The Scope of Managerial Economics:

Managerial Economics – refers to the

application of economic theory and the
tools of decision science to examine how
an organization can achieve its aims or
objectives most efficiently.
The Nature of Managerial Economics:
Management decision
problems

Decision sciences:
Economic theory: Mathematical
Microeconomics, economics,
macroeconomic econometrics

MANAGERIAL ECONOMICS:
Application of economic theory
and decision science tools to
solve managerial decision
problems.

OPTIMAL SOLUTION
TO MANAGERIAL DECISION
PROBLEMS
Relationship to Economic Theory:
The organization can solve its management
decision problems by the application of economic
theory and the tolls of decision science. Economic
theory refers to microeconomics and
macroeconomics.
Although the Theory of the Firm is the single most
important element in managerial economics, the
general macroeconomic conditions of the
economy within which the firm operates are also
very important.
Economic theories seek to predict and explain
economic behavior. Economic theories usually
begins with a model. This abstracts from the
many details surrounding an event and seeks to
identify a few of the most important
determinants of the event.
Ex. The theory of the firm assumes that the firm
seeks to maximize profit and on the basis of that
it predicts how much of a particular commodity
the firm should produce under the different form
of market structure or organization.
Relationship to the Decision Sciences:
Managerial economics is closely related to the
decision sciences. These use the tools of
mathematical economics and econometrics to
construct and estimate decision models aimed
at determining the optimal behavior of the firm
(i.e. how the firm can achieve its goals most
efficiently).
Mathematical Economics – is used to formalize
(1.e. to express in equational form) the
economic models postulated by economic
theory
Econometrics – applies statistical tools
(particularly regression analysis) to real world
data to estimate the models postulated by
economic theory and forecasting.
Relationship to the Functional Areas of Business
Administration Studies:
• Accounting
• Finance
• Marketing
• Human Resource Management
• Production
These disciplines study the business
environment in which the firm operates and
provide the background for managerial decision
making.
Thus, managerial economics can be regarded as
as :
1. An overview course that integrates economic
theory, decision sciences, and the functional
areas of business administration studies;
2. It examines how they interact with one
another as the firm operates to achieve its
goal most efficiently.
Five Steps in Managerial Decision Making:
1. Establishing the objective of the firm or
organization,
2. Defining the problem or obstacles that the
firm faces in trying to achieve its objective,
3. Identifying the range of possible solutions,
4. Selecting the best solution available, and
5. Implementing the decision.
 The Theory of the Firm
Firm – an organization that combines and
organizes resources for the purpose of producing
goods and services for sale.
Reasons for Existence of Firms and Their
Functions:
Firms exist because:
1. It would be very inefficient and costly for
entrepreneurs to enter into and enforce contracts
with workers and owners of the resources.
2. To save transaction costs
By internalizing many transactions, the firm
saves on sales taxes and avoid price controls and
other government regulations that apply only to
transaction among firms.