Home » Investment Banking Resources » Economics Resources » Managerial Economics

Managerial Economics
Article by Reviewed by
Wallstreetmojo Editorial Team Dheeraj Vaidya, CFA, FRM

Managerial Economics Definition

Managerial economics is a stream of management studies that focus on
decision‐making and problem‐solving. Both microeconomics and
macroeconomics theories are applied. It focuses on the efficient utilization
of scarce resources.

It is a discipline that brings together the concepts of business and

economics. It enables leaders and managers with relevant data—demand
projections, capital management, pricing decisions, profit management, cost
analysis, and production analysis.

Table of contents

Managerial Economics Definition

Managerial Economics Explained
Scope of Managerial Economics
Microeconomics for Solving Operational Problems
Macroeconomics for Handling External Environment Issues
Nature of Managerial Economics
Importance
Frequently Asked Questions ﴾FAQs﴿
Recommended Articles
Key Takeaways
Cookies help us provide, protect and improve our products and services. By using our website, you agree
to our use of cookies ﴾Privacy Policy﴿
Managerial economics is the application of various economic measures,
policies, principles, tools, methods, and theories to enable decision‐making
and problem‐solving.
It highlights techniques for efficient utilization of financial, human, and
material resources—so that profits can be maximized.
It is a pragmatic and normative approach—it solves a business’s internal
﴾microeconomic﴿ problems—by analyzing macroeconomic threats and
challenges.

Managerial Economics Explained

Managerial economics analyzes the internal and external factors impacting

an organization. It aims to resolve problems using micro and
macroeconomic tools. Thus, it is a practical approach where economic
measures are undertaken to solve business problems. In addition to solving
problems, this approach extends to the growth and sustainability of a firm.

You are free to use this image on your website, templates etc, Please provide us with an attribution

linkHow to Provide Attribution?Article Link to be Hyperlinked

linkHow to Provide Attribution?Article Link to be Hyperlinked

For eg:

Source: Managerial Economics ﴾wallstreetmojo.com﴿

It is further classified into three subtypes:

Liberal: Consumer demand dictates markets; customers are free to make

their buying decisions and choices.
Normative: The administration takes pragmatic decisions pertaining to cost
management, demand analysis, production, and advertising.
Radical: The management adopts a game‐changing attitude to prioritize
customer needs, requirements, and satisfaction—over business profits.
N. Gregory Mankiw stated managerial economics is about answering three
crucial questions:

1. How do people make decisions?

2. How do people interact?
3. How does the economy work as a whole?

Finding answers to these questions can drive a business towards success.

Scope of Managerial Economics

The concept is implemented in the following ways:

Microeconomics for Solving Operational Problems

Managers apply microeconomic principles and theories to handle internal

issues—production, sales, distribution, capital, pricing, profit, workforce, etc.

Given below are the various microeconomic theories:

1. Production Theory: In order to ensure high productivity with limited

resources, microeconomics studies the impact of production‐related
decisions: capital requirement, labor requirement, production capacity,
process, methods, techniques, cost, and quality, 
2. Investment Theory: Companies diligently plan their capital
investment to ensure resource utilization—generating higher returns.
3. Demand Theory: To ensure consumer satisfaction, managers analyze
consumer needs and requirements—they understand consumer
attitudes and responses toward company products or services.
4. Market Structure Pricing Theory: It involves price determination and
management—the business prices its products and services very
competitively. To determine the price, the firms consider production
cost, market demand, and marketing cost.
5. Profit Management: Profit maximization is the ultimate aim—this
approach focuses on cost and revenue.

Macroeconomics for Handling External Environment

Issues

Businesses operate in external environments—face unforeseen challenges.

Macroeconomics deals with external challenges with the help of tools like
PESTEL analysis.

Let us go through the components in detail:

1. Political ﴾P﴿: The government plays a critical role in a firm’s progress.

Thus, managerial economics studies how governance style, political
unrest, and foreign collaboration affect private sector companies.
 2. Economic ﴾E﴿: Business profitability greatly depends on government
policies, tax reforms, GDP, and the nation’s economic stability.
3. Social ﴾S﴿: The social environment molds businesses. This includes
factors like societal values, beliefs, attitudes, consumer awareness,
employment conditions, literacy rate, and trade unions.
4. Technological ﴾T﴿: Technology enhances the production and
distribution of goods or services.
5. Environmental ﴾E﴿: When awareness of environmental concerns
increases—firms face pressure to adopt sustainable and eco‐friendly
practices. This includes the curtailing of pollution, waste management,
preservation of water, and preservation of natural resources.
6. Legal ﴾L﴿: Businesses must operate within legal boundaries—national
laws pertaining to consumer rights, labor laws, health and safety laws,
product labeling regulations, and advertising guidelines.

Nature of Managerial Economics

Managerial economics has often been confused with traditional economics

but it has a whole new meaning and purpose. Let us understand the
distinction by venturing deeper into its characteristics:

Microeconomics: It solves microeconomic problems faced by a particular

firm—does not focus on the entire economy.
Pragmatic: Managerial economics is a practical approach—it applies
economic principles in decision‐making and problem‐solving.
economic principles in decision‐making and problem‐solving.
Multidisciplinary: This approach aggregates multiple streams—business,
management, accounting, statistics, finance, and mathematics.
Application of Macro Economics: Every firm operates in an external
environment—influenced by legal, political, global, social, economic,
technological, competitive, and demographic factors. Macroeconomics deals
with all these threats.
Management Oriented: It educates leaders and managers on how to make
crucial decisions in critical situations.

Importance

Following are areas where managerial economics plays a key role:

The companies use managerial economics for forecasting demand. Based on

demand projections, long‐term business policies are formulated.
The external environment poses various challenges and uncertainties. This
discipline creates an estimate of those threats; as a result, firms can prepare
themselves for damage limitation strategies.
Inventory management is crucial for business. By employing demand
analysis, firms can plan inventory beforehand.
It facilitates the determination of the future cost of the business. Scarce
resources can be utilized efficiently; this way total cost of production and
sales can be mitigated.
This study aids top‐level management in making critical capital management
decisions—investing in the right venture.

Frequently Asked Questions ﴾FAQs﴿

What is managerial economics?

It is a management discipline that emphasizes the implementation of micro
and macro‐economic principles. These theories, methodologies, and
concepts are utilized for decision‐making and problem‐solving.
What is the role of managerial economics?
It plays a key role in business management—it facilitates decision making,
planning, demand projections, coordination, cost analysis, cost control,
production analysis, profit management, and capital management.

How does managerial economics differ from economics?

It is a systematic application of the various economic policies for decision‐
making. It solves business problems and focuses on the utilization of scarce
resources. Traditional economics, on the other hand, studies the need and
availability of resources for enhancing the production, distribution, and
consumption of commodities. It focuses on the allocation of limited
resources.

What are the characteristics of managerial economics?

Its characteristics are as follows:
#1 Microeconomic
#2 Multidisciplinary
#3 Goal‐oriented
#4 Practical
#5 Dynamic
#6 Normative
#7 Conceptual
#8 Metrical approach.

Recommended Articles
 Recommended Articles

This has been a guide to what is Managerial Economics and its definition. We
discuss the scope, meaning, nature, role & importance of managerial
economics. You can learn more about it from the following articles – 

Business Economics
Managerial Economics Books
Economic Efficiency

Investment Banking
Training ﴾120 Courses, 25+
Projects﴿
117 Courses

25+ Projects

600+ Hours

Full Lifetime Access

Certificate of Completion

LEARN MORE >>

Leave a Reply
Leave a Reply

Your email address will not be published. Required fields are marked *

Comment *

Name *

Email *

Website

Save my name, email, and website in this browser for the next time I
comment.

Post Comment
 FREE INVESTMENT BANKING COURSE

Learn the foundation of Investment banking, financial modeling,

valuations and more.
Join Wallstreetmojo Youtube
68.5K subscribers

FREE EXCEL COURSE

Learn MS Excel right from scratch. Master excel formulas, graphs,

shortcuts with 3+hrs of Video.

Join Wallstreetmojo Instagram

 FREE FINANCE MODELING COURSE

Learn Financial Modeling in Excel with this Step by Step Guide

﴾Colgate Case Study﴿

Join Wallstreetmojo Linkedin

 FINANCE DICTIONARY

Learn & Master Finance & Accounting with 5400+ Step by Step
Guides & Resources

Featured Guides
What is Economics?
Top Economic Indicators
What is Microeconomics?
What is Macroeconomics?
What is Fiscal Policy?

Company

About
Reviews
Contact
Privacy Policy
Terms of Service
Advertise with us

Resources
Blog
Free Courses
Investment Banking Resources
Financial Modeling Guides
Excel Resources
Accounting Resources
Financial Statement Analysis

Courses

Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Follow Us

YouTube
Facebook
LinkedIn
Twitter
Instagram

ACTIVE ACTIVE ACTIVE

06­16­22 06­16­22 06­16­22
CLICK TO VERIFY CLICK TO VERIFY CLICK TO VERIFY

Copyright © 2022 . CFA Institute Does Not Endorse, Promote, Or Warrant The
Copyright © 2022 . CFA Institute Does Not Endorse, Promote, Or Warrant The
Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst®
Are Registered Trademarks Owned By CFA Institute.