Public policy is useful to politicians and political parties | Utility of public policy in business decision making | Utility to administrative officials

The utility of public policy in different sectors / the utility of public policy in business decision-making / the utility of public policy is different for them which is analyzed as follows:

1) Utility to political parties and politicians

The political parties and politicians are directly or indirectly involve for the development of the nation. The state holders or leaders are the main agents for driving the nation. The knowledge of public policy is importance to the political parties and politicians because they may be in power and opposition. The politicians who are in power holders have to implement policies and modify the existing policies. They have to formulate appropriate policies and analysis to the effects of those policies. If the political parties or politicians are in opposition, they have to get knowledge about the public policy. The opposition leaders should have to suggest and give guidelines to the statesmen. The opposition political parties should also check and warn to the government whether the government goes according to rules and order or not. The knowledge of public policy gives appropriate guidelines to the statesmen and provides appropriate guidelines to the statesmen and provides appropriate ideas to the opposition leaders.

2) Utility to administrative officials

The knowledge of public policy is important to all the administrative officials such as senior level officials and junior officials. The policies are formulated by political leaders and executed by the administrative officials. The administrative officials need comparative knowledge about public policy because they are the means of implementation of the government policies. The existing policies should be effectively implemented according to the development objectives of the government for the development of economy. If the administrative officials do not have good knowledge about public policies, the policies may be used inappropriately and the results will be dissatisfactory.

3) Utility to general people

People are the safeguard to the government and they also make aware of the government. The government conducts various public welfare programs for the people and it promotes and regulates the business sectors. People pay different amount of payments in terms of tax, VAT and other expenses to the government. Various government activities adversely affect to the people. People should also know about the public policy whether they are properly lunched or not, whether the government activities are favor for the public welfare or not. It is also necessary to know the appropriateness of the government policies. Hence, the knowledge of public policy is important to the general people to warn and check the government.

4) Utility of public policy in business decision-making

Public policy affects the life of business like the life of an individual from cradle to grade. For example, a business firm should be registered in registrar’s office according to rule for the establishment (birth). After that license should be received from the concerned department (for example, department of industry) according to rule. Likewise, it should be registered in tax department etc. Similarly, even for the dissolution (death) of a business firm its owners should be according to the rule.

A business firm should make decision taking into consideration the existing political, economic and social environment. The profit-maximization or cost-minimization objective of such firm is remarkably affected by public policy. The business cannot breathe by ignoring public policy. Milton H. Spencer has rightly remarked, “For management, decision-making does not take place in an economic vacuum, but rather in a socio-political environment that must be recognized as a limiting factor in the process of adjusting to uncertainty.”

Since business decisions are affected by social, political environment sometime, it is not enough that decisions and plans being guided by economic theory. It is also necessary to modify in a different way than that.

The government on the one hand, imposes different types of tax and applies rules like grant, patent, antitrust policy, and price control to affect business activities. These policies of the government have great effect on output, pricing, profit rate, investment rate of the firm. From it, it is also obvious that the reaction of the profit-maximizing manager is different from revenue-maximizing manager.

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Various uses of income and cross elasticity of demand in business decision-making

The use of income elasticity of demand for a firm’s is to determine the growth opportunities of the firm, useful in targeting marketing efforts, success at different stages of business cycles. Following are the theoretical and practical importance:

1. Estimate the effects of changes in economic activity

During the periods of expansion, incomes are rising and firms selling luxury items that the demand for their products will increase at a faster rate than the rate of income growth.

During a recession, demand may decrease rapidly. Knowledge of income elasticity can be useful in targeting marketing efforts. If per capita or household income is found to be an important determinant of the demand for a particular product, this can affect the location and nature of sales outlets. It can also have an impact on advertising and other promotional activities.

2. Uses in capitalist economics

The concept of income elasticity of demand takes an important place among the analytical tools applied for business research. This concept is of income sensitivity of consumption expenditure. Income sensitivity has a co-efficient which measures the percentage increase in rupee expenditure associated with one percent change in disposable income in the same period. The income sensitivity estimates are of great use in business forecasting.

3. Planned developing economies

In the developing countries like Nepal, as levels of living rise, demand for some commodities is expected to go up much faster than the demand for others. In the earlier stages, income elasticity of demand for food tends to be high. As income rises, there is a shortage of food, which not satisfied, leads to inflation. If the planners know income elasticity of demand for goods and services of general use, steps can be taken to balance demand and supply by using appropriate method.

4. Marketing activity and making market strategy

The concept of income elasticity of demand has important role in marketing activities of the firm. People demand goods and services on the basis of their income level. The level of income of the people affects the location and nature of sales. The high-income elasticity of demand indicates the significant promotional efforts in the business.

It is also useful in making marketing strategy. The business firm should concentrate its marketing efforts in media that reaches to the high-income group of the people.

Importance of Cross Elasticity of Demand

The concept of cross-elasticity is useful for the following main purposes:

1. Useful in inter-commodity relations: It is important for the firm to be awared of how the demand for its products likely to respond to changes in the prices of other goods; this information is necessary for formulating the firm’s own pricing policy and for analyzing the risk associated with various products. This is particularly important for the firms with extensive product lines, where significant substitution or complementary interrelationships exists between the various products. The concept of cross elasticity of demand is very useful in handling the inter-commodity relations.
2. Classification of markets and market structure: The classification of markets of commodities and services is mainly based on the concept of cross elasticity of demand of one seller in relation to the other. It is used in industrial organization to measure the interrelationships among industries. The cross price elasticity between the firm’s product and products in related industries is large and positive, the firm, even though it may be a monopolist in a narrow sense, will not be able to raise its prices without losing sales to other firms in related industries.
3. Importance for anti-monopoly legislation: The concept of cross elasticity of demand has been of practical use in sponsoring anti-monopoly legislation. When a particular seller tries to estimate or buy up substitutes of his own product through unfair means, there is a case of monopoly practice against him. But, it is only of drawing a clear-cut line between fair competition and monopoly, however, it is basic concept of doing so.

  SOME RELATED LINKS:   

• Cross Elasticity of Demand: Proportionate change in demand with change in price

• Uses of Price Elasticity of Demand in Managerial Decision-making

• Elasticity of Demand: Types of Price Elasticity of Demand

• Income Elasticity of Demand: Proportionate change in quantity demanded per change in income

• Measurement of Price Elasticity: Total Outlay Method

Uses / Significance of Managerial Economics in Business Decision Making

Management is concerned with decision-making. Decision-making needs a balance between simplification of analysis to be manageable and complications for handling a variety of factors and objectives. Managerial economics accomplished several objectives. Moreover, it also needs common sense and good judgment. Managerial economics helps the decision-making process in the following ways:

1. Managerial economics presents those aspects of traditional economics, which are relevant for business decision-making in real life. It culls from economic theory the concepts, principles and techniques of analysis, which have a bearing on the decision-making process. These are, if necessary, adopted or modified with a view to enable the manager take better decisions. Thus, managerial economics accomplished the objective of building a suitable took kit from traditional economics.
2. Managerial economics also incorporates useful ideas from other disciplines such as psychology, sociology, etc; if they are found relevant for decision-making. In fact, managerial economics takes the aid of other academic disciplines having a bearing upon the business decisions of a manager in view of the various explicit and implicit constraints subject to which resource allocation is to be optimized.
3. Managerial economics helps in reaching a variety of business decisions in a complicated environment such as what products and services should be produced? What inputs and production techniques should be used? How much output should be produced and at what prices it should be sold? What are the best sizes and locations of new plants? When should equipment be replaced? And how should the available capital be allocated?
4. Managerial economics makes a manager a more competent model builder. Thus, he can capture the essential relationship, which characterizes a situation while leaving out the cluttering details and peripheral relationships.
5. At the level of the firm, where for various functional areas, functional specialists or functional departments exist, such as finance, marketing, personal, production, etc. Managerial economics serves as an integrating agent by coordinating the different areas and bringing to bear on the decisions of each department or specialist the implications pertaining to other functional areas. It thus, enables business decision-making not in watertight compartments but in an integrated perspective, the significance of which lies in the fact that the functional departments or specialists often enjoy considerable autonomy and achieve conflicting goals.
6. Managerial economics takes cognizance of the interaction between the firm and society and accomplishes the key role of business as an agent in the attainment of social and economic welfare. It has come to be raised that business, apart from its obligations to shareholders, has certain social obligations. Managerial economics focuses attention on those social obligations as constraints subject to which business decisions are to be taken. It serves as an instrument in furthering the economic welfare of the society through socially oriented business decisions.
7. Managerial economics is helpful in making decisions such as the following: What should be the product-mix? Which is the production technique and the input-mix that is least costly? What should be the level of output and price for the product? How to take investment decisions? How much should the firm advertise and how to allocate an advertisement fund between different media? It has to concede that good decisions require ability to analyze problems logically and clearly.

In summary, the usefulness of managerial economics lies in borrowing and adopting the took-kit from economic theory, incorporating relevant ideas from other disciplines to achieve better business decisions, serving a catalytic agent in the course of decision-making by different functional departments at the firm’s level and finally accomplishing a social purpose through orienting business decisions towards social obligations.

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Related Topics on Managerial Economics:

• Meaning of Managerial Economics
• Characteristics / Features of Managerial Economics
• Scope of Managerial Economics
• Relationship of Managerial Economics with Traditional Economics
• Significance of Managerial Economics in Business Decision Making

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Scope of Managerial Economics | Demand Analysis and Forecasting | Cost and Production Analysis | Pricing Decisions and Techniques | Profit and Capital Management | Objective of Business Firm

The scope of managerial economics means the fields of study in which managerial economics cover. Hence, scope of managerial economics includes the subject matter of managerial economics and relationship of managerial economics with other subjects also fall under the scope of managerial economics.

Managerial economics has a close connection with economic theory, operations research, statistics, mathematics and the theory of decision making. Managerial economics also draws together and relates ideas from various functional areas of management such as production, marketing, finance and accounting, project management, etc. Managerial economics is concerned with the following aspects which constitute its subject matter.

1. Demand Analysis and Forecasting: Demand analysis theory can be 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 before making production schedules for employing resources. The forecast helps the manager in keeping and strengthening the market and increasing profits. Demand analysis and forecasting both are very much essential for business planning and take an important place in managerial economics. Under this topic; determinants of demand, types of demand, elasticity of demand, various statistical and non-statistical methods of demand forecasting are included.
2. Cost and Production Analysis: The cost estimates are helpful for managerial economics. The cost estimate is essential for planning aims. The factors determining costs are not always known or controllable which gives rise to cost uncertainty. 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 (limited) and have alternative uses. The factors of productions may be allocated in a particular way to get maximum output. Due to this, production analysis is also important in managerial economics. The major topics of study under cost and production analysis are concepts of cost and classification, production function, least-cost combination of inputs, factor of 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 suitable pricing decisions. So, price is the source of the revenue, the success of a firm depends on the correctness of the pricing decisions. The main topics included under it are: Price determination under different market structure, pricing objectives, pricing methods, price discrimination, price of joint products.
4. Profit and Capital Management: Profit provides the index of success of a business firm. So, the business firms are organized for making profits. Profits analysis is difficult since the knowledge about uncertain future but uncertainty expectations are not always realized which makes the profit planning and measurement difficult that is covered by managerial economics. The important aspects covered under the topics are nature, theories and measurement of profit, profit policies and techniques of profit planning. There is one of difficult problems of a business manager is relating to firm’s capital investments. Hence, capital management is required which in turn, needs considerable time and labor. Capital management means planning and control of capital expenditures. The main aspects covered are: Cost of capital, types of investment decisions, and evaluation of selections of projects.
5. Objective of Business Firm: A firm should fix its objective at the initiation of the business. The objective may be many ranging from profit maximization to sales maximization to utility maximization to satisfying. It is assumed that manager consistently makes decisions in order to maximize profit. Though a firm may have only one objective at a time. The objective should guide a firm in decisions regarding its prices and outputs.

Traditionally, managerial economics drew heavily upon economic analysis for its decision-making process. But lately, the development of mathematical and statistical techniques for analyzing situations faced by managerial economists have also prompted their use in the decision-making process. Managerial economics is also concentrated on integration of managerial economics and operation research. Hence, many mathematical, statistical as well as other techniques are also regarded as a part of a managerial economics.

  SOME RELATED LINKS  

• Meaning of Managerial Economics

• Characteristics/ Features of Managerial Economics

• Uses / Significance of Managerial Economics in Business Decision Making

• Factors Influencing Managerial Decisions | Managerial Business Decision Making

• Value of Maximization Theory of Firm | Superiority of Maximization Theory

• Difference between Consumer Buying Behavior and Organizational Buying Behavior