You are on page 1of 8

Table of Contents

1 Definition of the term Managerial Economics ........................................................................ 2

1.1 Managerial and Economic Theory Compared ................................................................. 3

1.2 The Role of Managerial Economics in Decision Making ................................................ 3

2 The Scope of Managerial Economics ...................................................................................... 4

2.1 Positive Economics .......................................................................................................... 4

2.2 Normative Economics ...................................................................................................... 4

3 Managerial Economics Techniques that are used to arrive at appropriate optimum decisions5

3.1 Demand Analysis and Forecasting ................................................................................... 5

3.2 Cost and Production Analysis .......................................................................................... 5

3.3 Inventory Management .................................................................................................... 5

3.4 Advertising ....................................................................................................................... 6

3.5 Pricing Decision, Policies and Practices .......................................................................... 6

3.6 Profit Management ........................................................................................................... 6

3.7 Capital Management ........................................................................................................ 6

4 Conclusion ............................................................................................................................... 7

5 References ............................................................................................................................... 8

1|Page
1 Definition of the term Managerial Economics

It is a branch of economics that deals with the application of microeconomic analysis to


decision-making techniques of businesses and management units. It acts as the via media
between economic theory and pragmatic economics. Managerial economics bridges the gap
between "theory and practice". Managerial economics can be defines as:

According to Spencer and Siegelman: “The integration of economic theory with business
practice for the purpose of facilitating decision-making and forward planning by management”.
According to McGutgan and Moyer: “Managerial economics is the application of economic
theory and methodology to decision-making problems faced by both public and private
institutions”.

It generally refers to the integration of economic theory with business practice. Economics
provides tools, managerial economics applies these tools to the management of business. In
simple terms, managerial economics means the application of economic theory to the problem of
management. It may be viewed as economics applied to problem solving at the level of the firm.
It is concerned with the application of economic principles and methodologies to the decision-
making process within the firm or organization under the conditions of uncertainty.

It enables the business executive to assume and analyze things. Every firm tries to get satisfactory
profit even though economics emphasizes maximizing of profit. Hence, it becomes necessary to
redesign economic ideas to the practical world. This function is done by managerial economics.
(http://economicsconcepts.com/managerial_economics.htm)

2|Page
1.1 Managerial and Economic Theory Compared

Managerial theory refers to those aspects of economic theory and application which are directly
relevant to the practice of management and the decision making process. Managerial theory is
pragmatic. It is concerned with those analytical tools which are useful in improving decision
making. Managerial theory provides necessary conception tools which can be of considerable help
to the manager in taking scientific decisions. The managerial theory provides the maximum help
to a business manager in his decision making and business planning. The managerial theoretical
concepts and techniques are basic to the entire gamut of managerial theory.

Economic theory deals with the body of principles. But managerial theory deals with the applica-
tion of certain principles to solve the problem of a firm. Economic theory is both positive and
normative in character but managerial theory is essentially normative in nature. Economic theory
studies only economic aspect of the problem whereas managerial theory studies both economic
and non-economic aspects.

Managerial economics is a science applied to decision making. It bridges the gap between abstract
theory and managerial practice. It concentrates more on the method of reasoning. In short,
managerial economics is “Economics applied in decision making”.

1.2 The Role of Managerial Economics in Decision Making

Managerial economics is supposed to enrich the conceptual and technical skill of a manager. It is
concerned with economic behavior of the firm. It concentrates on the decision process, decision
model and decision variables at the firm level. It is the application of economic analysis to evaluate
business decisions.

The primary function of a manager in business organization is decision making and forward
planning under uncertain business conditions. Some of the important management decisions are
production decision, inventory decision, cost decision, marketing decision, financial decision,
personnel decision and miscellaneous decisions. One of the hallmarks of a good executive is the
ability to take quick decision. He must have the clarity of goals, use all the information he can get,
weigh pros and cons and make fast decisions.

3|Page
2 The Scope of Managerial Economics

The scope of managerial economics refers to its area of study. Managerial economics has its roots
in economic theory. The empirical nature of managerial economics makes its scope wider.
Managerial economics provides management with strategic planning tools that can be used to get
a clear perspective of the way the business world works and what can be done to maintain
profitability in an ever changing environment.

Most of the managerial economists are of the opinion that managerial economics is fundamentally
normative and prescriptive in nature. It is concerned with what decisions ought to be made.

The application of managerial economics is inseparable from consideration of values or norms, for
it is always concerned with the achievement of objectives or the optimization of goals. In
managerial economics, we are interested in what should happen rather than what does happen.
Instead of explaining what a firm is doing, we explain what it should do to make its decision
effective.

2.1 Positive Economics

A positive science is concerned with ‘what is’. Robbins regards economics as a pure science of
what is, which is not concerned with moral or ethical questions. Economics is neutral between
ends. The economist has no right to pass judgment on the wisdom or folly of the ends itself.

He is simply concerned with the problem of resources in relation to the ends desired. The
manufacture and sale of cigarettes and wine may be injurious to health and therefore morally
unjustifiable, but the economist has no right to pass judgment on these since both satisfy human
wants and involve economic activity.

2.2 Normative Economics

Normative economics is concerned with describing what should be the things. It is, therefore, also
called prescriptive economics. What price for a product should be fixed, what wage should be paid,
how income should be distributed and so on, fall within the purview of normative economics?

4|Page
In managerial economics, we are interested in what should happen rather than what does happen.
Instead of explaining what a firm is doing, we explain what it should do to make its decision
effective. Managerial economists are generally preoccupied with the optimum allocation of scarce
resources among competing ends with a view to obtaining the maximum benefit according to
predetermined criteria. (https://en.wikipedia.org/wiki/Managerial_economics)

3 Managerial Economics Techniques that are used to arrive at appropriate optimum


decisions
3.1 Demand Analysis and Forecasting

A firm is an economic organization which transforms inputs into output that is to be sold in a
market. Accurate estimation of demand, by analyzing the forces acting on demand of the product
produced by the firm, forms the vital issue in taking effective decision at the firm level.

This forecast can also serve as a guide to management for maintaining or strengthening market
position and enlarging profit. Demand analysis helps in identifying the various factors influencing
the demand for a firm’s product and thus provides guidelines to manipulate demand. The main
topics covered are: Demand Determinants, Demand Distinctions and Demand Forecasting.

3.2 Cost and Production Analysis

Cost analysis is yet another function of managerial economics. In decision making, cost estimates
are very essential. The factors causing variation in costs must be recognized and allowed for if
management is to arrive at cost estimates which are significant for planning purposes. Production
analysis frequently proceeds in physical terms. Inputs play a vital role in the economics of
production. The factors of production otherwise called inputs, may be combined in a particular
way to yield the maximum output.

3.3 Inventory Management

An inventory refers to a stock of raw materials which a firm keeps. Now the problem is how much
of the inventory is the ideal stock. If it is high, capital is unproductively tied up. If the level of
inventory is low, production will be affected.

5|Page
3.4 Advertising

To produce a commodity is one thing and to market it is another. Yet the message about the product
should reach the consumer before he thinks of buying it. Therefore, advertising forms an integral
part of decision making and forward planning. Expenditure on advertising and related types of
promotional activities is called selling costs by economists.

3.5 Pricing Decision, Policies and Practices

Pricing is very important area of managerial economics. The control functions of an enterprise are
not only productions but pricing as well. When pricing a commodity, the cost of production has to
be taken into account. Business decisions are greatly influenced by pervading market structure and
the structure of markets that has been evolved by the nature of competition existing in the market.

3.6 Profit Management

A business firm is an organization designed to make profits. Profits are acid test of the individual
firm’s performance. In appraising a company, we must first understand how profit arises. The
concept of profit maximization is very useful in selecting the alternatives in making a decision at
the firm level.

Managerial economics tries to find out the cause and effect relationship by factual study and logical
reasoning.

3.7 Capital Management

Planning and control of capital expenditures is the basic executive function. The managerial prob-
lem of planning and control of capital is examined from an economic stand point. The capital
budgeting process takes different forms in different industries.

6|Page
4 Conclusion

Firms have only limited resources at their disposal which they must utilize to make profit. The
managers of these firms must make judgements about the disposition of their resources and decide
which priorities among the various competing claims they have upon them. Models can guide
business executives to predict the future consequences.

Executives make many types of decisions connected with the business such as production, inven-
tory, cost, marketing, pricing, investment and personnel. In the long-run, application of principles
of business decisions will result in successful outcomes. A good decision is one that is based on
logic, considers all available data and possible alternatives and applies the quantitative approach.

7|Page
5 References
1. Yogesh Maheswari. 2005. Managerial Economics Phi Learning. New delhi: Gupta G.S.
2. http://economicsconcepts.com/managerial_economics.htm
3. https://en.wikipedia.org/wiki/Managerial_economics
4. Thomas J. Webster, 2003.Managerial Economics Theory and Practice. Lubin School of
Business Pace University: New York, NY

8|Page