Managerial economics is a form of economics that focuses on the application of economic analysis and statistics for business or management decisions. It is usually a combination of traditional economic theory and the practical economics seen every day in the business environment. Managerial economics provides users with a more quantitative analysis of business situations through the use of mathematical formulas and other calculations, including risk analysis, production analysis, pricing analysis and capital budgeting. Most businesses use some form of managerial economics in their business operations.
Companies often include risk in a managerial economic process to determine what might happen if a significant shift occurs in the economy or competing companies began selling similar goods and services to consumers. Risk analysis is the business function of assessing the amount of risk in business decisions and the overall economic environment Common economic risk models include decision trees, Nash game theory or the capital asset pricing model (CAPM).
Production analysis is a managerial economics function that focuses on the internal production processes of a company. Managers review internal production processes to determine how efficient the company is using economic resources or inputs to produce goods and services sold to consumers. This economic function may include the use of management accounting, which develops cost allocation methods that apply business costs to individual goods or services. Finding ways to increase production efficiency can help companies achieve an economy of scale, which is the economic theory that companies that maximize their production processes can lower overall business costs.
Pricing analysis is a classic economic tool based on the economic theory of supply and demand curves. Basic supply and demand theory states consumers will purchase more goods at cheaper prices and fewer goods at more expensive prices. Companies who supply too many goods at low prices may not make enough profit, while offering goods at higher prices can limit the company’s market share.
Managerial economics uses pricing analysis to find the equilibrium point, which is where the company will maximize its profits through a specific amount of sales to consumers.
NATURE OF MANAGERIAL ECONOMICS
Managerial economics is concerned with the business firm and the economic problems that every business management need to solve. Spencer and Siegelman point to the fact that “Managerial Economics is the integration of economic theory and business practice for the purpose of facilitating decision – making and forward planning by management. The nature of economic theory considered relevant for managerial decision making.
Macro-economic Conditions: The firm are made almost always within the broad framework of economic environment within which the firm operates, known as macro-economic conditions with regard to these conditions, the three points include are :
- The economy in which the business operates is predominantly a free enterprise economy using prices & market.
- The present – day economy is the one undergoing rapid technological and economic changes.
- The intervention of government in economic affairs has increased in recent times and there is no livelihood that this invention will stop in future.
Micro-economic Analysis : The micro economic analysis deals with the problems of an individual firm, industry, consumer etc. In the case of managerial economics, micro-economies helps in studying what is going on within the firm, how best to use the available scare resources between various activities of the firm, how to be technically as well as economically efficient, etc.
The chief source of concepts & analytical tools for management economics is micro-economic theory, also known as price theory. Some of the popular micro-economic concepts are the elasticity of demand marginal cost, the long run economies and diseconomies of scale, opportunity cast, present value & market structures.
Positive Vs Normative Approach: Whether one is using micro-economic analysis or macro-economic analysis, one can take resource to positive approach or normative approach or both.
Positive approach concerns with what is, was or will be, while normative approach concerns with what ought to be. The statement a government deficit will reduce unemployment and cause an increase in prices is a hypothesis in positive economics, while the statement in setting policy unemployment ought to matter more than inflation is a normative hypothesis.
Integration of Economic Theory & Business Practice: A critical look (a) with the help of economic theory one can understand the actual business behaviour. This does not mean that in economics there is always a theoretical construct present for every business behaviour. In fact, economic theory is based on certain assumptions, and sometimes very simplified assumptions.
b) Managerial economies attempts to estimate and predict the economic qualities and relationships. The estimation of elasticity of demand, production relation, are all necessary for the purposes of forecasting by the firm. Similarly predicting about the demand, cost, pricing etc., is needed for decision making.
SCOPE OF MANAGERIAL ECONOMICS
Managerial economics has a close connection with economic theory (micro-economics as well as micro-economics), operations, research, statistics, mathematics, and the theory of decision-making. Managerial economics also draws together and relates ideas from various functional areas of management like production marketing, finance and accounting, project management etc.
As far as Managerial economics is concerned, the following aspects constitute its subject-matter.
i) Objectives of a business firm
ii) Demand Analysis and Demand forecasting.
iii) Production and cost.
v) Pricing and output.
vii) Investment and capital budgeting and
viii) Product policy, sales promotion and market strategy.
MANAGERIAL ECONOMICS AND OPERATIONS RESEARCH
In general the relation between managerial economics are concerned with taking effective decisions. Given the firm’s objectives, both are concerned with what is the best way of achieving them. The difference, however, is : managerial economics is a fundamental academic subject which seeks to understand and to analyse the problems of business decision-taking, while operations research is an activity carried out by functional specialists
MANAGERIAL ECONOMICS AND TRADITIONAL ECONOMICS
In general the relation between managerial economics and economic theory is very much like the relation of engineering to physics & machine to biology. It is in fact the relation of an applied field to its more fundamental & conceptual counter part. Economics provides certain basic concepts and analytical tools which are applied suitably to a business situation.
Further, while economists mainly concentrate on the study of types of markets, managerial economists are concerned more with problems like the impacts of market or technological changes on a competitive position of the firm and the likely reactions of their own actions in the market. But managerial economist can get answers of the questions regarding the working of market mechanism only when they analyse the problems from a broader perspective of an economist.
Thus, the two main contributions of economics to managerial economies are.
- To help in understanding the market & the general environment with a which the firm operates.
- To provide a philosophy for understandings & analyzing resource – allocation problems.
MANAGERIAL ECONOMICS AND MATHEMATICS
Mathematics provides us with a set of tools which help in the derivation and exposition of economic analysis. Mathematics is closely related to managerial economics. This is mainly because the managerial economics, besides conceptual, is also metrical. It derives its metrical property from the set fact that an individual function of managerial economics is to estimate and predict the relevant economic factors for decision making and forward planning.
MANAGERIAL ECONOMICS AND STATISTICS
Statistics is widely used by managerial economists. ManageriaP economies aims at quantifying the past economics activity as well as to predict its future course. This is needed for a correct judgment and decision-making.
MANAGERIAL ECONOMICS AND THE THEORY OF DECISION-MAKING
The theory of decision-making is relatively a new subject that has significance for managerial economics. Much of economic theory is based on the assumption of a single goal maximization of profit for the firm or maximization of utility of a consumer.