Managerial economics is a study of application of managerial skills in economics,more over it help to find problems or obstacles in the business and

provide solution for those problems.problems may be relating to costs,prices,forecasting the future market,human resource management,profits etc. Managerial economics is a study of application of managerial skills in economics,more over it help to find problems or obstacles in the business and provide solution for those problems.problems may be relating to costs,prices,forecasting the future market,human resource management,profits etc. Managerial economics (also called business economics), is a branch of economics that applies microeconomic analysis to specific business decisions. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis and correlation, Lagrangian calculus (linear). If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of operations research and programming. Nature of Managerial Economics: Following points constitute nature of managerial economics 1. Micro Economics 2.Theory of the firm 3.Managerial Economics is Pragmatic (practical in outlook) 4. Managerial economics is normative 5. Using inputs from Macroeconomics 6. It is concerned with Normative Economics Scope of managerial economics:

Operational issues 1. Resource Allocation 2.Demand Analysis and Forecasting 3. Cost and Production Analysis 4.Pricing Decisions, Policies and Practices 5.Profit Management 6. Capital Management 7. Strategic Planning Environmental or external issues Economic Environment: Social environment Political Environment Technological Environment International environment

DIFFERENCE BET.ECONOMICS VS MANAGERIAL ECONOMICS

1) Managerial Economics is micro in character Pure Economics is both micro and macro in character 2) Managerial Economics study only practical application of the Economic principle to the problem of firm Pure Economics deals with the study of principles itself 3) Managerial Economics deals with the Economic problems of the firm while Pure Economics deals with Economic problems of both firm and individuals 4) Managerial Economics deals with profit theory only Pure Economics deals with all distribution theories like rent, wages, interests, and profits.

Demand Forecasting
Provided by SME.com.ph What is a demand forecast? A demand forecast is the prediction of what will happen to your company's existing product sales. It would be best to determine the demand forecast using a multi-functional approach. The inputs from sales and marketing, finance, and production should be considered. The final demand forecast is the consensus of all participating managers. You may also want to put up a Sales and Operations Planning group composed of representatives from the different departments that will be tasked to prepare the demand forecast. Determination of the demand forecasts is done through the following steps: Determine the use of the forecast Select the items to be forecast Determine the time horizon of the forecast Select the forecasting model(s) Gather the data Make the forecast Validate and implement results

The time horizon of the forecast is classified as follows: Description Short-range Duration Medium-range Forecast Horizon Long-range More than 3 years Usually less than 3 3 months to 3 years months, maximum of 1 year Job scheduling, worker assignments

Applicability

Sales and production New product planning, budgeting development, facilities planning

How is demand forecast determined? There are two approaches to determine demand forecast (1) the qualitative approach, (2) the quantitative approach. The comparison of these two approaches is shown below: Description Applicability Qualitative Approach Quantitative Approach

Used when situation is vague & Used when situation is stable & little data exist (e.g., new products historical data exist and technologies) (e.g. existing products, current technology) Involves intuition and experience Jury of executive opinion Sales force composite Delphi method Consumer market survey Involves mathematical techniques Time series models Causal models

Considerations Techniques

Qualitative Forecasting Methods Your company may wish to try any of the qualitative forecasting methods below if you do not have historical data on your products' sales. Qualitative Method Jury of executive opinion Description The opinions of a small group of high-level managers are pooled and together they estimate demand. The group uses their managerial experience, and in some cases, combines

the results of statistical models. Sales force composite Each salesperson (for example for a territorial coverage) is asked to project their sales. Since the salesperson is the one closest to the marketplace, he has the capacity to know what the customer wants. These projections are then combined at the municipal, provincial and regional levels. A panel of experts is identified where an expert could be a decision maker, an ordinary employee, or an industry expert. Each of them will be asked individually for their estimate of the demand. An iterative process is conducted until the experts have reached a consensus. The customers are asked about their purchasing plans and their projected buying behavior. A large number of respondents is needed here to be able to generalize certain results.

Delphimethod

Consumer market survey

Quantitative Forecasting Methods

There are two forecasting models here (1) the time series model and (2) the causal model. A time series is a s et of evenly spaced numerical data and is o btained by observing responses at regular time periods. In the time series model , the forecast is based only on past values and assumes that factors that influence the past, the present and the future sales of your products will continue. On the other hand, t hecausal model uses a mathematical technique known as the regression analysis that relates a dependent variable (for example, demand) to an independent variable (for example, price, advertisement, etc.) in the form of a linear equation. The time series forecasting methods are described below: Description Time Series Forecasting Method Nave Approach Assumes that demand in the next period is the same as demand in most recent period; demand pattern may not always be that stable For example: If July sales were 50, then Augusts sales will also be 50

Description Time Series Forecasting Method Moving Averages MA is a series of arithmetic means and is used if little or no trend is present in the data; provides an overall impression of data over time (MA) A simple moving average uses average demand for a fixed sequence of periods and is good for stable demand with no pronounced behavioral patterns. Equation:

F 4 = [D 1 + D2 + D3] / 4
F forecast, D Demand, No. Period (see illustrative example simple moving average) A weighted moving average adjusts the moving average method to reflect fluctuations more closely by assigning weights to the most recent data, meaning, that the older data is usually less important. The weights are based on intuition and lie between 0 and 1 for a total of 1.0 Equation: WMA 4 = (W) (D3) + (W) (D2) + (W) (D1) WMA Weighted moving average, W Weight, D Demand, No. Period (see illustrative example weighted moving average) Exponential Smoothing The exponential smoothing is an averaging method that reacts more strongly to recent changes in demand by assigning a smoothing constant to the most recent data more strongly; useful if recent changes in data are the results of actual change (e.g., seasonal pattern) instead of just random fluctuations
F t + 1 = a D t + (1 - a ) F t

Where

F t + 1 = the forecast for the next period D t = actual demand in the present period F t = the previously determined forecast for the present period = a weighting factor referred to as the smoothing constant (see illustrative example exponential smoothing) Time Series Decomposition The time series decomposition adjusts the seasonality by multiplying the normal forecast by a seasonal factor (see illustrative example time series decomposition)

ECONOMIES AND DISECONOMIES OF SCALE IN PRODUCTION AND SUPPLY

In the long run all factors of production are variable; the whole scale of production can change. In this note we look at economies and diseconomies of large scale production. Economies of scale Economies of scale are the cost advantages exploited by expanding the scale of production in the long run. The effect is to reduce long run average costs over a range of output. These lower costs represent an improvement in productive efficiency and can feed through to consumers in lower prices. But economies of scale also give a business a competitive advantage in the market-place. They lead to lower prices and higher profits! The table below shows a simple representation of economies of scale. We make no distinction between fixed and variable costs in the long run because all factors of production can be varied. As long as the long run average total cost (LRAC) is declining, economies of scale are being exploited.
Long Run Output (Units) 1000 2000 5000 10000 20000 50000 100000 500000 Total Costs (s) 12000 20000 45000 80000 144000 330000 640000 3000000 Long Run Average Cost ( per unit) 12 10 9 8 7.2 6.6 6.4 6

Returns to scale and costs in the long run

The table below shows a numerical example of how changes in the scale of production can, if increasing returns to scale are exploited, lead to lower long run average costs.
Factor Inputs Production Costs (K) (La) (L) (Q) (TC) (TC/Q) Capital Land Labour Output Total Cost Average Cost Scale A 5 3 4 100 3256 32.6 Scale B 10 6 8 300 6512 21.7 Scale C 15 9 12 500 9768 19.5 Costs: Assume the cost of each unit of capital = 600, Land = 80 and Labour = 200

Because the % change in output exceeds the % change in factor inputs used, then, although total costs rise, the average cost per unit falls as the business expands from scale A to B to C. Increasing Returns to Scale Much of the new thinking in economics focuses on the increasing returns to scale available to a company growing in size in the long run. If a business can sell more output, it may become progressively easier to sell even more output and reap the benefits of large-scale production. An example of this is the computer software business. The overhead costs of developing new software programs are huge - often running into hundreds of millions of dollars or pounds - but the marginal cost of producing additional copies of the product for sale in the market is close to zero. If a company can establish itself in the market in providing a piece of software, positive feedback from consumers will expand the customer base, raise demand and encourage the firm to increase production. Because the marginal cost of production is so low, the extra output reduces average costs, giving the business the scope to exploit economies of size. Lower costs normally mean higher profits and increasing financial returns for the shareholders of a business. The long run average cost curve The LRAC curve or envelope curve is drawn on the assumption of their being an infinite number of plant sizes hence its smooth appearance. The points of tangency between LRAC and SRAC curves do not occur at the minimum points of the SRAC curves except at the point where the minimum efficient scale (MES) is achieved. If LRAC is falling when output is increasing then the firm is experiencing economies of scale. For example a doubling of factor inputs in the production process might lead to a more than doubling of output leading to increasing returns to scale. Conversely, When LRAC rises, the firm experiences diseconomies of scale, and, If LRAC is constant, then the firm is experiencing constant returns to scale.

There are many different types of economy of scale. Depending on the characteristics of an industry or market, some are more important than others. Internal economies of scale (IEoS) Internal economies of scale arise fromthe long term growth of the firm itself. Examples include: 1. Technical economies of scale: (these relate to aspects of the production process itself):

a. Expensive capital inputs: Large-scale businesses can afford to invest in expensive and specialist machinery. For example, a supermarket might invest in new database technology that improves stock control and reduces transportation and distribution costs. It may not be cost-efficient for a small corner shop to buy this technology. We find that highly expensive fixed units of capital are common in nearly every mass manufacturing production process a good example is investment in robotic technology in producing motor vehicles or in assembling audio-visual equipment. b. Specialization of the workforce: Within larger firms the production process can be split into separate tasks to boost productivity. c. The law of increased dimensions or the container principle. This is linked to the cubic law where doubling the height and width of a tanker or building leads to a more than proportionate increase in the cubic capacity the application of this law opens up the possibility of scale economies in distribution and transport/freight industries and also in travel and leisure sectors. Consider the new generation of super-tankers and the development of enormous passenger aircraft capable of carrying well over 500 passengers on long haul flights. The law of increased dimensions is also important in the energy sectors and in industries such as office rental and warehousing. d. Learning by doing: There is growing evidence that industries learn-by-doing! The average costs of production decline in real terms as a result of production experience as businesses cut waste and find the most productive means of producing output on a bigger scale. Evidence across a wide range of industries into so-called progress ratios, or experience curves or learning curve effects, indicate that unitmanufacturing costs typically fall by between 70% and 90% with each doubling ofcumulative output. Businesses that expand their scale can achieve significant learning economies of scale.

1. Marketing economies of scale and monopsony power: A large firm can spread its advertising and marketing budget over a much greater output and it can also purchase its factor inputs in bulk at discounted prices if it has monopsony (buying) power in the market. A good example would be the ability of the electricity generators to negotiate lower prices when finalizing coal and gas supply contracts. The national food retailers also have significant monopsony power

when purchasing supplies from farmers and wine growers and in completing supply contracts from food processing businesses 2. Managerial economies of scale: This is a form of division of labour. For example, large-scale manufacturers employ specialists to supervise production systems. And better management; increased investment in human resources and the use of specialist equipment, such as networked computers can improve communication, raise productivity and thereby reduce unit costs. 3. Financial economies of scale: Larger firms are usually rated by the financial markets to be more credit worthy and have access to credit facilities with favourable rates of borrowing. In contrast, smaller firms often face higher rates of interest on overdrafts and loans. Businesses quoted on the stock market can normally raise fresh money (extra financial capital) more cheaply through the sale (issue) of equities to the capital market. They are also likely to pay a lower rate of interest on new company bonds because of a better credit rating. 4. Network economies of scale: (Please note: This type of economy of scale is linked more to the growth of demand for a product but it is still worth understanding and applying.) There is growing interest in the concept of a network economy of scale. Some networks and services have huge potential for economies of scale. That is, as they are more widely used (or adopted), they become more valuable to the business that provides them. We can identify networks economies in areas such as online auctions and air transport networks. The marginal cost of adding one more user to the network is close to zero, but the resulting financial benefits may be huge because each new user to the network can then interact, trade with all of the existing members or parts of the network. The rapid expansion of e-commerce is a great example of the exploitation of network economies of scale. EBay is a classic example of exploiting network economies of scale as part of its operations.

The container principle at work- an example of an internal economy of scale Economies of scale the effects on price, output and profits for a profit maximizing firm The next diagram illustrates the effects of economies of scale using cost and revenue curve analysis. Note: To understand the following diagram you will need to have covered the profit maximising rule

for

business

where

marginal

revenue

marginal

cost.

External economies of scale (EEoS) External economies of scale occur outside of a firm but within an industry. Thus, when an industry's scope of operations expand due to for example the creation of a better transportation network, resulting in a decrease in cost for a company working within that industry, external economies of scale have been achieved. Another example is the development of research and development facilities in local universities that several businesses in an area can benefit from. Likewise, the relocation of component suppliers and other support businesses close to the centre of manufacturing are also an external cost saving. Agglomeration economies may also result resulting from the clustering of similar businesses in a distinct geographical location. Economies of Scale The Importance of Market Demand The market structure of an industry is affected in the long term by the nature and extent of the economies of scale available to individual suppliers and also by the size of market demand. In many industries, it is possible for small firms to operate profitably because the cost disadvantage of them doing so is small. Or because product differentiation allows a business to charge a price premium to consumers which more than covers their higher costs.

A good example is the retail market for furniture. The industry has some major players in each of its different segments (e.g. flat-pack and designer furniture) including the Swedish giant IKEA and a number of other mass-volume producers. However, much of the home furniture market remains with smaller-scale suppliers with consumers willing to pay higher prices for bespoke furniture. One reason is that the price elasticity of demand for furniture products is more inelastic than at the volume end of the market. Small-scale furniture manufacturers can exploit the higher level of consumer surplus that is present when demand is estimated to have a low elasticity. Economies of scope Economies of scope occur where it is cheaper to produce a range of products rather than specialize in just a handful of products. A companys management structure, administration systems and marketing departments are capable of carrying out these functions for more than one product. In the publishing industry for example, there might be cost savings to a business from using a team of journalists to produce more than one magazine. Expanding the product range to exploit the value of existing brands is a good way of exploiting economies of scope. There are many good examples of this consider the way in which Cadbury has rapidly widened the product range associated with Dairy Milk chocolate bars in recent years. The minimum efficient scale (MES) The minimum efficient scale (MES) is best defined as the scale of production where the internal economies of scale have been fully exploited. The MES corresponds to the lowest point on the long run average cost curve and is also known as an output range over which a business achieves productive efficiency. The MES is not a single output level more likely we describe the minimum efficient scale as comprising a range of output levels where the firm achieves constant returns to scale and has reached the lowest feasible cost per unit in the long run.

The MES must depend on the nature of costs of production in a particular industry. 1. In industries where the ratio of fixed to variable costs is high, there is scope for reducing average cost by increasing the scale of output. This is likely to result in a concentrated market

structure (e.g. an oligopoly, or perhaps a monopoly) indeed economies of scale may act as an effective barrier to the entry of new firms because existing firms have achieved cost advantages and they then can force prices down in the event of new firms coming in! 2. In contrast, there might be only limited opportunities for scale economies such that the MES turns out to be just a small percentage of market demand. It is likely that the market will be competitive with many suppliers able to achieve the MES. 3. With a natural monopoly, the long run average cost curve falls over a huge range of output, there may be room for perhaps only one or two suppliers to fully exploit the available economies of scale. Diseconomies of scale Diseconomies are the result of decreasing returns to scale. The potential diseconomies of scale a firm may experience relate to: 1. Control monitoring the productivity and the quality of output from thousands of employees in big corporations is imperfect and costly this links to the concept of the principal-agent problem how best can managers assess the performance of their workforce when each of the stakeholders may have a different objective or motivation which can lead to stakeholder conflict? 2. Co-ordination - it can be difficult to co-ordinate complicated production processes across several plants in different locations and countries. Achieving efficient flows of information in large businesses is expensive as is the cost of managing supply contracts with hundreds of suppliers at different points of an industrys supply chain. 3. Co-operation - workers in large firms may feel a sense of alienation and subsequent loss of morale. If they do not consider themselves to be an integral part of the business, their productivity may fall leading to wastage of factor inputs and higher costs. Traditionally this has been seen as a problem experienced by large state sector businesses, examples being the Royal Mail and the Firefighters, the result being a poor and costly industrial relations performance. However, the problem is not concentrated solely in such industries. A good recent example of a bitter dispute was between Gate Gourmet and its workers. Avoiding diseconomies of scale A number of economists are skeptical about diseconomies of scale. They believe that effective management techniques and the appropriate incentives can do much to reduce the risk of rising long run average costs. Here are three reasons to doubt the persistence of diseconomies of scale: 1. Developments in human resource management (HRM) are an attempt to avoid the risks and costs of diseconomies of scale. HRM is a horrible phrase to describe improvements that a business might make to any of its core procedures involving worker recruitment, training, promotion, retention and support of faculty and staff. This becomes critical to a business when the skilled workers it needs are in short supply. Recruitment and retention of the most productive and effective employees makes a sizeable difference to corporate performance in the long run (as does the flexibility to fire those at the opposite extreme!) 2. Likewise, performance-related pay schemes (PRP) can provide appropriate financial incentives for the workforce leading to an improvement in industrial relations and higher productivity. Another aim of PRP is for businesses to reward and hang onto their most efficient workers. 3. Increasingly companies are engaging in out-sourcing of manufacturing and distribution as they seek to supply to ever-distant markets. Out-sourcing is a tried and tested way of reducing costs whilst retaining control over production.