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What is Managerial Economics

Managerial Economics – What is Managerial Economics and Discuss its Scope and Application?

Definition:

  1. “Economics is concerned with the study of the allocation of scarce resources among competing ends.”
  2. “Managerial Economics is the application of economic theory and methodology to business administration practice.”-Eugene F. Brigharm and James L. Pappas
  3. “Managerial Economics is concerned with the application of economic principles and methodologies to the decision making process under conditions of uncertainty.”-Evan J. Douglas

Nature of Economics:

Economics is a social science which details about the economy and its effect and impact on the society. The market place where trade and commerce takes place in the society is never a pre-existing condition of nature. It is not cosmic or natural. This process is controlled by people and is chiefly manipulated to fulfill specific motives. Where there is money, there is economics. Thus, economics is related to society and its people. The subject is therefore often identified as a part of social science and not a branch of natural science, chemistry or mathematics.

 

Managerial economics is the science of directing scarce resources to manage cost effectively. It consists of three branches: competitive markets, market power, and imperfect markets. A market consists of buyers and sellers that communicate with each other for voluntary exchange. Whether a market is local or global, the same managerial economics apply.

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A modern society cannot survive without economics intervention. Elements like banking, business of a firm, machine performance, production level, unemployment all falls under economics. On the contrary the term natural science refers to that discipline which is related to the study of nature and its relation to mankind or with each other.

A seller with market power will have freedom to choose suppliers, set prices, and use advertising to influence demand. A market is imperfect when one party directly conveys a benefit or cost to others, or when one party has better information than others.

Managerial Economics

Dollar Exchange Rate

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An organization must decide its vertical and horizontal boundaries. For effective management, it is important to distinguish marginal from average values and stocks from flows. Managerial economics applies models that are necessarily less than completely realistic. Typically, a model focuses on one issue, holding other things equal.

 Application:

Managerial economics applies to:

(a) Businesses (such as decisions in relation to customers including pricing and advertising; suppliers; competitors or the internal workings of the organization), nonprofit organizations, and households.

(b) The “old economy” and “new economy” in essentially the same way except for two distinctive aspects of the “new economy”: the importance of network effects and scale and scope economies. .

(c) Both global and local markets.

 Scope:

Managerial economics is concerned with various micro and macro-economic tools and analysis which can be used in managerial decision making to solve business problems.

 (a) Microeconomics – the study of individual economic behavior where resources are costly, e.g., how consumers respond to changes in prices and income, how businesses decide on employment and sales, voters’ behavior and setting of tax policy.

Micro-economic tools- Demand analysis, Production and cost analysis, Break-even analysis, Pricing theory and practice, Location decisions and Capital budgeting.

(b) Managerial economics – the application of microeconomics to managerial issues (a scope more limited than microeconomics).

(c) Macroeconomics – the study of aggregate economic variables directly (as opposed to the aggregation of individual consumers and businesses), e.g., issues relating to interest and exchange rates, inflation, unemployment, import and export policies.

Macro-economic tools- National income analysis, Business cycles, Consumption, Investment function, Multiplier analysis, Role of government,  Monetary policy, Fiscal Policy, Central banking, Government finance, Economic growth, International trade, Balance of payments, Free trade protectionism, Exchange Rates and International Monetary system.

Important Terms in Economics That You Should be Knowing:

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