What is 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 business problems and to evaluate alternative options and opportunities open to the firm for finding an optimum solution to the problems.
In simple words, managerial economics is an integration of economic science with the decision-making process of business management.
Definitions of Managerial Economics
Some other definitions of managerial economics offered by some economists:
“Managerial economics is concerned with the application of economic concepts and economics to the problem of formulating rational decision making’’.
Mansfield
“Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management.”
Spencer and Seigelman
“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.”
Davis and Chang
“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 goal of management.”
Douglas
Characteristics of Managerial Economics
The features/characteristics of managerial economics are given below:
- Micro Economic Analysis
- Economics of the Firm
- Acceptance of Use & Utility of Macroeconomic Variables
- Normative Approach
- Emphasis on case study
- Applied and Business Economics
- Study of Business Environment
Micro Economic Analysis
The main part of the study of managerial economics is the behaviour of business firm/s, which is a microeconomic unit. Therefore, managerial economics is essentially a microeconomic analysis. Under the study of managerial economics, the problems of firms are analyzed and solved through the application of economic methods and tools. It does not study the whole economy.
Economics of the Firm
According to Norman F. Dufty, Managerial Economics includes, that portion of Economics known as the theory of the firm, a body of the theory which can be of considerable assistance to the businessman in his decision-making.
Acceptance of Use & Utility of Macroeconomic Variables
In understanding the overall economic environment of an economy and its influence on a particular firm, the study and knowledge of macroeconomic variables or macroeconomics is a must. For example, the study of Monetary, Fiscal, Industrial, Labor and Employment and EXIM policy, National Income, Inflation etc.
Normative Approach
Managerial Economics is basically concerned with value judgment, which focuses on ‘what ought to be’. It is determinative rather than descriptive in its approach as it examines any decision of a firm from the point of view of its good and bad impact on it.
Emphasis on case study
In place of a purely theoretical and academic exercise, managerial economics lays more emphasis on the case study method. Hence, it is a practical and useful discipline for a business firm. It diagnoses and solves business problems.
Applied and Business Economics
Managerial Economics is an application of economics into business practices and decision-making processes; therefore, it is an applied economics and business economics.
Study of Business Environment
The business environment in the present world has not only become more complex, but also more dynamic. In a very complex and rapidly changing environment, making correct and timely decisions is a tedious task. Managerial Economics helps in understanding the business environment of firms.
Scope of Managerial Economics
The scope of managerial economics is as follows:
- Theory of Consumer Demand
- Theory of Production
- Pricing Decisions
- Profit Management
- Advertising
- Competition
Theory of Consumer Demand
Managerial economics analyses the decision-making behaviour of individuals because the firm’s decision-making depends on the accurate estimation of consumer demand. Only after the accurate estimation of consumer demand, a manager can take decisions regarding the quantity, quality, price, etc. of the product.
Theory of Production
Production function defines the theory of production which is a relationship between input and output of a production process. This mathematical relationship relates to the maximum amount of output with a given number of inputs. The firm is aimed to establish a least-cost combination that ensures the optimal output with a given number of inputs.
Pricing Decisions
Pricing tactics are also a vital aspect of management as a firm’s revenue basically governed by its pricing tactics. Managerial economics carefully analyzes the nature of consumers and markets in which a firm is operating. Firms take the help of market analysis, pricing tactics, and price forecasting in order to fix the correct pricing policy for their product.
Profit Management
The prime objective and chief measure of success of business firms are making profits. Managing the profit is an essential function of any business firm that depends on the projection of future earnings, sales volume, pricing and competitive strategies, etc.
Advertising
The message should reach the potential consumer after production but earlier he thinks of purchasing it. The concept of advertisement becomes an integral part of business decision-making and future planning.
Competition
A managerial economist must have the perfect knowledge of the different markets existing in the environment. Managerial economics enables the managers to identify the perfect and imperfect markets so as to introduce the product in such markets in order to increase the sales revenue.
Importance of Managerial Economics
The significance/importance of managerial economics are as follows:
- Helps the Managers in Directing
- Helps in Solving Problems
- Helps in Business Decisions
- Helps in Deciding Pricing Policies and Tactic
- Helps in identifying the Business Activities
Helps the Managers in Directing
Managerial economics helps the managers in directing all the natural and man-made resources in the desired manner. The demand for different goods and services is continuously increasing with the explosion of population and increasing per capita income. It assists the management in satisfying the increasing and diversified human needs and wants.
Helps in Solving Problems
Managerial economics assures the central role in solving various problems of an economy such as what, how, how much, to whom and where to produce. With the help of economic methods, the management formulates the business policies to make proper decisions in solving these economic problems.
Helps in Business Decisions
Managerial economics is useful in taking crucial business decisions by understanding the complex system of the entire economy. It provides the relevant aspects of traditional economics i.e. economic concepts, theories, models, and techniques of analysis that have a major role in business decision-making.
Helps in Deciding Pricing Policies and Tactic
It also provides the various pricing policies and tactics that guide the managers in handling the price of the product. Different pricing policies are adopted in different competitive situations i.e. perfect & imperfect competition and monopoly.
Helps in identifying the Business Activities
It identifies the business activities that can positively or negatively affect the growth of the business and decisions regarding product, production, quantity, quality, cost, selling price, etc. are taken accordingly.
FAQs
What is 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.
What is the Importance of Managerial Economics
The significance/importance of managerial economics are as follows:
1. Helps the Managers in Directing
2. Helps in Solving Problems
3. Helps in Business Decisions
4. Helps in Deciding Pricing Policies and Tactic
5. Helps in Identifies the Business Activities