What is Managerial Economics?

● Managerial economics is deemed to apply economic theory and principles to business decision-
making. It is concerned with the use of economic analysis for the formulation and solution of
business.

● L. Pappas and E. F. Brigham wrote a managerial economics book entitled “Managerial Economics:
An Introduction”. They define managerial economics as “the application of economic analysis to
decision-making within an organisation”, emphasising that it should aid managers’ decisions to
increase organisational efficiency and profitability.

● Furthermore, they emphasise the importance of managerial economics for understanding market
forces such as demand curves and production costs about pricing strategies, resource allocation
policies and forecasting methods for making informed financial management decisions. They also
note that while it is essential to consider both microeconomic and macroeconomic factors when
making decisions, attention must also be given to how these issues affect the business environment
within the organisation.
 ● Amir Hachemi defines managerial economics as
“the branch of economics that deals with applying economic principles to
business management practices.

● He further adds that it is concerned with analysing how resources are allocated
and utilised within a firm to maximise profits and efficiency, emphasising the
importance of understanding the implications of various economic theories and
models on managerial decision-making.

● Managerial economics, in simpler terms, is the application of economic

principles and methods to business decision-making. It is concerned with how
managers use economic concepts and tools to make sound business
decisions.
Managerial economics bridges the gap between the theory of economics and
managerial practice.
 1. The Incremental Principle
● The Incremental Principle is one of the most important concepts in managerial economics. It states that
decision-makers should always choose the option that provides the most incremental benefit or the option
that provides the greatest increase in benefits over the next best alternative.

● This principle is especially important when making decisions about investments and other long-term
projects. For example, if a company is considering two different investment options, it should choose the
option that is expected to provide the highest return on investment.

2. The Marginal Principle

● The marginal principle is one of the essential concepts in managerial economics. It states that businesses
should make decisions by considering each option’s marginal benefits and marginal costs. In other words,
businesses should compare the additional benefits of an option to its additional costs and choose the
option that provides the most benefit for the least cost.

● This principle can be applied to various business decisions, from production and pricing to investment and
financing decisions. The key is to always consider each option’s incremental benefits and the cost before
taking decisions .
 3. The Opportunity Cost Principle

● The opportunity cost principle is used in various decision-making situations, including

investment, production, and resource allocation decisions. In each case, the goal is to make
the best use of resources by considering all of the potential costs and benefits.

● The opportunity cost principle is essential for managers who want to make sound decisions
that maximise value for their organisations. By considering all of a decision’s potential costs
and benefits, managers can make choices that will result in the best possible outcome for their
companies.It states that decisions should be based on the opportunity cost of resources, not
just the monetary cost.

● The opportunity cost principle is relevant to both individuals and organisations. For individuals,
it means that decisions should be based on the opportunity cost of time and effort. For
organisations, it means that decisions should be based on the opportunity cost of capital and
other resources.
 4. The Discounting Principle
● The Discounting Principle is one of the essential principles of Managerial Economics. It states
that the present value of a stream of future cash flows is always less than the future value of
those cash flows. This is because money has time value – it is worth more today than it will be
in the future. This principle is used extensively by businesses when making investment
decisions, as well as by individuals when making personal financial decisions.

● There are several reasons why the discounting principle is so important.

Firstly, it takes into account the fact that people prefer to have money now rather than later. It.
is because people can use the money now to buy goods and services they may not be able to
afford.

● Secondly, the discounting principle also considers that money invested today will earn interest
over time, meaning that it will be worth more in the future. Finally, the discounting principle
considers inflation – as prices rise over time, money will lose its purchasing power and be
worth less.
 5. The Time Perspective Principle

● The Time Perspective Principle is a fundamental principle of managerial economics

that states that an individual’s decisions are influenced by their perceptions of time.
This principle dictates that individuals make decisions based on their present
situation, prospects, and past experiences. Individuals with a positive time
perspective focus on the present and future, while those with a negative time
perspective focus on the past.

● The Time Perspective Principle is essential for managers, as it can influence an

individual’s willingness to take risks and make investment decisions.

● Overall, the Time Perspective Principle is a valuable tool for managers when making
decisions. By understanding and considering an individual’s time perspective,
managers can ensure that their decisions align with the organisation’s short-term
and long-term goals.
 6. The Equi Marginal Principle

● The Equi-Marginal Principle is one of the key concepts in Managerial Economics

that shapes the decision-making process. It states that rational decision-makers will
allocate their resources in such a way as to maximise their utility.

● This principle is based on the assumption that the decision maker is rational and
seeks to maximise their utility. The utility is often thought of as happiness or
satisfaction. So, the Equi-Marginal Principle says that rational decision-makers will
use their resources in a way as to maximise their happiness or satisfaction.

● The principle can be applied to any situation where there are limited resources and
multiple possible uses for those resources.
 1. Demand analysis and forecast

Managerial economics is a tool that can be used to analyse business decisions and help managers make better
choices. The goal of managerial economics is to use economic theory and tools to make business decisions that
are efficient and effective.
Demand analysis is the study of how consumers behave in different markets. Market structure refers to the way
that different markets are organised.

2. Cost and Production

Cost and Production AnalysisIn managerial economics, cost and production analysis study how businesses
decide what to produce, how, and who to produce it for. It helps managers understand how to optimise resources
and minimise costs while still meeting customer demand.There are two main cost and production analysis types:
short-run and long-run. In the short run, firms are limited by the amount of capital available. This means that they
can only change one factor of production, such as labour while keeping all other factors constant. In the long run,
firms can change all factors of production, giving them greater flexibility.
 3. Pricing Decisions, Policies, And Practices

In managerial economics, pricing decisions, policies, and practices broadly fall under the
scope of microeconomic analysis. Managerial economists use microeconomic tools to
analyse business decisions and strategies. This majorly includes analysing customer
behaviour, demand and supply, elasticity, market structure, and other economic concepts
 4. Capital Management

Capital Management means making decisions that ensure a company’s sound financial health.
There are two critical aspects to capital management, i.e., investment and financing. Investment
decisions involve using money to buy assets that will generate income for the business. Financing
decisions include raising money to fund investments and other activities.

Both investment and financing decisions are essential, but they can be quite different. Managerial
economics helps managers make sound capital investment and financing decisions. It provides
them with tools and frameworks for analysing problems and making informed decisions.

5. Profit Management
The scope of managerial economics is extensive. It covers almost all aspects of business decision-
making. Managerial economists use economic theory and quantitative methods to help managers
make decisions that are in the best interests of their firms. They also study how environmental
factors affect businesses, such as government policies, taxes, and competition.