(sometimes referred to as business economics), is a branch of economicsthat appliesmicroeconomicanalysis to decision methods of businesses or other
management units. As such, it bridges economic theory and economics in practice. It drawsheavily from quantitative techniques such asregression analysisandcorrelation,Lagrangian
calculus(linear). If there is a unifying theme that runs through most of managerial economicsit is the attempt tooptimizebusiness decisions given the firm's objectives and givenconstraints imposed by scarcity, for example through the use of operations researchand programming.Almost any business decision can be analyzed with managerial economics techniques, but itis most commonly applied to:
- various models are used to quantifyrisk and asymmetricinformation
and to employ them indecision rulesto manage risk.
- microeconomic techniques are used to analyze productionefficiency,optimum factor allocation,costs,economies of scaleand to estimate the
firm's cost function.
- microeconomic techniques are used to analyze various pricingdecisionsincludingtransfer pricing, joint product pricing, price discrimination, price
elasticity estimations, and choosing the optimum pricing method.
- Investment theory is used to examine a firm'scapital purchasingdecisions.At universities, the subject is taught primarily to advanced undergraduates and graduate business schools. It is approached as an integration subject. That is, it integrates manyconcepts from a wide variety of prerequisite courses. In many countries it is possible to readfor a degree in Business Economics which often covers managerial economics,financialeconomics,game theory, businessforecastingandindustrial economics.
is used inKeynesianeconomics to refer to a situation where thedemand for money becomes infinitely elastic, i.e. where the demand curve is horizontal, sothat further injections of money into the economy will not serve to further lower interestrates. Under the narrow version of Keynesian theory in which this arises, it is specified thatmonetary policy affects the economy only through its effect on interest rates. Therefore, if theeconomy enters a liquidity trap area -- and further increases in the money stock will fail tofurther lower interest rates -- monetary policy will be unable to stimulate the economy.In the wake of the "Keynesian revolution" in the 1930s and 1940s, variousneoclassicaleconomistssought to minimize the concept of a liquidity trap by specifying conditions inwhich expansive monetary policy would affect the economy even if interest rates failed todecline.Don PatinkinandLloyd Metzler were the most prominent writers in this regard.
They specified the existence of a "Pigou effect," named for English economistA.C. Pigou, inwhich the stock of real money balances is an element of the aggregate demand function for goods, so that the money stock would directly affect the "IS" curve in anISLManalysis, andmonetary policy would thus be able to stimulate the economy even under the existence of aliquidity trap.