Managerial Economics

Friday, March 17, 2023 4:44 PM

Definition of Managerial Economics

“Managerial economics is concerned with the application of economic concepts and economic analysis to the
problems of formulating rational managerial decisions.

Relationship between MACRO, MICRO and MANGERIAL Economics

Microeconomics studies the actions of individual consumers and firms; managerial economics is
an applied specialty of this branch. Macroeconomics deals with the performance, structure, and
behavior of an economy as a whole. Managerial economics applies microeconomic theories and
techniques to management decisions. It is more limited in scope as compared to microeconomics.
Macroeconomists study aggregate indicators such as GDP, unemployment rates to understand the
functions of the whole economy. Managerial economics is a science as well as an art.
Microeconomics and managerial economics both encourage the use of quantitative methods to
analyze economic data. Businesses have finite human and financial resources; managerial
economic principles can aid management decisions in allocating these resources efficiently.
Macroeconomics models and their estimates are used by the government to assist in the
development of economic policy.

Examples of Managerial Economics What is the Scope of Managerial Economics?

Different tools of managerial economics can be used to achieve all the goals Managerial economics is a developing subject and its empirical and
of a business organization in an efficient manner. The examples of managerial perspective nature widens its scope. It works as a tool for businesses that is
economics applications are: used to understand the functioning of a market and also how to sustain
themselves in an ever-changing market.
• Managerial economics finds its use in deciding the price of a product.
• It also helps firms to decide on the manufacturing of a product or to From analyzing demands and forecasting future demand to capital
purchase it from another manufacturer. management, managerial economics provides help with almost everything. It
• To decide on the production technique to be used in the manufacturing of a also helps companies in Pricing Decisions, Policies, and Practices, cost and
product production analysis, and manage their profits.
• It also helps in inventory management. A firm can decide on the level of
1. Demand Analysis and Forecasting
inventory it will maintain of a product or a raw material.
• Decide on the advertising media and the intensity of advertising campaigns.
A firm relies on converting inputs into outputs and generates revenue from
• Managerial economics is used by businesses to decide on employment and
them. A clear and accurate estimation of demand ensures a continuous
training.
efficiency of the firm. Several external factors like price, income, affect the
• After all the analyses, the management looks at the opportunities for further
demand that need to be analyzed.
investment.
Upon analyzing these factors affecting the demand for a product, managers
From <https://www.analyticssteps.com/blogs/scope-managerial-economics>
can decide on the production. After estimating the current demands,
Tools Used in Managerial Economics
managers move ahead to predict future demands for the product. This is
Managerial economics makes use of different economic tools. The concepts
referred to as demand forecasting.
of micro vs macroeconomics are applied for effective decision-making. Let’s
The ability to forecast demands allows the management to capitalize on the
explore the uses of some economic tools in managerial economics:
opportunities available and strengthen the market position of the firm. During
the process of demand analysis, the management also gets to know about the
1. Opportunity Cost Principle
external factors affecting it and hence work on them to nullify any negative
The Opportunity Cost Principle is concerned with the cost of the next best
effect.
alternative of the good we are buying or opting for. The idea behind
opportunity cost is that the cost of one item is the lost opportunity to do or
2. Cost and Production Analysis
consume something else.
This principle has significant use in the process of decision making.
Cost Analysis is yet another function of Managerial economics. A company
Comparing the opportunity cost of one decision with another one gives an
makes a profit in two ways: by increasing the demand or by reducing the
idea about the ideal decision.
cost. The determinants of assessing costs, the connection between cost and
yield, the gauge of cost and benefit are indispensable to a firm.
2. Incremental Principle
Cost analysis is an important exercise for any company. A component of cost
Managerial economists make use of the incremental principle in the theories
vulnerability always exists since all the elements deciding expenses are not
of consumption, product pricing, and distribution.
generally known or controllable.
The principle states that the firm can maximize its profit if it is able to equate
By taking the help of managerial economics, the management of a company
its marginal cost with the marginal revenue it generates. This helps managers
identifies the factors causing a variation in costs. The company then uses the
decide on the expansion of their business, as it guides them to keep
cost estimates in their decision making like pricing a product.
expanding until they reach the desired point: when marginal costs stand equal
Production analysis is more of a physical exercise. It involves examining the
to the marginal revenue.
factors of production, also known as inputs, and obtaining the best
combination so as to get the least cost combination.
3. Principle of Time Perspective In case of price rise in the inputs, the management looks beyond and tries out
The principle of time perspective states that a decision should take into the alternatives. The analysis helps them get instant ideas in such uncertain
account both the short and long-run effects on revenue and costs. It should situations.
maintain the right balance between the short-run and the long-run The topics covered during cost and production analysis are production
perspectives. function, least-cost combination of factor inputs, factor productiveness, returns
This principle helps managers in decision-making in output, prices, to scale, cost concepts and classification, cost-output relationship, and linear
advertising, and expansion of the business. programming.

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perspectives. function, least-cost combination of factor inputs, factor productiveness, returns
This principle helps managers in decision-making in output, prices, to scale, cost concepts and classification, cost-output relationship, and linear
advertising, and expansion of the business. programming.

4. Discounting Principle 3. Pricing Decisions, Policies, and Practices

The discounting principle states that if a decision taken today affects the cost Among the 4Ps of marketing, Price finds an important place. For any firm,
and revenues of the future, those costs and revenues must be discounted Pricing is a very important aspect of Managerial Economics as a firm's
today to avoid any comparisons with alternatives. revenue earnings largely depend on its pricing policy. However, it is a bit
This economic tool is used by managers in deciding on the prices of the challenging as other players are competing in the same price segment.
product and also in investment decisions. When pricing a product is done, the costs of production are also taken into
account. Managerial economics helps the management to go through all the
5. Equi-Marginal Principle analyses and then price a product. In an oligopoly market condition, the
The Equi marginal principle states that consumers will choose a combination knowledge of pricing a product is essential.
of goods to maximize their total utility. The principle works on the basic idea of
human nature. We tend to compare the utility of two products and opt for 4. Capital Management
"The
those limitations of managerial economics are as follows:
which are efficient. Every asset a business owns is known as its capital. Capital management
(a)Managerial economics
In a similar fashion, focusin
managers ona management
firm would wantanalysis based
to utilize on financial
all their thus becomes an important practice.
and cost accounting data. Thus, the reliability of this data depends on the
resources to the same extent. Planning and control of capital expenditures is a basic executive function. It
accuracy of the financial accounting information.
involves the Equi-marginal principle. The prime objective is to ensure the
(b)Such analysis is based on past information. But if a new scheme is to be
introduced, the circumstances change and the conclusions cannot be sustainable use of capital. This means that funds should be kept at a bay
predicted using this past information. when the managerial returns are less than in other uses.
(c)Managerial economics is subjected to the personal preferences of the The main topics dealt with during capital management are Cost of Capital,
individual manager which can influence the final decision of the manager to a
Rate of Return, and Selection of Projects.
certain extent.
(d)It is an expensive process as a business firm generally requires a certain 5. Profit Management
number of managers to ensure proper functioning.
A business firm is an organization designed with an intention to make profits
(e)The science of managerial economics is quite recent and is not fully
developed. Thus, it is subjected to ambiguity in certain scenarios. and profits reflect the success of a company. After all the analyses, it all rolls

The manager is required to have extensive knowledge in a variety of fields in
order to ensure that he completely comprehends the situation to be dealt
with."
From <https://brainly.in/question/2412233>
down to profits.
To maximize profits a firm needs to manage certain things like pricing, cost
aspects, resource allocation, and long-run decisions. This would mean that
the firm should work from the very beginning, evaluate its investment
decisions and frame the best capital budgeting policies. Profit management is
considered as a difficult area of managerial economics.
The important aspects covered under this area are: nature and measurement
of profit, profit policies, and techniques of profit planning like break-even
analysis, cost-volume-profit analysis, etc.

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