Introduction

Managerial Economics is economics applied in decision making. It is the branch which serve as a link
between abstract theory and managerial practice. It is based on analysis for identifying problems,
organizing information and evaluating alternatives.

Managerial Economics involves analysis of allocation of the resources available to a firm or a unit of
management among the activities of that unit. It is concerned with choice or selection among
alternatives. Managerial economics is goal-oriented & perspective and aims at maximum
achievement of objectives.

Definitions

According to McNair & Meriam “ Managerial Economics is the use of economic mode of thought to
analyze business situation.”

According to Spencer & Siegelman “ Managerial Economics is integration of economic theory with
business practice for the purpose of facilitating decision making & forward planning by management.

According Watson “ Managerial Economics is price theory in the services of business executives”.

According to Brigham & Pappas “ Managerial Economics is the application of economic theory and
methodology to business administrative practice.”

According to Hague “ Managerial Economics is a fundamental academic subject which seeks to

understand and to analyze the problems of business decision-making.

Features of Managerial Economics

• Managerial Economics is concerned with decision-making of economic nature.

• Managerial Economics is goal-oriented & perspective.

• Managerial Economics is pragmatic. It is concerned with those analytical tools which are
useful in decision-making.

• Managerial Economics is both conceptual & metrical.

• Managerial Economics provides link between traditional economics and the decision
sciences for managerial decision making.
Macro-economic

“ The decisions of the firm are made almost always within the broad frame work of economic
environment within which firms operates.” This stress the following,

i. The economy in which business operates is predominantly a free enterprise economy using
prices & market.

ii. The present day economy is the one undergoing rapid technological & economic changes

iii. The intervention of Government in economic affairs has increased in recent past & hence
this will continue in the future also.

Micro-economic

This deals with the problems of an individual firm, industry, consumer, etc. In case of
managerial economics, micro economics helps in studying what is going to on within the
firm, how best to use the available scare resources between various activities of the firm.

Positive & Normative Approach

Using Micro economic analysis or Macro economic analysis, company can take resources
to positive approach or Normative approach.

Positive Approach concerns with “what is, was or will be”. Positive economic theory
attempts to develop hypotheses which explain why it happen.

Normative approach is concerns with “what ought to be”. Normative economic theory is concerned
with problems like what the objectives & policies of business ought to be & how to go about them.
 Managerial Economics is concerned with Normative Approach.

Integration of Economic theory & Business practice

a) Understand the actual business behavior:- Economists have developed a theory of firm
which fundamentally centers on the assumptions of profit maximization & the assumption
that firm act rationally.

b) Managerial Economics attempts to estimate & predict the economic quantities &
relationship

c) Decision making & forward planning.

d) Environment implications.

Nature of Managerial Economics

1. Managerial Economics is Micro-economic.

2. Managerial Economics is concerned with normative micro economics.

3. Managerial Economics concentrates on making economic theory more application oriented.

4. Managerial Economics takes the help of macro economics also so as to understand the
external conditions which are relevant to the business.

Scope of Managerial Economics

Managerial Economics has large scope in various fields. Managerial economics has close connections
with economic theory, operations research, Statistics, Mathematics, and theory of decision making.
It also relates ideas from various functional areas of management like production, marketing, finance
& accounting, project management.

In managerial Economics, the following aspects includes it subject matters,

1. Objectives of Business firms,

2. Demand Analysis & Demand Forecasting.

3. Production cost.

4. Competition.

5. Pricing & output.

6. Profit.

7. Investment and Capital Budgeting and

8. Product policy, sales promotion &market strategy.

 Scope of Managerial Economics

1) Managerial Economics and Traditional Economics:-

Traditional Economics & Managerial Economics both deal with identical problems. Both are
concerned with problems of scarcity & resource allocation. The 2 main contribution of economics to
Managerial Economics are

a) To help in understanding market conditions & general economic environment within which
firm operates.

b) To provide a philosophy for understanding & analyzing resource allocation problems.

2) Managerial Economics and Operational Research:-

Both Managerial Economics and Operational Research are concerned with taking effective decisions.
From firms objective, both are concerned with what is the best way of achieving them. OR & ME are
also concerned with model –building. Ex Operational Research models like queuing, linear
programming etc are used widely in ME .By using knowledge of Managerial Economics &
Operational Research, manager often reaches more quickly to the solution as is required by the job.

3)Managerial Economics and Mathematics:-

Mathematics provide us with set of tools which help in the derivation & exposition of economic
analysis. Managerial Economics is being conceptual as well as metrical. Mathematics widens the
scope of analysis of Managerial Economics. Main Branches of mathematics which are generally used
in Managerial Economics are geometry, algebra & calculus. Mathematical concepts used are
logarithms & exponentials, vectors & determinants, inputs-output tables etc.

4) Managerial Economics and Statistics:-

Statistics is widely used by Managerial Economics. Managerial Economics aims at quantifying the
past economic activity as well as to predict its future course. This is necessary for correct judgment &
decision making. The most useful aspect of statistics is that it can deal with uncertainty conditions
which the firm generally faces.

5)Managerial Economics and theory of Decision Making:-

Economic theory is based on the assumption of single goal- maximization of profit of the firm or
maximization utility of a consumer. The theory of decision making recognizes the multiplicity of goals
& pervasiveness of uncertainty in the real world of management.
Roles of Managerial Economist

Making decisions and processing information are two primary task of the managers. In order to
make intelligent decisions, manager must obtain, process & use information. The second task is to
use readily available information to make decisions or carry out a course of action that furthers the
goals of the organization.

There are two general forms by which manager can take decisions.

1. Task of making specific decisions.

2. General task.

Specific Decisions:- These are several decisions that the manager might have to take. Ex Whether
or not a store should stay open for more hours a day, whether to pay outside copying services rather
than install a copier.

Specific Decisions

1. Production Scheduling.

2. Demand Forecasting.

3. Market Research.

4. Economic analysis of the industry.

5. Investment Appraisal.

6. Security Management Appraisal.

7. Advice of foreign Exchange.

8. Advice on trade.

9. Pricing & related decisions.

10. Analyzing & forecasting environmental factors.

Responsibility of Managerial Economist

1. His objective must coincide with maximize profit on the invested capital.

2. Enhance the ability of the firm to maximize overall profit.

3. He has to make accurate forecast.

4. If any change due to uncertainties, he has to work out new forecast & present it at the
earliest.

5. He should have the ability to obtain necessary information quickly by personal contact for
speed & accurate decision making.

6. He must have contacts with specialist in the area of his so as to act at the earliest in favor of
the firm.

7. He must be a member of full status in the business firm.