Managerial Economics

Definition/concept
 Managerial economics is the study of how scarce resources
are directed most efficiently to achieve managerial goals. It is
a valuable tool for analyzing business situations to take better
decisions.
 Managerial Economics 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
 Managerial Economics is the integration of economic theory
with business practices for the purpose of facilitating decision
making and forward planning by management
Nature Of Managerial Economics
1. Managerial economics is concerned with the analysis of finding
optimal solutions to decision making problems of businesses/
firms (micro economic in nature)
2. Managerial economics is a practical subject therefore it is
pragmatic/ applied.
3. Managerial economics describes, what is the observed economic
phenomenon (positive economics) and prescribes what ought to
be (normative economics)
4. Managerial economics is based on strong economic concepts.
(conceptual in nature)
5. It helps to find optimal solution to the business problems
(problem solving)
Scope /Use of managerial Economics
 Analysis of market /demand and demand forecasting
 Production or supply capacity analysis ( cost analysis) and
planning
 Pricing and output decisions based on the nature of market
 Investment decisions-selection of appropriate projects-capital
budgeting
 Analysis of risks and uncertainty
 Business strategy development and analysis
Economic Analysis and Business Decision Making
 Economic analysis is a guideline for best business decision making
 Economic analysis provides the best decisions based on the theory
and tools
 Economic analysis makes the business decision more rational and
effective
 Economic analysis considers various risks and uncertainties and so
help the management to make business decision accordingly
 Economic analysis considers both accounting costs and
opportunity cost which makes the decision making more logical
and effective.
 Economic analysis provides the justification for the business
decision.
 Gap between theory and practice
 There is a gap between any theory and practices because:
-an economic theory is an abstraction of reality where as managerial
practice is in real world
-a theory is built under some specific context of the society which might
have changed and there will be the gap between the theory and
managerial practices
-in some cases the management has to make the immediate decision
ignoring the economic theory, which may create gap
-some times the management may take decision based on the humanitarian
motive which may create the gap between theory and practice
-- It requires time, money and human resources to make decision based on
theory which may be lacking to the firm.
How managerial economics helps to fulfill the gap
between theory and practices?
 Managerial economics well equips the managers about the
economic theories, tools and their application in business decision.
So, the managerial practices may be closer to the theory.
 Understanding the managerial economics by the managers
encourages the timely and regular researches on markets which
may help to minimize the gap.
 The theories are changing over the period and understanding this
change, the managers are trying to update the changes in the
managerial theories and practices which minimizes the gap.
 The basic tenet of the firm is more or less same over the period
which is long term wealth maximization and based on this
concept/theory when managers makes decisions, this minimizes
the gap between theory and practice.