What is Managerial Economics?

Managerial Economics

Is the application of the Economic Theory to managerial practice. It relates to the use of

tools and techniques of economic analysis to solve managerial problems.

Is the integration of economic theory with business practice to facilitate decision making

and forward planning.

Is the application of economic theory and methodology to business administration

practice.

Is a science that helps to explain how resources such as labor, technology, land and

money can be allocated efficiently, also a science in dealing with effective use of scarce

resources.

It guides the managers in taking decisions relating to the firm’s customers, competitors,

suppliers as well as relating to the internal functioning of a firm.

Thus, Spencer and Seligman defined managerial economics as "The integration of

economic theory and business practice for the purpose of facilitating decision making and

forward planning by management."

Nature of Managerial Economics

 Managers study managerial economics because it gives them insight to reign the

functioning of the organization. If manager uses the principles applicable to economic behavior

in a reasonably, then it will result in smooth functioning of the organization.

 Managerial Economics is a Science

 Managerial Economics requires Art

 Managerial Economics for administration of organization

 Managerial economics is helpful in optimum resource allocation

 Managerial Economics has components of micro economics

 Managerial Economics has components of macro economics

 Managerial Economics is dynamic in nature

Scope of Managerial Economics

1. Theory of Demand

2. Theory of Production

3. Theory of Exchange or Price Theory

4. Theory of Profit

5. Theory of Capital and Investment

Features of Managerial Economics

1. Micro Economics character

Managerial economics is micro economics in character because its unit of study is firm.

However, it always takes the help of macroeconomics to understand and adjust to the

environment in which firm operates.

2. Choices and Allocation

 Managerial economics is concerned with decision making of economic nature. This

implies that managerial economics deals with identification of economic choices and allocation

of scarce resources on the best alternative.

3. Goal Oriented

Managerial economics is goal oriented and prescriptive. It deals with how decisions

should be formulated by managers to achieve the organizational goals.

Importance of Managerial Economics

Business and industrial enterprises aim at earning maximum proceeds. In order to

achieve this objective, a managerial executive has to take recourse in decision making, which is

the process of selecting a specified course of action from a number of alternatives. A sound

decision requires fair knowledge of the aspects of economic theory and the tools of economic

analysis, which are directly involved in the process of decision-making.

Spencer and Siegelman have described the importance of managerial economics in a

business and industrial enterprise as follows:

 Accommodating traditional theoretical concepts to the actual business behavior

and conditions

 Estimating economic relationships

 Predicting relevant economic quantities

 Understanding significant external forces

 Basis of business policies

Principles of Managerial Economics

 Economic principles assist in rational reasoning and defined thinking. They develop

logical ability and strength of a manager. Some important principles of managerial economics

are:

1. Marginal and Incremental Principle

This principle states that a decision is said to be rational and sound if given the firm’s

objective of profit maximization, it leads to increase in profit, which is in either of two scenarios-

-If total revenue increases more than total cost.

-If total revenue declines less than total cost.

2. Equi-marginal Principle

Marginal Utility is the utility derived from the additional unit of a commodity consumed.

The laws of equi-marginal utility states that a consumer will reach the stage of equilibrium when

the marginal utilities of various commodities he consumes are equal.

3. Opportunity Cost Principle

By opportunity cost of a decision is meant the sacrifice of alternatives required by that

decision. If there are no sacrifices, there is no cost. According to Opportunity cost principle, a

firm can hire a factor of production if and only if that factor earns a reward in that occupation/job

equal or greater than it’s opportunity cost.

4. Time Perspective Principle

According to this principle, a manger/decision maker should give due emphasis, both to

short-term and long-term impact of his decisions, giving significance to the different time periods

before reaching any decision. Short-run refers to a time period in which some factors are fixed
while others are variable. The production can be increased by increasing the quantity of variable

factors. While long-run is a time period in which all factors of production can become variable.

5. Discounting Principle

According to this principle, if a decision affects costs and revenues in long-run, all those

costs and revenues must be discounted to present values before valid comparison of

alternatives is possible.

References:

https://www.linkedin.com/learning/managerial-economics/what-is-managerial-economics

https://www.managementstudyguide.com/principles-managerial-economics.htm

https://www.managementstudyguide.com/managerial-economics-nature.htm

https://www.slideshare.net/WelingkarDLP/1-mgr-economics-6859930

https://www.slideshare.net/adeeroy/nature-scope-significance-of-managerial-economics

http://economicsconcepts.com/managerial_economics.htm