ROLE OF BUSINESS ECONOMIST

2. SOME GREAT ECONOMISTS
Adam Smith
Amartya
Sen
Muhammad
Yunus
Wassily
Leontiff

3. 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

4. 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?

5.  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

6. 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.

9. 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.

10. 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

11. Decision Problem
Managerial Economics
Traditional
Economics
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.

12. 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

13. 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.

14. 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.

15. 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

16. 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.

18. 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

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

20. IMPORTANT AREAS OF DECISION
MAKING - External
The
Organisation
Technology
Economic
Legal Media
Demographic
Climatic
Market
Political

21. 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

22. 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

23. 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

24. 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?

25. 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

26. 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

27. 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

28. 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

29. 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.

30. 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
(1) how subjects are assigned to groups and/or
(2) which treatments each group receives.

31. BASIC PRINCIPLES OF
MANEGERIAL ECONOMICS
Marginalism Principle
Incremental Principle
Equi-Marginalism Principle
Time Perspective Principle
Discounting Principle
Opportunity Cost Principle

32. INCREMENTAL PRINCIPLE
The 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.

33. 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.

34. 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.

35. 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’.
• 𝑃𝑉 =
𝐹𝑉
(1+𝑖) 𝑛
where PV = Present Value
FV = Future Value
𝑖 = Rate of interest
𝑛 = no. of years
The concept of discounting is found
most useful in managerial
economics in decision problems
pertaining to investment planning or
capital budgeting.

36. 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

37. 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

38. QUANTITATIVE TECHNIQUES
• Variables
• Functions
• Schedules
• Graphs
• Differentiation
• Integration etc.

39. 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

40. 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

41. 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

42. 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.

43. FORWARD PLANNING

44. 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

45. TYPES OF FORECASTING
• Short term- period of 1 year
• Long term- production for a year or more

46. Methods of Forecasting
Consumer
Survey
Expert
Opinion
Market
Experiment
Time Series
Analysis

47. Conclusion
To 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.