The Managerial Function

The study of managerial economics begins with developing an awareness of the environment within which managerial decisions take place. It is a complex environment. Considerable disagreement exists, for example, as to what managerial goals should even be. In large measure this disagreement serves a great many diverse interests: those of stockholders, employees, the local community, the larger society or nation within which the firm operates and finally, of course, the interests of specific members of the management group itself. Furthermore, management can be a highly diverse group; new managerial trainees may view the firm very differently from middle level executives, who, in turn, may have different perspectives than top-level management.

Ask an executive to define his goals for the firm and a whole set of partially contradictory answers may well be forthcoming. He might, for example, cite alternatively the maximization of profits, or sales or the value of the firm’s assets as his goals; in addition, he might discuss stability of employment, managerial control, employee and community welfare, customer satisfaction, or the minimization of costs. Difficulty in defining goals is not limited to businessmen, however. Bentham’s “greatest good for the greatest number” satisfied countless generations of intellectuals before someone finally realized that it contained one “greatest” too many. Moreover, businessmen may be well aware that their proclaimed goals are less than fully, or even comfortable with one another. Quite properly, they feel often that one of management’s key responsibilities is reconciling or arbitrating divergent views and interests. Consequently, managers, like politicians, may think of their objectives in terms of service to, or tradeoffs between, diverse and sometimes bitterly competitive interests and interested parties.
The absence of a single well-defined objective usually creates analytical problems when a decision is being made. Actions that are rational in terms of one objective (maximizing profits, for example) may be largely inconsistent with another goal (such as maximizing employee welfare). All of this suggests that conflicts are almost bound to arise in the situations modern managers confront. These conflicts must be reconciled somehow—and quite often at the highest levels of management. But no general solution or resolution is now at hand. It is important to recognize, however, that conflicts exist and must be dealt with, for analysis, or choice, presupposes criteria or goals.
Within these pages, we will largely “beg the question” of conflict and conflict resolution. We shall simply assume that managerial goals or objectives can be specified. Indeed, we shall go even further and assume in most instances that a firm’s primary goal is profit maximization, or maximization of the present value of the firm’s expected future earnings. We shall define these terms more precisely in subsequent chapters. At this point, a rough translation for such a statement is that a firm’s primary objective is to maximize the firm’s market value to its owners. We would not want to defend this assumption to the death. But we can point out that managerial economics is built largely on the presumption that profit maximization is the dominant goal of management. And even if it is not, the analytical techniques built on that assumption could still be very helpful in analyzing certain limited problems.
To satisfy his firm’s goals, however these may be specified, a business manager today has at his disposal certain resources in the form of people and capital (plant and money to finance his operations). He also has available a growing body of knowledge regarding utilization of these resources to meet objectives. Basically, this book treats some of the particular analytical tools that make up this body of administrative or managerial knowledge. However, to apply any analytical techniques one needs information. So before discussing the analytical techniques themselves, let us survey a few of the more basic data generated by and available to business managers, specifically those summarizing the financial position and achievements of the firm.

Conclusion
The managerial function, to somewhat oversimplify, consists of utilizing and analyzing information so as to organize resources to serve a specified objective.
Managerial economics conventionally has stressed the concepts underlying these analytical techniques. To the best of its ability, managerial economics has focused on the development of tools for finding an optimal, or best, solution, given some specified objective. Defining that objective may not always be easy, but managerial economics presupposes that somehow or other the objective can be specified. Indeed, managerial economists feel most comfortable if the objective can be defined as profit maximization which, roughly translated, means making the most possible money for the owners of the firm, given the resources available. They recognize that this objective may not be the most socially responsible. Sometimes compromises and other objectives must be entertained. But managerial economists would argue that their analytical techniques, even given these limitations, make a contribution to improving the productivity or efficiency of their enterprises. Furthermore, they would insist, with considerable propriety, that by trying to be efficient, their firm would contribute more to the wealth available to all groups in society than if it pursued other, more ambiguous goals.