managers have little time and ability to process the datas and they have to work under a number of constraints. Hence, the managers have to take the decisions on the basis of past events and incomplete informations about the future conditions of their business. The basic assumptions of Simons Theory of Satisfying are:

a) Satisfactory aspiration level of profit is assumed rather than profit maximization

Simon said that a firm has normally a satisfactory level of achievement which it hopes for in a particular field. For example, if the firm hopes to attain the profit in present year by 8%, it is aspiration level about profit. If the firm hopes to increase sales in present year by 10%, it is aspiration level about sales. The aspiration level of profit or sales will depend on past experience and fixing it under future uncertainties will be taken into account. If the firm easily attains the aspiration level, then it will raise its aspiration level. But if it proves difficult to attain the aspiration level, it will be revised downwards. When the actual performance of the firm can not reach the aspiration level, then Search Theory is started so that the remedial actions can be taken to achieve the aspiration level by better performance. Search theory is related to the search for new alternatives of action. The Simon theory of business objective is considered more utilized and more descriptive because it depends on the aspiration level, utility of past events and search theory. So, Simons theory of satisfying deals about the different concept than that of the profit maximization.

Criticism of Simons theory of satisfying: a) Simon explains about satisfactory level of profit but the limit of satisfaction can not be defined in an exact term. b) This theory depends on the mutual understanding of different sectors under the same firm but this function is very difficult.

Williamsons Model of managerial discretion

Williamsons theory of managerial discretion is a full fledged managerial theory. According to this theory, the managers look at their self-interest while making decisions regarding price, output, sales etc. of a firm. Hence, their decisions regarding price, output etc. differ from those of a profit maximizing firm. This theory depends upon some assumptions which are: a) This model is conducted under weakly competitive environment. b) There is divorce of ownership from control. c) A capital market impose minimum profit constraints. On the basis of above assumptions, Williamson says that managers are motivated by their self-interest and they maximize their own utility function (monetary and other benefits) after attaining the minimum profit line. The most important motive of managers is desires for salaries, security, dominance and professional excellence. These can be gained by additional values of expenditure on staff S, managerial emoluments M, qualified number of staffs Qn, and discretionary investment DI. When managerial utility is U, then utility function can be written as U=f(S,M,Qn,DI) It should borne in mind that managers try to maximize utility subject to minimum profit constraints. A minimum profit is necessary to satisfy the shareholders otherwise managers job will be endangered.

Cyert and Marchs Behavioral Theory

Cyert and March developed a full-fledged behavioral theory of a firm. They opined that large scale corporate type of firms exists now-a-days. Hence, entrepreneur can not alone be a decision-maker. The decision-making involves a complex group or organization. It consists of various individuals whose interest may conflict with each other. This group is called organizational coalition and includes managers, stockholders, workers, consumers and so on. All of these individuals participate in setting the goals of an organization. Unlike conventional theories of single goal, the behavioral theory states that an organization has multiple goals. The real world firm generally possesses the following five goals and the different parts of the organization or coalition members have different goals. a) Production goal:According to this goal, production should not fluctuate too much nor fall below an acceptable level. The production goal originates from the production department. The main goal of the production manager is the smooth running of the production process. The production manager should ensure stable employment, ease of scheduling, maintenance of adequate cost performance and growth. b) Inventory goal:The inventory goal originates mainly from the inventory department if such a department exists or from the sales and production department. The sales department wants an adequate stock of output for the customers while the production department needs adequate stocks of raw materials and other items necessary for a smooth flow of the production system. c) Sales goals:The sales goal or the share of the market goal originates from the sales department. This department sets the sales strategy that is decided on the advertising campaigns, the market research programs and so on. d) Profit goal:The profit goal is set by the management so as to satisfy the demand of the shareholders and the expectations of the bankers and other financial institutions; and also to create funds with which they can accomplish their own goals and projects or satisfy the other goals of the firm. e) Market share goals:This goal is an alternative to the sales goal. It is the measurement of sales effectiveness. The top level managers especially the sales managers or those in marketing department have this goal. While making decisions, firms are guided by these five goals. All goals must be satisfied in an implicit order of priority among them. The conflict among different goals may crop up. For example, sales goal may require a lower price whereas the profit goal may require a higher price. Sales and production goal may require high inventories whereas profit goal may require low inventories. Such conflicts among coalition members are resolved within the firm as a result of persuasion and accommodation of each others viewpoint. The goals of the firm are ultimately decided by the top management through continuous bargaining between the groups of the coalition. In the process of goal formation, the top management attempts to satisfy as many as demands with which the various members of the coalition confront it. Hence, the goals of the firm such as the goals of the individual members or particular groups of the coalition take the form of aspiration levels rather than strict maximizing constraints. In other words, the firm is as satisfying organization rather than a maximizing entrepreneur. The top management, responsible for the co-ordination of the activities of the various members of the firm, wishes to attain a satisfactory level of production, to attain a share of the market, to earn a satisfactory level of profit, to divert a satisfactory percentage of their total receipts to research and development, to acquire a satisfactory public image and so on. But it is not clear in the behavioral theories what is a satisfactory and what an unsatisfactory attainment is.