Application of Managerial Economics in Decision Making

1. 0 Introduction7 1. 1 Definition of managerial economics7 1. 2 Choice and opportunity cost9 2. 0 Basic concerns of economics9 3. 0. 0 Theories of economics12 3. 1. 0 The theory of demand13 3. 1. 1 Tastes14 3. 1. 2 Number of buyers14 3. 1. 3 Income14 3. 1. 5 Expectations15 3. 2 The theory of supply16 3. 3 The theory of production16 3. 4 The theory of price( in government)17 3. 5 The theory of consumer behaviour17 3. 5. 1 Rational behaviour17 3. 5. 2 Preferences17 3. 5. 3 Budget constraint18 3. 5. 4 Prices18 4. 0 Managerial Economics and Economic Theories18 5. 0 General overview of the office of the Attorney General19 6. Decision-making centres under the Office of the Attorney General20 6. 1 Decisions in the Office of the Attorney General:21 6. 2 The role of Public Procurement Act, 2007 in decision-making and application economic theories23 6. 3 Other decisions25 6. 3. 1 Employment decisions25 6. 3. 2 Training decisions25 6. 4 Economic decisions of the Office of the Attorney General and budget constraint25 7. 0 Conclusion26 References28 TOPIC:APPLICATION OF MANAGERIAL ECONOMICS IN DECISION MAKING Introduction This paper attempt to discuss the application of managerial economics in decision-making in an organisation of my workplace.
In discussing managerial economics a link has been made to some economic theories and their influence in decision making. The organisation selected is the Office of the Attorney General. The first part of the paper discusses; what managerial economics is and how it relates to economics; the concept of opportunity cost and its application; what are the concerns of economics and how they have been responded. The second part of this paper discusses theories of economics which the office of the Attorney General apply directly or indirectly in its decisions.
The theories which have been looked at are: theory of demand, theory of supply, theory of consumer behaviour, production theory and price theory. It is in this part where a brief discussion on the relationship of economic theories and managerial economics is made, emphasis being made on the general decision-making process. The third and fourth part of this paper discuss the general overview of the office of the Attorney General, its statutory functions, various decisions made under the office and decision criterion. Also the role of Public Procurement Act, 2007 in procurement decisions is briefly looked into.

The last part of the paper discusses the applicability of economic theories in decision making under the conditions of budget constraints and global financial and economic crisis. 1. 1 Definition of managerial economics Managerial economics has several definition as defined by different economists and authors. Thomas J. Webster defines managerial economics as the application of economic theory and quantitative methods (mathematics and statistics) to the managerial decision-making process. Simply stated managerial economics is applied microeconomics with special emphasis on those topics of greatest interest and importance to managers.
McGuigan and Moyer define managerial economics as a branch of economics subject which deal with the application of microeconomics reasoning to real world decision-making problem faced by private, public, and non-profit institutions. Managerial economics extracts from microeconomic theory those concepts and techniques that enable a decision maker to select strategic direction, to allocate efficiently the resources of the organisation, and to respond effectively to tactical issues. The role of managerial economics in a globalised environment cannot be overemphasized.
From the above definitions it is obvious that managerial economics stems from the main subject of economics. It therefore important to briefly look at what economics is about so as to appreciate the nature of managerial economics. According to Lipsey there are three economics concerns: i)The allocation of a society’s resources among alternatives uses and the distribution of the society’s output among individuals and groups; ii)The ways in which production and distribution change over time; and iii)The efficiencies and inefficiencies of economic systems.
The definitions above are based on the fact that the resources of any society consists not only of the free gifts of nature, such as land, forests and minerals, but also of human capacity, both mental and physical, and of all man-made aids such as tools, machinery and buildings. It is sometimes useful to divide those resources into three main groups: (1) all those free gift of nature, such as land, forests, minerals,etc. commonly called natural resources and known to economists as LAND; (2) all human resources, mental and physical, both inherited and acquired, which economists call LABOUR; and (3) all those man-made aids to further production, such as tools, machinery, plant and equipment, including everything man-made which is not consumed for its own sake but is used in the process of making other goods and services which economists call CAPITAL. These resources are called FACTORS OF PRODUCTION because they are used in the process of production. Often a fourth factor, ENTERPRENEURSHIP is distinguished.
The entrepreneur is the one who takes risk by introducing both new products and new ways of making products. He organises the other factors of production and directs them along new lines. The things that are produced by the factors of production are called COMMODITIES. Commodities may be divided into goods and services: goods are tangible, as are cars or shoes; services are intangible, as are haircuts or education. This distinction, however , should not be exaggerated: goods are valued because of the services they confer on their owners.
A car, for example is valued because of the transportation that it provides-and possibly also for the flow of satisfaction the owner gets from displaying it as a status symbol. It is undisputable fact that every nation’s resources are insufficient to produce the quantities of goods and services that would be required to satisfy all of its citizens’ wants. Most of the problems of economics arise out of the use of scarce resources to satisfy unlimited human wants. This problem brings economists and other persons to the concept of choice and opportunity cost. 1. 2 Choice and opportunity cost Choices are necessary because resources are scarce.
Because we cannot produce everything we would like to consume, there must exist some mechanism to decide what will be done and what left undone; what goods will be produced and what left unproduced; what quantity of each good will be produced; and whose wants will be satisfied and whose left unsatisfied. In most societies many different people and organizations either make or influence those choices. Individual consumers, business organisations, labour unions and government officials all exert some influence. If you choose to have more of one thing, then , where there is an effective choice, you must have less something else.
Think of a man with a certain income who considers buying bread. We could say that the cost of this extra bread is so many shillings per loaf. A more revealing way of looking at the cost, however, is in terms of what other consumption he must forge in order to obtain his bread. Say that he decides to give up cinema attendance. If the price of a loaf is one fifth of the price of a cinema seat, then the cost of five more loaves of bread is one cinema attendance forgone or, put other way round, the cost of one cinema attendance is five loaves of bread foregone.
The concept of opportunity cost emphasizes the problem of choice by measuring the cost of obtaining a quantity of one commodity in terms of the quantity of other commodities that have been obtained instead. 2. 0 Basic concerns of economics There are basic questions which economists in any society or organization need to ask and have answers as part of the process of resolving the problem of scarcity of resources and choices of satsfiable needs among the possible alternatives. The following are some of the basic questions economists should ask and attempt to answer: i) What commodities are being produced and in what quantities? This question arises directly out of scarcity of resources. It concerns the allocation of scarce resources among alternative uses or resource allocation. The question ‘what determines the allocation of resources in various societies? ’ and ‘what are the consequences of conscious attempts to change resource allocation? ’ have occupied economists since earliest days of the subject. In free-market economies, most decisions concerning the allocation of resources are made through the price system.
The study of this system works is the main issue in the THEORY OF PRICE (ii) By what methods are these commodities produced? This question because there is always one technically possible way in which goods and services can be produced. Agricultural goods, for example, can be produced by farming a small quantity of land very intensively, using large quantities of fertilizer, labour and machinery, or by farming a large quantity of land extensively, using only small quantities of fertilizer, labour and machinery.
Both methods can be used to produce the same quantity of some good; one method is frugal with land but uses large quantities of other resources. The same is true of manufactured goods; it is usually possible to produce the same output by several different techniques, ranging from ones using large quantity of labour and a few machines to one using a large quantity of highly automated machines and only a very small number of workers.
Questions about why one method of production is used rather than another, and the consequences of these choices about production methods, are among the issues resolved in THEORY OF PRODUCTION (iii) how is society’s output of goods and services divided among its members? Why can some individuals and groups consume large share of capital of the natonal output while other individuals and groups consume only a small share? The superficial answer is because the former earn a large incomes while the later earn small incomes. But this only pushes the question one stage back.
Why do some individuals and groups earn large incomes while others earn only small incomes? The basic question concerns the division of the total national product among individuals and groups. Economists wish to know why any particular division occurs in a free-market society and what forces, including government intervention, can cause it to change. All these questions are discussed in discussed in the theory of DISTRIBUTION OF INCOME, which is not dealt with in Managerial Economics. (iv) How efficient is the society’s production and distribution?
These questions quite naturally arise out of questions i, ii and iii. Having asked what quantities of goods and services are produced, how they are produced and to whom they are distributed, it is natural to go on to ask whether the production and distribution decisions are efficient. The concept of efficiency is quite distinct from justice. The latter is a normative concept, and a just distribution of the national product would be one that our value judgements told us was a good or desirable distribution. (v) are country’s resources being fully utilized, or are some of them lying idle?
As we have noted that the existing resources of any country are not sufficient to satisfy even the most pressing needs of all the individual consumers. It may seem strange, therefore, that we must ask this question at all. Surely if resources are so scarce that there are not enough of them to produce all of those commodities which are urgently, there can be no question of leaving idle any of the resources that are available. Yet one of the most disturbing characteristics of free-market economies is that such waste sometimes occurs.
When this happens the resources are said to be in involuntarily unemployed. Unemployed workers would like to have jobs, the factories in which they could work are available, the managers and owners would like to be able to operate their factories, raw materials are available in abundance and the goods that could be produced by these resources are urgently required by individuals in the community. (vi) is the purchasing power of money and savings constant, or is being eroded because of inflation? The world’s economies have often experienced periods of prolonged and rapid changes in price levels.
Over the long swing of history, price levels have sometimes risen and sometimes fallen. In recent decades, however, the course of prices has almost always been upward. (vii) is the economy’s capacity to produce goods and services growing from year to year or is it remaining static? The capacity to produce goods and services differ in different economies. In some economies the capacity grows rapidly but slow or stagnant in others. Stagnation and slow capacity growth is the main feature of economies of less developing countries.
There are, of course, other questions that arise, but these seven questions are the mojor ones common to all types of market economies. 3. 0. 0 Theories of economics The world is a very complicated place. In understanding how markets operate, for example, the economists make a number of simplifying assumptions. Without these assumption, the ability to make predictions about the cause-and –effect relationship becomes unmanageable. The “law” of demand asserts that the price of a good or service and its quantity demanded are inversely related, ceteris paribus.
This theory asserts that, other factors remaining constant, individuals will tend to purchase increasing amounts of a good or service as prices fall and decreasing amounts as the prices rise. Of, course, other things do not remain unchanged. Along with ,changes in the price of the good or service, disposable income, the prices of related commodities, tastes, and so on, may also change. It is difficult, if not impossible, to generalize consumer behaviour when multi[le demand determinants are simultaneously changing. It is good to remember that economics is a social, not a physical, science.
Economics cannot conduct controlled, laboratory experiments, which makes economic theorizing all the more difficult. It also makes economists vulnerable to ridicule. One economic quip, for example, asserts that if all the economists in the world were laid to end, they would never reach a conclusion. This is, of course, an unfair criticism. In business, the objective is to reduce uncertainty. Economic theories and principles are statements about economic behaviour or the economy that enable prediction of the probable effects of certain actions. Good theories are those that do a good job of explaining and predicting.
They are supported by facts concerning how individuals and institutions actually behave in producing, exchanging, and consuming goods and services. But these facts may change in time, so economists must continually check theories against the shifting economic environment. Despite the fact that decision making in the government is not solely based on economic theories it is worthy discussing some of the common theories and later see if they are relevant to the office of the Attorney General. The following are some of the theories which are used in managerial economics: 3. 1. 0 The theory of demand
The demand function asserts that there is a measurable relationship between the price that a company charges for its products and the number of units that buyers are willing and able to purchase during a specified time period. Economists refer this behavioural relationship as the law of demand, which is sometimes called the first fundamental law of economics. The law of demand states that the quantity demanded of a good or service is inversely related to the selling price, ceteris paribus( all other determinants remaining unchanged). The demand schedule is the simplest form of the demand relationship.
It is merely a list of prices and corresponding quantities of a commodity that would be demanded by some individuals at uniform prices. This can be illustrated as shown below: price of maize Tshs per tonQuantity demanded tons per month 100,000200 150,000250 200,000300 250,000350 300,000400 350,000450 400,000500 The concept of demand is based on the theory of consumer choice. Each consumer faces optimization problem, where the objective is to choose among the combination of goods that maximize his or her satisfaction or utility, subject to a constraint on the amounts of funds available(i. e. budget) to purchase these goods. Economists assume that price is the most influencing factor of quantity of any product purchased. But economists know that other factors can and affect purchases. These factors, called determinants of demand. The basic determinants of demand are (i) consumer tastes(preference), (ii) the number of consumers in the market, (iii) consumers’ incomes, (iv) the price of related goods, and (v) consumer expectations about future prices and incomes. The determinants are expressed mathematically as follows: Qd=f(P, I, T, Ps, Pc, Pe, N…………….. ) 3. 1. 1 Tastes
A favourable change in consumer taste(preference) for a product, a change that makes the product more desirable means the more of it will be demanded at each price. Demand will increase ; the demand curve will slope rightward. An unfavarouble change in consumer preferences will decrease demand, shifting the demand curve to the left. New products may affect consumer tastes; for example the introduction of compact discs greatly decreased the demand for cassette tapes. Consumers’ concern over the health hazard of cholesterol and obesity have increased for broccoli, low-calorie beverages, eggs, and whole milk.
Over the past several years, the demand for coffee drinks, bottled water, and sports utility vehicles has greatly increased, driven by a change in tastes. So, too for DVDs and digital cameras. 3. 1. 2 Number of buyers An increase in the number of buyers in the market increases demand. A decrease in the of buyers in a market decreases demand. For example improvement in communications have given financial markets international range and have thus increased the demand for stocks and bonds. Also, an increase in life expectancy can increase the demand medical care, retirement communities, and nursing homes.
International trade agreements have reduced foreign trade barriers to most of the countries in the world, thus increasing the demand for those products. 3. 1. 3 Income How changes in income affect demand is a more complex matter. For most products, a rise in income causes increase in demand. Consumers typically buy more steaks, steaks, furniture, and electronic equipment as their incomes increase. Conversely, the demand for such products decline as their incomes fall. Products whose demand varies directly with money income are called superior goods or normal goods.
Although most products are normal goods, there are some exceptions. As incomes increase beyond some point, the demand for used clothing, retread tires, and third-hand automobiles may decrease, because the higher incomes enable consumers to buy new versions of those products. Rising incomes may also decrease the demand for soy-enhanced hamburger. Similarly, rising incomes may cause the demand for charcoal grills to decline as wealthier consumers switch to gas grills. Goods whose demand varies inversely with money income are called inferior goods. 3. 1. 4 Price of related goods
A change in the price of a related good or service may either increase or decrease the demand for a product, depending on whether the related good is a substitute or a compliment. A substitute good is one that can be used in place of another good. A complimentary good is that can be used together with another good. Substitutes: beef and chicken ars example of substitute goods or simply, substitutes. When the price of beef rises, consumers buy less beef, increasing the demand for chicken. Conversely, as the price of beef falls, consumers buy more beef, decreasing the demand for chicken.
When two products are substitutes, the price of one and the demand for the other move in the same direction. Examples may include coca and Pepsi, and Kilimanjaro beer and Serengeti beer. Complement: Ccomplementary goods are goods that are used together and demanded together. If the price of gasoline falls and, as a result you drive your car more often, the extra driving increases your demand for motor oil. Thus, gasoline and motor oil are jointly demanded; they are compliments. So it is with ham and eggs, tuition and text books, movies and popcorn, cameras and films.
When two products are compliments, the price of one good and demand for the other good move in opposite directions. Unrelated goods: The vast majority of goods that are not related to one another are called independent goods. Examples include butter and golf balls, potatoes and automobiles, and bananas and wrist watches. A change in the price of one has little or no effect on the demand for the other. 3. 1. 5 Expectations Changes in consumer expectations may shift demand. A newly formed expectation of higher future prices may cause consumers to buy now in order to beat the anticipated price rises, thus increasing current demand.
Similarly, a change in expectations relating to future product availability may affect current demand. change in demand is to be distinguished with change in quantity demanded. A change in demand is a shift of the demand curve to the right (an increase in demand) or to the left (a decrease in demand). A change in quantity demanded is a movement from one point to another point, from one price quantity combination to another on a fixed demand schedule or demand curve. In summary, an increase in demand may be caused by the following factors: •A favourable change in consumer tastes An increase in the number of buyers •Rising incomes if the product is a normal good •Falling incomes if the product is an inferior good •An increase of the price of a substitute good •A decrease in the price of a complimentary good •A new consumer expectation that either prices or income will be higher in the future. 3. 2 The theory of supply While we have discussed some of the conditions under which consumers are willing , and able, to purchase quantities of a particular good or service, we also need to say something about the willingness of producers to produce those very same goods and services.
This is discussed by the law of supply. The law asserts that quantity supplied of a good or service is directly related to the selling price, ceteris paribus. 3. 3 The theory of production The theory of production is centered around the concept of production function. A production function relates the maximum quantity of output that can be produced from given amounts of various inputs for a given technology. It is a technological relation between what is fed into the productive apparatus by way of inputs of factor services and what is turned out by way of product.
The production function is mathematically expressed as: Q=q(L,K), Where Q is tons of output per day, L is labour days employed, and K is units of capital services( e. g. , machine days) used. In varying the combinations of the factor inputs the organisation has to consider three distinct types of decisions: decisions to be made over the short run, decisions to be made over the long run and decisions to be made over the very long run. The short run is defined as the period of time over which the inputs of some factors, called fixed factors, cannot be varied.
The factor that is fixed in the short run is usually an element of capital( such as plant and equipment), but might be land, or the service of management, or even the supply of skilled labour. In the short run, production must be varied by changing the quantities used of those inputs that can be varied; these are called variable factors. It worth to take note here that the short run does not correspond to a fixed time period, it is a matter of fact. The long run is defined as the period long enough for the inputs of all factors of production to be varied, but not so long that basic technology of production changes.
In our simple two factor example above, the firm varies q in the long run by varying L and K. The importance of the long run in the production theory is that it corresponds to the situation facing the firm when it planning to go into business, or to expand or contract the scale of its operations. The very long run is concerned with situations in which the technological possibilities open to the firm are subject to change, leading to new and improved products and new methods of production. 3. 4 The theory of price( in government)
The decision-taking units in economic theory are households for demand, firms for supply, and central authorities for government regulation and control. Given the resources at their command, each household is assumed to act consistently to maximize its satisfaction, and each firm is assumed to act consistently to maximise its profits. 3. 5 The theory of consumer behaviour In addition to explaining the law of demand, the idea of diminishing marginal utility explains how consumers allocate their money incomes among the many goods and services available for purchase.
The typical consumers’ situation has the following dimensions: 3. 5. 1 Rational behaviour The consumer is a rational person, who tries to use his or her money income to derive the greatest amount of satisfaction, or utility, from it. Consumers want to get “the most of their money” or, technically, to maximize their total utility. They engage in a rational behaviour. 3. 5. 2 Preferences Each consumer has clear-cut preferences for certain of the goods and services thathat are available in the market.
It is assumed that buyers as well have a good idea of how much marginal utility they will get from successful units of the various products they might purchase. 3. 5. 3 Budget constraint At any point in time the consumer has a fixed, limited amount of money income. Since each consumer supplies a finite amount of human and property resources to society, he or she earns only limited income. Thus, every consumer faces what economists call a budget constraint(budget limitation), even those who earn millions of dollars a year. f course budget constraint are more severe to consumers with average incomes than for those with extraordinarily high incomes. 3. 5. 4 Prices Goods are scarce relative to the demand for them, so every good carries a price tag. We assume that price tags are not affected by the amounts of specific goods each person buys. The consumer cannot buy everything wanted. So, the consumer must compromise; he must choose the most satisfying mix of goods and services. Different individuals will choose different mixes. . 0 Managerial Economics and Economic Theories Most decisions made by managers usually involve questions of resource allocation within the organisation in both the short and the long run. In the short run, a manager may be interested in estimating demand and cost relationship to make decisions about the price to charge for a product and the quantity of output to produce. The areas of microeconomics dealing with demand theory of cost and production are obvious useful in making decision on such matters.
Macroeconomic theory also enters into decision making when a manager attempt to forecast future demand based on forces influencing the overall economy. In the long run, decisions must be made about expanding or contracting production and distribution facilities, developing and marketing new products, and possibly acquiring other firms. Basically, these decisions require the organisation to make capital expenditure; that is, expenditure made in the current period that are expected to yield returns in future periods.
Economists have developed a theory of capital budgeting that can be used in deciding whether to undertake specific capital expenditures. It is therefore not realistic to think that a firm will make decisions based on one theory or a combination of two. Application of economic theories is an issue which depends on each case. There may be cases which are not complex, these may be simple decisions to be made by organisation which are not faced with constraints. 4. 1 General decision-making Process The ability to make good decisions is the key to successful managerial performance.
All decision making shares several common elements. First, the decision maker must establish or identify the objectives of the organization. The failure to identify organizational objectives correctly can result in the complete rejection of an otherwise well-conceived and well implemented plan. Generally, economic decision-making process involves the following steps: 1. Establish and/or identify Objectives 2. Define the problem 3. Identify possible alternative solutions 4. Evaluate alternatives and select the best alternative . Implement and monitor the decision. 5. 0 General overview of the office of the Attorney General Article 59(1) of the Constitution of the united Republic of Tanzania establishes the office of the Attorney General. It states “ there shall be an Attorney General for the Government of the United Republic, who in subsequent articles of this constitution shall be referred to as the “Attorney-General” who shall be appointed by the president. Thus, the office of the Attorney General is constitutionally established.
The constitution also prescribe the main role and function of the Attorney General in article 59(3). It provides “ the Attorney General shall be the adviser of the Government of the United Republic on legal matters and for that purpose he shall be responsible for advising the Government on all legal matters, and to discharge any other functions pertaining to or connected with law which are referred or assigned to him by the president and also to discharge such other duties or functions which shall be entrusted to him by this constitution or by any law” 5. Statutory functions of The Attorney General As the powers and functions of the Attorney General are derived from the constitution it is undisputed fact that decision making in this office is guided by law. In accordance with the Attorney General(Discharge of duties and functions) Act prescribe the following as functions of the Attorney General: (a)To advise the Government on legal matters; b)To institute and prosecute criminal cases in courts of law and defend criminal appeals, revisions and applications on behalf of the United Republic; (c)To litigate civil cases including constitutional and human rights matters on behalf of the Government; (d)To draft and vet legislative instruments, translate and revise legislation; (e)To research, analyse and advice the Government on constitutional and human rights matters; (f)To represent the Government in civil and criminal matters; (g)To represent the government in International Arbitration, mediation and negotiations of contacts, Government Loans and international agreements. . 0 Decision-making centres under the Office of the Attorney General From the organisation structure of the ministry of justice and constitutional affairs(attached as appendix) the following are main departments or directorates: Functional departments: •Public Prosecutions Division •Civil and International Law Division •Legislative Division •Constitutional Affairs and Human Rights Division Supporting departments: •Administrative and Personnel Division •Policy, planning and Information Services Division 6. 1 Decisions in the Office of the Attorney General: (a)Statutory decisions
In making statutory decisions the decision makers are guided by law as to which option to take and the procedure of making the decision. For instance, the decision to prosecute a criminal is both legal and economical but much consideration is given to legal. The criminals have to be prosecuted though the costs associated with prosecution may be very high. In these decisions the decision makers are less flexible. Thus, economic theories are given consideration at the level when the Government as a whole makes a decision of allocating its resources in accordance to preference of the services to offer to the citizens. b)Economic decisions Most of the economic decisions of the Attorney General’s Office are based on the budget which is approved by the parliament. Generally the budget is of two types of expenditures, development expenditure and recurrent expenditure. Development expenditure In the development expenditure each department proposes the development activities which it intends to implement in the next financial year. Each department is categorised as a vote and identified by vote number. Some department have divisions which are mandated to control their funds, these are categorised as sub-votes.
As between various development requirements the department must choose which projects require immediate implementation, this is because each department has more demands of these expenditures, however, the funds allocated by the parliament in each year are meagre. The decisions for development expenditure are made by top management of each department, each department being led by its core functions. Some of the expenditures which are development include rehabilitation of offices, purchase of office furniture, computers, motor vehicles, etc.
The foresaid expenditures are those financed solely by the government. There are expenditure which are financed by donors, these are also divided in two categories: basket funding and project funding. Basket funding are donations by donor countries which are to the general budget of the government. Each donor country individually or in groups contribute to the budget without specifying the project or activities which they wish to assist. The decision as how to spend the money is left to the government through normal budget process.
Project funding is done by donor countries(development partners) whether individually or in groups who are interested to assist in specific area which they are interested. There are two main development projects in the ministry of constitutional affairs and justice, these are: the Legal Sector Reform Programme(LSRP) and the Tackling of Corruption Programme(TCP). In these programmes the decisions of what activities to be undertaken in each is a prior bargaining between the Government of the United Republic and the development partners.
Usually the agreement in the form of memorandum of understanding(MOU) which stipulates the scope and focus of the project and the role of each party. The AG’s Office being one of the beneficiary of these project is responsible for implementation and monitoring of the progress. In the course of implementation and monitoring economic theories have to be applied. These theories include demand and supply and consumer behaviour. Generally development expenditure are determined by the government at top level and implemented by the departments. There is very little influence of the management of departments in this type of expenditure. hus, at this level application of economic theories is so indirect as most of the decision are made top-bottom. Recurrent expenditure The budget process of the government on recurrent expenditure does not differ much from development expenditure but there is a slight variation. While the great part of development budget is decided by the top level of the government recurrent expenditure is in the ambit of management of each department. From the start to the implementation of the budget there are various decisions which are frequently made by departments. However, the decision made must confine to other liming factors.
When the budget of the ministry has been approved by the parliament each department has to prepare its action plan which is sent to the ministry of finance. The action plan enables the ministry of finance to determine amounts of money which should be issued by way of exchequer issues to each department. An action plan is a timeframe based plan for implanting the budget(see appendix). In the action plan management of each department has to make an decisions on the following issues: (a)Activities which are to be implemented in each quarter, the department may choose an activity to be implemented in the 1st, 2nd , 3rd or 4th quarter.
Some of the activities may be spread evenly in all the 4 quarters. The decision as to which quarter an activity should be carried is very critical due to the following reasons: •Prices of goods and services may rise and affect the budget adversely •Funds may not be available at the time when the goods or services are needed •Unexpected event or state may occur. (b)Activities which are not to be implemented as caused by changes in the approved budget (c)Activities which may require application for approval of reallocation and timing of the same. 6. The role of Public Procurement Act, 2007 in decision-making and application economic theories Enactment of the Public Procurement Act, 2007 has made the application of the theories of demand and supply and theory of consumer behaviour to be feasible. The law makes it a mandatory requirement to follow certain procedures when purchasing goods and services for public offices. Section 28(1) requires each ministry, independent department of Government, Region, District and others to establish a tender board for procurement of goods, services and works. Paragraph 4(1) of Government Notice No. 7 states the rationale of the law as“ the public procurement policies are based on the need to make the best possible use of public funds, whilst conducting all procurement with honesty and fairness”. Paragraph 4(2)(a) goes further to state that all public officers and members of the public and members of the tender boards who are undertaking or approving procurement shall be guided the following basic considerations of the public procurement policy:- •The need for economy and efficiency in the use of public funds and in the implementation of projects including the provision of related goods and services. The best interests of a public authority, in giving all eligible suppliers, contractors, and service providers equal opportunities to compete in providing goods or executing works or providing services. •The importance of integrity, accountability, fairness and transparency in the procurement process. To achieve the above objectives the law requires that tenders are awarded by way of competitive tendering in which suppliers, contractors or consultants are invited by the procuring entity to compete with each other in submitting priced tenders for goods, works or services.
By providing these legal requirements the enhances the application of economic theories in public procurement. Just as demand theory states that other factors remaining constant a consumer will increase quantity of goods demanded when its price is lower, Public procurement Act requires among other things to select the lowest bidder( assuming other things are equal to all bidders, for instance quality and time of supply) The process of budgeting in the Government is both top-down and bottom-top depending on the stage of the budget.
The process starts by the Ministry of Finance(MoF) issuing budget guidelines and instruction which are to be followed by all Ministries and departments when preparing the budget. Included in the guidelines are government priorities in the financial year in reference. Budget for the AG’s Office is proposed for both the development and recurrent expenditure is done in departments on the following sequences: (i)Budget guidelines, budget ceiling and instructions issued by the Ministry of Finance (ii)Top Management of the ministry discusses the guidelines and priorities to synchronise with the ministry’s priorities. iii)The top management of AG’s Office make budget strategies and sets the way forward. (iv)Instructions to the Heads of departments are issued for implementation of the guidelines, overall government priorities and ministerial priorities. (v)Head of departments implements the above by proposing their expenditures in the year under reference. 6. 3 Other decisions 6. 3. 1 Employment decisions Generally all matters related to staff requirements of any government office are dealt with the President’s office Public Service office.
When the Attorney General’s Office is need of staff of a certain category, it will have to report the needs to this office. Practice has shown that the Public Service Office will scrutinise the needs and if satisfied will grant a permission to the department to employ subject to the given conditions. Thus, the room to make decision is not based on the application of the production theory, theory of demand but on policies of the government on employment.
For instance, salaries payable are not based on the demand and supply for labour but on what are the government scales of salaries. 6. 3. 2 Training decisions Training of staff in the office of Attorney General is based on the training plan. The training plan shows the training needs of all employees and proposed period of training. It is from this plan that each department has to ensure that it includes in its budget funds for training staff. Practice has proved that the plan is hardly implemented due to the fact that funds allocated to training are always inadequate.
This poses a problem as to what criterion will be used to select employees to attend training. There is no set criterion for this aspect and remains to be a challenge. 6. 4 Economic decisions of the Office of the Attorney General and budget constraint When budget of the ministry of constitutional affairs is approved by the parliament implementation does not start until the ministry of finance disburses funds by way of exchequer issues. It from exchequer issues that the ministry and its departments can start spending.
Release of funds by the Ministry of Finance is made monthly and the amount depends on tax collections in the preceding month. It is therefore apparent that the funds availed to each ministry and department is not necessarily equivalent to the approved budget, in most of the times is less than the budget(see appendix). This compels the ministry or the department to revisit its decisions which were based on approved budget. In this regard some of the decisions are not based economic theories, but on other factors, e. g. , political and social factors.
Global financial crisis and economic crisis has contributed to the above mentioned problem by causing a depression in the business sector which has a negative impact on tax revenue. Application of economic theories to make decisions is done both by the top government management and also departmental management. At the government levels directives are issued to cut down expenditures which are deemed not necessary. For instance in the year 2007, the Prime minister issued a directive which restricted government spending on workshops, seminars and unnecessary conferences.
In 2008, the government restricted purchase of expensive vehicles. All these measures were aimed at ensuring that the scarce resources of the government are directed towards provision of essential services. This is linked to the theory of consumer behavior and the government as a consumer acts rationally and wisely in spending taxpayers money. Likewise, all departments after having been allocated with monthly funds less than their budgets are expected to act rationally by spending money in areas where they will maximize the value for money.
They are automatically required to revisit their needs in the budget and rescale the preferences. 7. 0 Conclusion Managerial economics as a science is used as a road-map to show and aid decision makers in arriving at optimal decisions given various constraints. In its application managerial economics uses microeconomics principles and economics theories. Managerial economics is mostly applicable to risk analysis, production analysis, pricing analysis, and capital budgeting. However, practical life tells that almost all businesses apply managerial economics in one way or another.
Managerial economics is used and applied in both profit-making and non- profit making organisations. While the objective of profit making entities is to maximize profit the objective of non-profit making entities is to achieve and maximise the objectives for their establishment. The government as an institution is also faced with economical and social dilemma some of which need application of managerial economics. Like any other institution, the government is faced with the problem of limited resources against unlimited wants. The resources in the orm of capital, Land, Labour, and Management are not enough to satisfy an endless list of their uses. In addition to this problem the world is operating in uncertainty, if decisions are made without accommodating the risk component adverse results are likely to happen. Examples of uncertainties which have impacted government resources in Tanzania include electric power crisis which compelled the government to incur cost to buy fuel for IPTL(Independent Power Tanzania Ltd) power plant. The crisis was erroneously not anticipated and therefore not pre-planned.
This has impacted negatively government budget as it had to forgo some of the economic and social activities which were envisaged to be carried in the financial year 2009/2010. Explosion of bombs at Mbagala military camp caused loss of lives and properties of citizens and caused injuries and mental shock of thousands of Dar-es-salaam residents. The government made compensation for damaged property. All these events were likely to be foreseen and the risks minimised or eliminated. Elimination or minimization of these risks entails using techniques under managerial economics(risk analysis).
Together with uncertainties which the government can analyse using managerial economics as above there are uncertainties which are beyond the control of the government. For instance, the global financial crisis (GFC) started in the United States of America in the second half of 2007. The crisis was prompted by increase defaults in subprime mortgages. The crisis spread all over the world and has much impacted developing countries than others. Impacts include loss of employment due to closure of businesses, loss of revenue and decline in new investments.
Despite the importance and use of economic theories in decision-making process, the government sometimes use non economic factors to make decisions. This is so because according to the nature of some of the activities of the government and laws and rules governing the same. For instance, a decision to build a school in a certain area does not depend on expected revenue in the form of fees but the factor will be provision of education services. Thus, in some of the problems economic theories do not apply.
The theory which assumes that the objective of the firm is to maximise profit does not apply to government because its existence does not depend on profit but on welfare of the people. Decisions of the office of the Attorney General apart from applying managerial economics, have to be in line with government policies and in some aspects with the law governing such decisions. It therefore important for decision makers in the governments and its department to make sure that not only policies and laws are considered in making decisions, they should make sure managerial economics together with applicable economic theories are taken on board.
References McMconnell, C. R and Brue, S. L,(2005) Economics: Principles, Problems, and Policies (16th edn). McGraw-Hill Companies, inc. , New York. McGuigan, J. R. , Moyer, R. C, etal (2005), Managerial Economics: Application, Strategy and Tactics. (10th edn), United States of America. Lipsey, R. G, An Introduction to Positive Economics. (6th edn), Butler & Tanner Ltd, London Jehovaness, A. ,(2009),” The Impact of Global Financial Crisis on Developing Countries”.
A paper presented in the seminar on International Accounting Standards and Global Financial Crisis, 28th March, Dar es Salaam. Ngowi, H. P. (20100. “The current Global Financial and Economic Crisis and its impact on Africa”. A paper for the Medals for Research on Development at the Eleventh Annual Global Development Conference, Prague, Czech Republic. The Constitution of the United Republic of Tanzania The Public Procurement Act, 2007