Discuss any three (3) aspects of microeconomic theory that are relevant to managerial
economics:
1, theory of the firm
theory of consumer behavior (demand)
3, production and cost theory (supply)
4, price theory
5, market structure and competition theory
‘Theory of the Firm
According to the theory of the firm, every business organization is driven by the motive of
maximizing profits. This theory influences decisions for allocating resources, methods of
production, adjustments in prices, and manufacturing in huge quantum, Both the theory of the firm
and the theory of the consumer go hand in hand. (Theory of the Firm (Economics) - Explained,
n.d.-b). Managerial theories of the firm place emphasis on various incentive mechanisms in
explaining the behaviour of managers and the implications of this conduct for their companies and
the wider economy. (MANAGERIAL THEORIES OF THE FIRM, n.d.),
It says that every firm operates in order to turn inputs into outputs. In this theory, the goal
of the firm is profit maximization through different courses of action for increasing the net profits.
‘The theory of firm is relevant as it has great influence on decision-making in a variety of areas,
including resource allocation, production techniques, pricing adjustments, and the volume of
production which are all significantly important. It is highly pertinent on managerial economics
due to its very nature as a microeconomic theory.‘Theory of Consumer Behavior (Demand)
Consumer behaviour theory is the study of how people make decisions when they purchase,
helping businesses and marketers capitalise on these behaviours by predicting how and when a
consumer will make a purchase. It helps to identify what influences these decisions, as well as
highlight strategies to proactively manipulate behaviour. Consumer behaviour theory allows
businesses to understand more about their target audience and so be able to craft products, services
and company culture to influence buying habits (Kornbluth, 2022; Theory of the Firm (Economics)
- Explained, n.d.).
tis a concept that determines how the consumer spend their money, its scope include the
behavior the people exhibits as consumers and studies how people think in spending their resources
based on their preferences and other budget restrictions to maximize utility. This theory is relevant
in managerial economics because with this, consumer preferences are used to determine demand
and producers are informed on how consumers allocate income to the purchase of different goods.
Price Theory
‘The theory of price is an economic principle in which demand and supply determine the
prices at which goods and services will be traded. When the money paid for goods and services by
consumers meet the marginal cost of producing the goods, the point of equilibrium between
demand and supply occurs. (What Is Theory of Price? Definition in Economics and Example,
2022) This theory is relevant to managerial economics because (Pettinger, 2019) states that the
price of goods plays a crucial role in determining an efficient distribution of resources in a market
system.In other words, Price theory gives emphasis on the relationship between the supply and
demand of a specific good or services. It says that price hikes occur when the demand surpasses
supply and price reduction happens when supply exceeds demand. This theory is indispensable
to managerial economics because it allows price adjustments which are helpful for the firms and
‘consumers respond to changing market conditions.
References
Kombluth, H. (2022, August 17). Consumer Behaviour Theory: How Has It Changed. FastPay.
hhutps://fastpayltd.co.uk/blog/consumer-behaviour-theory-how-has-it-changed/
MANAGERIAL THEORIES OF THE FIRM.
(nd), hitps:/sites. google.com/site/economicsbasics/managerial-theories-of-the-firm
Pettinger, T. (2019, December 17). Role and Function of Price in Economy. Economics
Help. https://www.economicshelp.org/blog/1170/economics/role-and-function-of-price-
in-economy/
Theory of the Firm (Economics) - Explained. (0.4.). The Business Professor, LLC.
/htips:/thebusinessprofessor.conv/en_US/economic-analysis-monetary-policy/theory-of-
the-firm-definition
What ls Theory of Price? Definition In Economics and Example. (2022, July 30).
Investopedia. hitps://www.investopedia.com/terms/ttheory-of-price.asp