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Nature and Scope of Managerial Economics MBS First Year

Nature and Scope of Managerial Economics MBS First Year

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Published by: Store Sansar on Sep 08, 2010
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06/23/2013

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Nature and Scope of Managerial Economics
1.
 
Introduction
 Managerial economics is a special branch of economics evolved to bridgethe gap between abstract theory and managerial practice. It deals withthe use of economic concepts and principles for decision-making andforward planning through an uncertain future. Economic theory provides anumber of concepts and analytical tools which are of considerablesignificance to the executives in their decision-making process in anuncertainty framework. But this does not mean that economic providesanswers for all the problems faced by the firm or a business unit. Inpractice, many more skills are to be developed in solving the variety of problems faced by the firm. Only conceptual knowledge is of no use. Theexecutives have to develop necessary skills to make use of theirknowledge in the context of the firm. Managerial economics, therefore,refers to only those aspects of economics that are useful in the decisionmaking process of the firm. The scope of managerial economics mainlyconfines to microeconomics and it generally does not extend tomacroeconomics. This does not mean that macroeconomics is completelyuseless to a managerial economist. Even though the scope of managerialeconomic does not cover the area of macroeconomics, its understanding isabsolutely essential for a potential business executive.Managerial economics is thus a science which deals with the application of economic theory to managerial practice. It lies on the borderline of economics and business management. It may be defined precisely as
thestudy of the allocation of resources available to a firm among its activities.
Briefly, managerial economics may be called ‘
economics applied indecision making
’. It is mainly concerned with classifying problems,organizing and evaluating information and ultimately comparing thealternative course of action.McNair and Meriam in their book
Problems in Business Economics
maintainthat the managerial economics consists of the use of economic modes of 
 
thought to analyze business situations. According to Milton H. Spencerand Louis Siegelman, managerial economics is the
integration of economictheory with business practice for the purpose of facilitating decisionmaking and forward planning by management
.Managerial economics is highly pragmatic. It deals mainly with analyticaltools that are useful in decision-making process. It avoids some of theabstract issues of economic theory, but has also certain complications thatare neglected in theory. Managerial economics, therefore, considersparticular environment of decision-making. William J. Baumol in hisarticle, ‘What Can Economic Theory Contribute to managerial Economics?’,points out that
it is not the final theorems of economics that are importantto management but rather the methods of reasoning.
Managerialeconomics borrows only the analytical tools of economic theory and givesvery little importance to the final theorems of economics.Managerial economics is thus realistic in nature. It is applied to solvesome of the problems faced by the firm. These problems generally relateto choices faced by the firm. These problems generally relate to choicesand allocation of recourses which are essentially economic in characterand are experienced by the managers. It should be remembered here thateven though managerial economics helps a great deal in solving some of the ticklish problems of the firm by influencing decision-making process,the decision-making process is not only dependent on the tools andconcepts of managerial economics; but there are several other factorswhich also significantly influences the decision-making process of the firm.In other words, managerial decision-making is influenced not only byeconomic factors but also by many other considerations. The other factorsinfluencing the decisions made by the managers are:
i)
 
Human and behavioral consideration
ii)
 
Technological forces
iii)
 
Environmental factors
 
2.
 
Scope/Areas of Managerial Economics
The areas of business issues to which economic theories can be directlyapplied may be divided into followings:a)
 
Demand Analysis and Forecastingb)
 
Cost and Production Analysisc)
 
Pricing Decision, Policies and Practicesd)
 
Profit Managemente)
 
Capital Managementf)
 
Linear Programming and the Theory of Games
(a)
 
Demand Analysis and Forecasting.
Effective decision-making atthe fir level depends on accurate estimates of demand. Demandanalysis aims at discovering the forces that determine sales. It has twomain managerial purposes (i)
forecasting sales,
and (ii)
manipulatingdemand
. It is useful for business planning and hence occupies a pivotalplace in managerial economics. The demand analysis mainly relates tothe study of 
demand determinants, demand distinctions and demandforecasting.
 
The Case of Wool production:a)
 
During the late 1980s, wool prices increased considerably due toincreased demand by China and the former Soviet Union. From1977 to 1988, the price of wool for worsted clothing rose from$3.67 to $5.81 per pound. Expecting that wool prices would remainhigh, wool producers raised a lot more sheep. Did this result in ashift right in the supply curve for wool?b)
 
At the same time the Chinese and Russians cut back on theirpurchases of wool because of lack of foreign currency (and in thecase of Chain because of organizational problem).c)
 
Australia is the world’s largest producer of wool and for a timeAustralia Wool Corporation propped up the price of wool by buyingup any unsold Australian wool.Why was it necessary to prevent the price from falling?

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