Introduction to Economics

• Economics is defined by economists of different generations in

different ways depending upon their perception and subject matter
of it.
• Adam Smith, “the father of economics” (1976): “Economics is an
inquiry into the nature and causes of the wealth of nations”.
• Alfred Marshall (1922), an eminent economist of Neo-classical
era: “Economics is the study of mankind in the ordinary business
of life; it examines that part of individual and social actions which
is most closely connected with the attainment and with the use of
material requisites of well being”.
• The ‘ordinary business’ of mankind is to work and earn their
livelihood by using their resources and to improve the economic
welfare i.e. economic behavior.
• Lionel Robbins (1932) defined economics more specifically:
“Economics is the science which studies human behaviour as
relationships between ends and scarce means, which have
alternatives uses”.
• Human wants are endless but resources are limited and have
alternative uses.
• Economic behaviour is making choice between the endless wants
and between the alternative uses of their limited resources for
meeting maximum number their needs.
• Economics can, thus be defined as a social science that studies
economic behaviour of the people, the individuals, households,
firms, and the government.
• Economic behaviour is essentially the economizing behaviour.
• Economizing behaviour is the effort of the people to derive
maximum gain from the use of their limited resources i.e. land,
labour, capital, time and knowledge etc., which have alternate uses.
• Technically, the term ‘economizing’ means deriving maximum
gains from a given cost and alternatively minimizing cost for a
given gain.
• Economizing behaviour is a natural behaviour.

• People tend to adopt economizing behaviour because

a) Human wants, desires and aspirations are endless.
b) Resources available to the people are limited and scarce.
c) People are by nature economizers.
• Thus, Economics as a social science studies how people allocate
their limited resources to their alternative uses with the objective
of deriving maximum possible gains from the use of their
resources.

• Economics has two major branches:

a) Microeconomics: It is the study of the economizing behaviour of
the individual economic entities i.e. individuals, households, firms,
industries and factory owners.
• It studies how individuals and households with limited income
decide what to consume and how much to consume so that their
total utility is maximised.
• It studies how individuals and households make choice of goods
and services they want to consume and how they allocate their
limited income between the goods and services of their choice to
maximize their total economic welfare.
• It also studies how business firms take decision on what to
produce, for whom to produce, how to produce, how much to
produce, what price to charge, how to fight competition, and how
to promote sales to maximise their profit.
• In addition, it studies how demand for a product and its supply
are affected by the change in price of the product and how a
price of a product is determined in the market.
• Making a reasonable business decision requires a good
knowledge and understanding of market conditions in respect
of demand and supply conditions, cost of production, pricing
system, nature and degree of competition, conditions in the
financial market, and so on.
• This requires an extensive and intensive analysis of the
market.

b) Macroeconomics: It studies the economic phenomena at the

national aggregate level.
• Specifically, Macroeconomics is the study of working and
performance of the economy as a whole.
• It studies what factors and forces determine the level of
national output or national income, rate of economic growth,
employment, price level and economic welfare.
• Besides, it studies how government of a country formulates its
macroeconomic policies i.e. taxation and public expenditure
policies (the fiscal policy), monetary policy, price policy,
employment policy, foreign trade policy, etc. to resolve the
problems of the country.
• It studies how these policies affect the economy.
• From the managerial economics point of view, the study of
macroeconomics gives basis for judging the economic environment
of the country.

Introduction to Managerial Economics/Business Economics

• Managerial economics has emerged as a separate branch of
economics.
• The emergence of managerial economics can be attributed to at
least three factors:
i) Growing complexity of the business environment and decision
making process;
ii) Increasing application of economic logic, concepts, theories and
tools of economic analysis in the process of business decision
making; and
iii) Rapid increase in demand for professionally trained
managerial manpower with good knowledge of economics
 The growing complexity of business world can be attributed
to
a) Rapid growth of large scale industries,
b) Increasing number of business firms,
c) Quick innovation and introduction of new products,
d) Globalisation and growth of multinational companies,
e) Merger and acquisition of business firms, and
f) Large scale diversification of business activities
 These factors have contributed a great deal to the inter-firm,
inter-industry and inter-country business rivalry and
competition, enhancing uncertainty and risk in the business
world.
 Making a reasonable business decision under the condition of
growing complexity of business conditions has inevitably
increased the application of economic concepts, theories and
tools of analysis in business decision making.
 Making a reasonable business decision requires a good
knowledge and comprehensive understanding of the business
environment, production and cost conditions, the nature and
degree of competition, and fundamentals of market
mechanism
 Decision making is the process to select a particular course of
action from among a number of alternatives.
 Clear understanding of the technical and environmental
conditions of decisions making is necessary to take
appropriate business decisions.
 This is the managerial economics and its tools or analysis
which are used in the process of decision-making of business
enterprise.
 A systematic analysis of market conditions and business
environment requires collecting large scale data on demand
and supply conditions, cost of production, pricing system,
morphology of market, the nature and degree of competition
and so on..
 It is in this context of the managerial function that economics
contributes a great deal and managerial economics has
emerged as an important aspect of management studies.
 Management of business and industrial enterprise involve
basic function to achieve the objectives of the organization
through many decisions on a variety of business issues.

Definitions of Business/Managerial Economics

• Managerial economics can be defined as the study of
economic theories, logic, concepts and tools of economic
analysis applied in the process of business decision making.
• In general practice, economic theories and techniques of
economic analysis are applied to diagnose the business
problems and to evaluate alternative options and opportunities
open to the firm for finding an optimum solution to the
problems.
• Mansfield: “Managerial economics is concerned with the
application of economic concepts and economics to the
problem of formulating rational decision making.”
1) Haynes Mote & Paul: “Managerial economics is the economics
applied in decision making. It is a special branch of economics
bridging the gap between abstract theory and managerial
practice.”
2) Spencer & Siegelman: “Business Economics/ Managerial
Economics is the integration of economic theory with business
practice for the purpose of facilitating decision-making and forward
planning by management.”
3) Davis and Chang: “Managerial economics applies the principles
and methods of economics to analyse problems faced by management
of a business, or other types of organizations, and to help find
solutions that advance the best of such organizations.”
4) Douglas: Managerial economics is concerned with the application
of economic principles and methodologies to the decision making
process within the firm or organization. It seeks to establish rules and
principles to facilitate the attainment of the desired goals of
management.”
5) McNair & Meriam: “ Business Economics consists of the use of
economic modes of thought to analyse business situations.”
6) Joel Dean: “Use of economic analysis in formulating policies is
known as Managerial Economics.”
 Thus, Managerial Economics is the process of application of the
principles, techniques and concepts of economics to solve the
managerial problems of a business and industrial enterprise.
 It lies on the borderline between the economics and business
management and serves as a bridge between the 2 disciplines.
 Managerial economics is an integration of economic science with
decision making process of business management.
 The integration of economic science with management has become
inevitable because application of economic theories and analytical
tools make significant contribution to managerial decision making.
 The ultimate objective of functions of management is to ensure
maximum return from the utilization of firm’s resources.
 To this end, managers have to take decisions at each stage of their
functions in view of business issues and implement decisions
effectively to achieve the goals of the organization.
 Almost all managerial decision issues involve economic analysis
and analytical techniques.
• Therefore, economic theories and analytical tools are
applied as a means to find solution to the business issue.
This is how economics gets integrated to managerial
functions and gives emergence of managerial economics.

Fig. Integration of economics with managerial decisions

• Taking decision on all of these business problems economic
consideration.
• All decision problems require the application of relevant economic
concepts, theories and analytical tools to find ways and means to
arrive at an appropriate solution to the problem.
• Application of economic concepts and theories alone is not
sufficient to make a specific decision. It has to be combined with
quantitative methods to find a numerical solution to the decision
problems.
• To make a sound decision, economic concepts and theories have to
be integrated with quantitative methods and models.
• The integration of economic theories and concepts with
quantitative methods creates managerial economics.
• All economic theories are neither applicable nor are applied to
business decision making.
• Most business management issues are of internal nature and a
significant part of microeconomics deals with internal decision
making issues of the business firms- what to produce, how to
produce, how much to produce, and what price to charge etc.
• Most microeconomic theories and analytical tools are generally
applied to managerial decision making.
• Macroeconomics deals with environmental issues- how is the
economic condition of the country, what is likely trend, what are
government’s economic policies, how government policies might
affect business environment of the country, what kind of business
policy will be required, and so on.
Contributions of Economics to Managerial decisions
• The primary function of managers is to take appropriate decisions
and implement them effectively to achieve the objective of the
organization to maximum possible extent, given the resources.
• Application of economics contributes a great deal to managerial
decision-making as it provides guidance in finding an appropriate
solution to the business problem.
• Economic theories, concepts and tools of analysis are applied as
roadmap to find solution to business problems.
• Application of economic theories and tools of analysis makes
significant contribution to the process of business decision making
in many ways.
• According to Baumol, a Nobel laureate in Economics, economic
theory contributes to business decision making in three important
ways:
1) Providing framework for building analytical models which can
help recognize the structure of managerial problem, determine the
important factors to be managed, and eliminate the minor factors
that might obstruct decision making.
2) Economics provides ‘a set of analytical methods’ which may no
be directly applicable to analyse specific business problems but
they do widen the scope of business analysis and enhance the
analytical capability of the business analyst in understanding the
nature of business problems.
3) Various economic terms are used in common parlance, which are
not applicable to business analysis and decision making.
Economic theory offers clarity to various economic concepts used
in business analysis, which enables the managers to avoid
conceptual pitfalls.
• Economics provides models, tools and technique to predict the
future course of market conditions, ways and means to assess the
risk, and thereby, helps in business decision making.
Characteristics of Managerial Economics
a) Microeconomics
• it is concerned with smaller units of the economy.
• It studies the problems and principles of an individual firm or
individual industry.
• It assists the management in forecasting and evaluating the
trends of market.
b) Normative Economics
• It is concerned with what management should do under
particular circumstances.
• It determines the goals of the enterprise and develops the ways
to achieve these goals.
• It deals with future planning, policy-making, decision-making
and making full utilization of the available resources of the
enterprise.
c) Pragmatic
• It tries to solve managerial problems in their day-to-day
functioning and avoids difficult issues of economic theory.
d) Uses Theory of Firm
• It uses economic concepts and principles which are known as
the Theory of Firm or Economics of the Firm.
• Its scope is narrower than of Pure Economic Theory.
e) Takes the Help of Macroeconomics
• It takes the help of macroeconomics because it needs
understanding of the circumstances and environment in which
an individual firm and an industry has to work.
• Issues of Macroeconomics whose knowledge is necessary for
the successful management of a firm or an industry are-
Business cycles, Taxation policies, Industrial Policy of the
Government, Price and Distribution Policies, Wage Policies
and Anti-Monopoly Policies etc.
f) Aims at helping the Management
• It aims at helping the management in taking correct decisions
and preparing plans and policies for future.
Scope of Managerial Economics
• The scope of managerial economics is comprised of economic
concepts, theories and tools of analysis that can be applied in
the process of business decision making to analyse business
problems, to evaluate business options, to assess the business
prospects, with the purpose of finding appropriate solution to
business problems and formulating business policies for
future.
• Both microeconomics and macroeconomics are applied to
business analysis and business decision making depending on
the nature of the issue to be examined.
• Managerial decision issues can be divided broadly under two
broad categories:
a) Internal managerial issues: Microeconomic theories and
analytical tools are applied to internal managerial issues.
b) External environmental issues: Macroeconomic theories
and analytical techniques are applied to assess the external
and environmental issues.
A) Microeconomic Theories applied to Internal Issues: Internal
managerial issues refer to decision-making issues arising in the
management of the firm.
• These issues includes problems that arise in operating the business
organization. All such managerial issues fall within the purview
and control of the managers.
• Some of the basic internal management issues are
a) What to produce- choice of the business
b) How much to produce- determining the size of the firm
c) How to produce choice of efficient and affordable technology
d) How to produce the product- determining the price of the product
e) How to promote the sale of the product
f) How to face price competition from the competing firms
g) How to enlarge the scale of production- planning new investment
h) How to manage profit and capital
• The economic theories and tools of analysis that provide a logical
basis and ways and means to find a reasonable solution to business
problems constitute the microeconomic scope of managerial
economics.
• The main microeconomic theories that fall within the scope of
managerial economics are:
1) Theory of consumer demand: According to Spencer and
Siegelman, “A business firm is an economic organization which
transforms productivity sources into goods that are to be sold in a
market”.
a) Demand analysis: It is necessary for demand forecasting which is
an important part of managerial decision-making because an estimate
of future sales is essential before preparing production schedule and
employing productive resources.
• It helps the management in identifying factors that influence the
demand for the products of a firm.
• Demand analysis and forecasting is thus, essential for business
planning.
b) Demand theory: It is the study of behaviour of consumers. Theory
of demand analyses the decision making behaviour of the consumers.
The decision making behaviour of the consumer relates to answers to
such questions such as,
• how consumers decide what to consume,
• how much to consume,
• how much to buy a commodity,
• Why do the consumer buy a particular commodity?
• how consumers react to change in price of the products they
consume and price of their substitutes,
• What is the effect of the income, habit, and taste of consumers on
the demand of a commodity?
• What are the factors influencing the demand of a commodity?
• Why and when do the consumers stop to consume a commodity?
etc.
• Demand theory combined with quantitative tools helps in assessing
the total demand for a product at different prices.
• Thus, the consumer demand theory helps in deciding ‘what to
produce’.

2) Theory of Production: It analyses the nature of input-output

relationship. It explains how output changes with change in inputs-
labour or capital, given the technology.
• It provides guidance in the choice of technology and in maximizing
the output from the resources of the firm.
• Production and cost analysis is also important for the smooth
functioning of production process and project planning.
• Certain amount of goods has to be produced to earn a certain
level of profit.
• To obtain such production, some costs have to be incurred.
• The problem before management is to determine the level of
production at which the average cost of production may be
minimum.
• Production theory helps in determining the size of firm and
the level of production.
• It explains how average and marginal costs change with the
change in production.
• Under what conditions do the costs increase or decrease? How
does total production increase when input of one of the factors
of production is increased keeping other factors constant?
How can one factor of production substitute another when all
the factors are increased simultaneously? How can optimum
size of production be obtained?
• Thus, the knowledge and application of the theory of production
helps in determining the optimum level of production, the size of
the firm, and the employment of labour and capital.
c) Theory of cost: It analyses the nature and pattern of change in cost
of production with change in output. Specifically, it reveals the
change in marginal and average cost of production.
• Application of cost theory helps in knowing the cost behaviour
with increase in production and in determining the output that
minimize the average cost production.
• In view of profit-maximization objective, this theory helps in
determining the profit maximising output, give the price of the
product.
d) Theory of exchange/price determination: It offers an analysis of
how price is determined under different kinds of market conditions.
• Market conditions are determined on the basis of degree of
competition between the firms of the industry- perfect competition,
monopolistic competition, oligopoly and monopoly.
• Price policy affects the demand of products. This theory is helpful
in determining price policy of the firm.
• The success of a business and industrial firm depends upon the
accuracy and correctness of price decisions taken by it.
• The price determination combined with the cost theory helps firms
in determining the profit maximising price of their product.
e) Theory of profit: Every business and industrial enterprise aims at
earning maximum profit. This theory analyses how to earn a
maximum profit for a firm.
• Profit is the difference between total revenue and total cost.
• Profit is uncertain because of the factors such as, demand of the
product, prices of factors of production, nature and degree of
competition, and price behaviour under changing competition.
• Profit planning and profit management are necessary for improving
profit earning efficiency of the firm.
• Profit management requires that the most efficient techniques
should be used for predicting future. The possibility of risks should
be minimised as far as possible.
f) Theory of capital and investment: Capital is the foundation of
business firms. An efficient management of capital is one of the most
important functions of the management as it is the determinant for the
success of the firm.
• The major issues in capital management are: i) the choice of
investment avenues, ii) assessing the efficiency and productivity of
capital investment avenues, iii) minimizing the possibility of under
capitalization or over capitalization, and iv) making the choice of
most efficient investment project.
• Capital is also scarce and it should be allocated in most efficient
manner.
• The theory of capital contributes a great deal in making appropriate
investment decisions.

B) Macroeconomic Applied to Business Decision (External

environmental issues):
• Macroeconomics is the study of economic conditions of the
economy as a whole whereas a firm is a smaller unit of the
economy.
• As such macroeconomic theories are not directly applicable to
managerial decisions.
• Changing economic conditions change the economic environment
of the country, thereby business environment and business
prospect.
• Weihrich and Koontz pointed out that “Managers cannot perform
their task well unless they have an understanding of, and are
responsive to the many elements of the external environment-
political, economic, social, technological and ethical factors that
affect the areas of operations.”
• While making decisions, managers have to take account the
economic environment of the country.
• The factors which determine the economic environment of a
country are
(i) the general trend in national income (GDP), saving and
investment, prices, employment etc.,
(ii) the structure and role of the financial institutions,
(iii) the level and general trend in foreign trade,
(iv) economic policies of the government like industrial policy, trade
and fiscal policy, taxation policy, price and labour policy etc.
(v) socio-economic organizations like trade unions, consumer
associations, and
(vi) political system/environment of the country
• It is far beyond the powers of a single firm to determine the course
of economic, political and social conditions of the country.
• As management of a firm cannot have any control over these
factors, it should adjust the plans, policies and programmes of the
firm according to these factors to offset the adverse effects on the
firm.
• It is therefore, essential for business decision makers to take in
view the present and future economic environment of the country.

Nature of Managerial Economics

1) It is Science: Science is the systematic knowledge which
establishes relationship between causes and effects of an event.
• Managerial economics is a science because it establishes
relationship between causes and effects.
• It studies the effects of various marketing factors and forces on the
demand of a particular product.
• It studies the effects and implications of the plans, policies and
programmes of a firm on its sales and profit.
2) It is an Art: Art is a systematic knowledge which develops the
best way of doing things and the ways for the attainment of
particular object.
• Managerial economics may be called an art because it helps
management in the best and most efficient utilisation of
limited resources of the firm and in selecting the best
alternative from among different alternatives.
3) It is Microeconomics: Microeconomics is concerned with
smaller parts of the economy.
• It studies the trends, conditions, and problems of a particular
business firm.
• It is microeconomics because it is concerned with the
problems of an individual business or industrial firm.
4) It is a Normative Science: Normative science studies what
should be done.
• Managerial economics is a normative science because it
suggests what should be done under particular circumstances
to achieve the goals of the enterprise and to develop the ways
to do so.
5) It is pragmatic: While pure micro economic theory analyses on the
certain basis of certain exceptions, pragmatic theory of
microeconomics avoids difficult issues of economic theory.
• Managerial economics is pragmatic as it tries to solve the
managerial problems in their day-to-day functioning.

Managerial Economics and Other Disciplines

• There are certain other disciplines which contribute to quantitative
economic analysis of business problems and hence to business
decision making.
• Managerial economics includes the study of the disciplines that
contribute to managerial decisions.
• The disciplines on which economics draws heavily are
Macroeconomics, Mathematical tools, Statistics, Operations
analysis, Management theory and Accountancy.
a) Macroeconomics: Macroeconomics is the study of economic
conditions of the economy as a whole whereas a firm is a smaller
unit of the economy.
• The principles of macroeconomics provide a base for the solution
of managerial problems of a firm.
• Managerial economics is the use of methods and techniques of
economics in the field of management.
• It is a special branch of economics which bridges the gap between
economic theory and managerial practice.
• Following policies and laws of macroeconomics provide an
important base for the solution of managerial problems of a firm-
law of demand, law of supply, the laws of returns, concept of
marginal and average cost, the concept of marginal and average
revenue, taxation policies, policy and foreign trade, etc.
• Changing economic conditions change the economic environment
of the country, thereby business environment and business
prospect.
• As management of a firm cannot have any control over these
factors, it should adjust the plans, policies and programmes of the
firm according to these factors to offset the adverse effects on the
firm.
• It is therefore, essential for business decision makers to take in
view the present and future economic environment of the country.
b) Mathematics: Business managers deal primarily with
variables that are essentially quantitative in nature e.g. demand,
supply, price, cost, product, capital, wages, interest rate,
inventories, etc.
• These variables are interrelated directly or indirectly.
• The use of mathematical tools in the analysis of economic
variables provides not only clarity of concepts, but also a
logical and systematic framework for measuring the
quantitative relationships between the relevant variables.
• More importantly, mathematical tools are widely used in
‘model’ building, for exploring the relationship between
related economic variables.
• Mathematical logic and tools are, therefore, a great aid to
economic analysis.
• A major problem that managers face is how to minimize cost,
maximize profit or optimize sales under certain constraints.
• Mathematical concepts and techniques are extensively used in
economic analysis with a view to finding answers to the
questions.
• Besides, mathematical tools and optimization techniques, relatively
more sophisticated and advanced, designed during WWII have
found wide ranging application to business management, viz.,
linear programming, inventory models and game theory.
• A working knowledge of these techniques and other mathematical
tools is essential for managers.

c) Statistics: Like mathematical tools, statistical tools provide a great

aid in business decision making.
• Statistical techniques are used in collecting, processing and
analysing business data, testing the validity of economic laws with
the real life economic data before they are applied to business
analysis.
• A good deal of business decisions are based on probable economic
events.
• The statistical tools e.g., theory of probability, and forecasting
techniques help decision makers in predicting the future course of
economic events and probable outcome of their business decisions.
• Regression technique is a widely used statistical method to
measure the relationship between the related variables.
• The statistical tools and techniques are applied to analyse the
business data and to forecast economic variables.
• The mathematical and statistical techniques are the tools for
decision makers that solve the complex problems of business.
d) Operations Research (OR): Operations Research (OR) is an inter-
disciplinary technique of finding solutions to managerial problems.
• It is concerned with model building, minimizing of costs,
maximization of profits, and optimization.
• It combines economics, mathematics and statistics to build models
for solving specific business problems and to find a quantitative
solution thereto.
• Linear programming and goal programming are two widely used
OR techniques in business decision making.
• It is helpful to business firm in studying the inter-relationship and
relative efficiencies of the various aspects of business such as,
sales, production and financing.
• As applied to a business firm, its primary purpose is to find the
optimum combination of various factors to achieve the objectives
of maximisation of profit, minimization of cost, saving time or any
other object.
e) Accounting: Accounting is concerned with recording and analysing
the financial activities of a business firm.
• It provides the data required by a managerial economist for the
purpose of decision making.
• Funds Flow statement provides the information how the funds have
been generated by a firm during a certain period and how these
funds have been applied in the firm.
• Profit & Loss Account of a firm indicates the expenses and
incomes of the firm during a particular period.
• Management accounting provides the sort of data which managers
need in solving business problems.
Managerial Economist & Its Roles & Responsibilities
• Managerial economist is the person responsible for assisting top
management in arriving at sound business decisions.
• He is also known as a Business Economist and an Economic
Advisor.
• He helps the top management in analysing all the internal and
external factors related to business firm so that sound business
decisions may be taken.
• Its importance is increasing day by day in business and
industrial firms due to his ability and efficiency in arriving at
sound decisions and in solving the complicated managerial
problems.
Roles/Functions
• A Managerial Economist plays key roles in the process of the
firm by assisting management in using the specialised and
complicated techniques and methods which are required to
make the process of decision making and planning easy.
• All the large business and industrial enterprises in are
employing Managerial Economist who studies, and analyses
the internal and external factors.
• The Managerial Economist advises management related to
internal and external factors of a business.
• According to K.J.W. Alexander and G. Kemp Alexander, the
functions of a Managerial Economist are:
(a) Sales forecasting, (b) Individual market research, (c)
Economic analysis of competing companies, (d) Pricing policy
of industry, (e) Capital projects, (f) Production programmes,
(g) Security/investment analysis and forecasts, (h) Advice on trade
and public relations, (i) Advice on primary commodities, (j) Advice
on foreign exchange, (k) Economic analysis of agriculture, (l)
Analysis of underdeveloped economies, (m) Environmental
forecasting
Responsibilities
1) To measure the increase in the earning capacity of a firm: A
Managerial Economist has a great responsibility to achieve an object
of earning maximum profit. If he does not do this properly, the
capacity of the firm cannot be utilised fully and the firm cannot
achieve its objects. Therefore, he should continue his efforts in
increasing the earning capacity of his firm.
2) To make successful forecasting: Success of a business firm is
largely determined by the degree of accuracy and correctness of the
forecasts made Managerial Economist by analysing all the internal
and external factors and by assessing their impact on profitability and
working of the firm.
• He must try to minimise the uncertainties of future. If he finds an
error in his forecasts, he should alert the management at the earliest
so that necessary changes may be made in plans, policies and
programmes.
3) To contact the sources of Economic Information and Experts: A
Managerial Economist is responsible for providing all the relevant
economic information to the management so that the plans and
programmes of the firm may be chalked out after taking these into
consideration.
• He should establish and maintain contacts with all the possible
sources from where he can collect the information relevant for his
firm.
• He should take the help of experts in analysing such information so
that the information may be more accurate and useful.
• He should join all the academic and professional associations from
where he can get the information useful for his firm.
4) To keep the management informed of all possible economic trends:
A Managerial Economist should keep himself in touch with the latest
developments of national economy and business environment so that
he can keep management informed with these developments and
expected trends of the economy.
5) To achieve respectable status in the firm: Managerial Economist
should earn respectable status in the firm performing his duties and
responsibilities sincerely and seriously.
• He should be helpful to the management in successful decision
making.
• He should offer himself to take up special assignment entrusted to
him by the management.
• He should explain his findings to the management in a simple and
easy language.
6) To function sincerely: The Managerial Economist should perform
his functions most sincerely.
Business Firm & Its Objectives
• According to Prof. Allen, “A business firm is a legal form of the
ownership of assets and contractual relations which is engaged in
the production and sale of goods and services with a view to
increase the worth of properties”.
• A business firm is a technical economic unit engaged in the
production of/or purchase and sale of goods and services.
• It may be organised as sole trade or partnership firm or joint stock
company or a corporation.
• The objective of business firm is to provide goods and services to
the people.
• Thus, a business firm is an economic unit engaged in the
production or distribution or both the production and distribution of
goods and services for the purpose of earning profits.
Objectives of Business Firm
1) To maximise total profits: All the efforts of a firm are directed to
earn maximum profits. A firm can earn maximum profits at the point
where Marginal Cost (MC) and Marginal Revenue (MR) are equal.
• Marginal Cost means the cost incurred on the production of an
additional unit of a commodity while Marginal Revenue is the
revenue received from the sale of such additional unit.
2) To maximise total sales revenue: The attainment of maximum sales
revenue means to obtain the maximum amount of revenue through
sales.
• A firm can obtain maximum sales revenue at the point when its
Marginal Revenue is zero. Beyond this point, the firm will be
suffering a loss.
3) To minimise cost: In order to minimise the cost of production of
producing goods and services so that these goods and services may be
provided to the consumers at minimum possible price, the business
firm makes continuous use of various techniques of cost control.
4) To establish long-run survival: A firm having the aim of long run
survival is always very cautious and its all decisions are safety
oriented.
• Such firms do not like to reap larger profits in short-run but prefer
lower profits in the long-run.
• For long-run survival, every firm makes best efforts to provide best
qualities of goods and services to its consumers at reasonable
prices.
• They change their marketing strategies and marketing approach
from time to time so that they maintain the demand of their
products in the market.
5) To achieve financial soundness: No business firm can continue for
long time unless it is financially sound.
• As banks and financial institutions stress upon financial soundness
of the firms to grant them any sort of financial assistance, every
business firm takes due care and precaution in the use of funds.

6) To achieve economic self-sufficiency: In order to be successful in

achieving its objects, a firm should be self-dependent in economic
affairs.
• As complete self-dependence is not possible, dependence on
external financial sources should be minimum.
• Therefore, all the business firms try to re-invest major part of
their profits in their business.
7) To provide maximum welfare and satisfaction to employees: If
the employees of a firm are satisfied, they will contribute their
best efforts to achieve the objectives of the firm.
• Firms provide maximum facilities to their employees so that
they may get maximum job satisfaction and their efficiency
and ability may be increased.
• They spend huge amount on the welfare of their employees
including the facilities of proper working conditions, canteen,
education training, incentive wage system, bonus etc.
• This is very helpful in the achievement of pre-determined
objectives of the firm.
8) To establish business empire: In order to dominate the whole
market, some business firms provide goods and services to
consumers at the lowest possible price besides best after-sales-
services to the consumers.
• These firms aim at selling product to the maximum
number of customers so that they can capture the
market and establish their business empire.

END OF CHAPTER ONE