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Managerial economics
(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:
y
 
R 
isk analysis
- various models are used to quantifyrisk and asymmetricinformation  and to employ them indecision rulesto manage risk.
y
 
P
roduction analysis
- microeconomic techniques are used to analyze productionefficiency,optimum factor allocation,costs,economies of scaleand to estimate the firm's cost function.
y
 
P
ricing analysis
- microeconomic techniques are used to analyze various pricingdecisionsincludingtransfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.
y
 
C
apital budgeting
- 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. The term
liquidity trap
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.
 
W
hile much of the economics profession had serious problems with the existence of significance of this Pigou Effect, academic economists had come to give little credence to theconcept of a liquidity trap by the 1960s.However, the concept came back to prominence in misconception in the 1990s when theJapanese economy fell into a period of prolonged stagnation and deflation despite the presence of near-zero interest rates.
W
hile the liquidity trap as formulated by Keynes refers tothe existence of a horizontal demand curve for money at some positive level of interest rates,the liquidity trap invoked in the 1990s referred merely to the presence of zero interest rates,the assertion being that since interest rates could not fall below zero, monetary policy would prove to be impotent in those conditions, just as it was asserted to be in a proper exposition of a liquidity trap.
W
hile this 1990s invocation of the term "liquidity trap" was not in conformity with thatasserted by Keynes, both treatments have in common first the assertion that monetary policyaffects the economy only via interest rates and second the subsequent conclusion thatmonetary policy is impotent with respect to being able to stimulate the economy under thoseconditions.Much the same furor has emerged in the United States and Europe in 2008-9, as short-term policy rates for the various central banks have moved close to zero. Note that the neoclassical economists' assertion was that even under an occurrence of aliquidity trap, expansive monetary policy could still stimulate the economy via the directeffects of increased money stocks on aggregate demand. This was essentially the hope of  both theBank of Japanin the 1990s, when it embarked uponquantitative easingand of the central banks of the United States and Europe in 2008-9, with their foray into quantitativeeasing. All these policy initiatives are attempts to stimulate the economy through methodsother than the mere reduction of short-term interest rates.
What Does
Liquidity Trap
Mean?
 A situation in which prevailing interest rates are low and savings rates are high, making monetarypolicy ineffective. In a liquidity trap, consumers choose to avoid bonds and keep their funds insavings because of the prevailing belief that interest rates will soon rise. Because bonds have aninverse relationship to interest rates, many consumers do not want to hold an assetwith a pricethat is expected to decline.
D
emand curve shifts
Main article:Demand curve 
 
 An ou
t
or r 
it
rd sh
it
 
i
n demand
i
ncreases bo
t
h equ
ili
 br 
i
um pr 
i
ce and quan
tit
 hen consumers
i
ncrease
t
he quan
tit
demanded
at a given price
,
it
 
i
s referred
t
o as an
increase in demand 
. Increased demand can be represen
t
ed on
t
he graph as
t
he curve be
i
ngsh
i
f 
t
ed ou
t
ard. A
t
each pr 
i
ce po
i
n
t
, a grea
t
er quan
tit
 
i
s demanded, as from
t
he
i
n
iti
a
l
curve
D1
 
t
o
t
he new curve
D2
.
M
ore peop
l
e wan
ti
ng coffee
i
s an examp
l
e. In
t
he d
i
agram,
t
h
i
s ra
i
ses
t
he equ
ili
 br 
i
um pr 
i
ce from
P1
 
t
o
t
he h
i
gher 
P2
. Th
i
s ra
i
ses
t
he equ
ili
 br 
i
um quan
tit
from
Q1
 
t
o
t
he h
i
gher 
Q2
. A movemen
t
a
l
ong
t
he curve
i
s descr 
i
 bed as a
"
change
i
n
t
he quan
tit
 demanded
"
 
t
o d
i
s
ti
ngu
i
sh
it
from a
"
change
i
n demand,
"
 
t
ha
t
 
i
s, a sh
i
f 
t
of 
t
he curve. In
t
heexamp
l
e above,
t
here has been an
increase
 
i
n demand wh
i
ch has caused an
i
ncrease
i
n(equ
ili
 br 
i
um) quan
tit
. The
i
ncrease
i
n demand cou
l
d a
l
so come from chang
i
ng
t
as
t
es andfads,
i
ncomes, comp
l
emen
t
ary and subs
tit
u
t
e pr 
i
ce changes, marke
t
expec
t
a
ti
ons, and number of buyers. Th
i
s wou
l
d cause
t
he en
ti
re demand curve
t
o sh
i
f 
t
chang
i
ng
t
he equ
ili
 br 
i
um pr 
i
ceand quan
tit
y.If 
t
he
demand decreases
,
t
hen
t
he oppos
it
e happens
:
an
i
nward sh
i
f 
t
of 
t
he curve. If 
t
hedemand s
t
ar 
t
s a
t
 
D2
, and
decreases
 
t
o
D1
,
t
he pr 
i
ce w
ill
decrease, and
t
he quan
tit
y w
ill
 decrease. Th
i
s
i
s an effec
t
of demand chang
i
ng. The quan
tit
y supp
li
ed a
t
each pr 
i
ce
i
s
t
hesame as before
t
he demand sh
i
f 
t
(a
t
bo
t
h Q1 and Q2). The equ
ili
 br 
i
um quan
tit
y, pr 
i
ce anddemand are d
i
fferen
t
. A
t
each po
i
n
t
, a grea
t
er amoun
t
 
i
s demanded (when
t
here
i
s a sh
i
f 
t
fromD1
t
o D2).The demand curve
"
sh
i
f 
t
s
"
because a non-pr 
i
ce de
t
erm
i
nan
t
of demand has changed.Graph
i
ca
ll
y
t
he sh
i
f 
t
 
i
s due
t
o a change
i
n
t
he x-
i
n
t
ercep
t
. A sh
i
f 
t
 
i
n
t
he demand curve due
t
oa change
i
n a non-pr 
i
ce de
t
erm
i
nan
t
of demand w
ill
resu
lt
 
i
n
t
he marke
t
s be
i
ng
i
n a non-equ
ili
 br 
i
um s
t
a
t
e. If 
t
he demand curve sh
i
f 
t
s ou
t
 
t
he resu
lt
w
ill
be a shor 
t
age² a
t
 
t
he newmarke
t
pr 
i
ce quan
tit
y demanded w
ill
exceed quan
tit
y supp
li
ed.If 
t
he demand curve sh
i
f 
t
s
i
n,
t
here w
ill
be a surp
l
us ² a
t
 
t
he new marke
t
pr 
i
ce quan
tit
y supp
li
ed w
ill
exceed quan
tit
ydemanded. The process by wh
i
ch a new equ
ili
 br 
i
um
i
s es
t
ab
li
shed
i
s no
t
 
t
he prov
i
nce of compara
ti
ve s
t
a
ti
cs ² 
t
he answers
t
o
i
ssues concern
i
ng when, whe
t
her and how a newequ
ili
 br 
i
um w
ill
be es
t
ab
li
shed are
i
ssues
t
ha
t
are addressed by s
t
ochas
ti
c mode
l
s² econom
i
c dynam
i
cs.
[ed
i]Sl
e sh
i
s
M
a
i
n ar 
ti
c
l
e
:
 Supp
l
y (econom
i
cs) 
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