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Managerial Economics and Decision Making

Managerial Economics and Decision Making

One has to observe the economic prospects of a particular before venturing into it. Most of the people are not aware of the existence of some businesses with fantastic economic characteristics like high rate of return on invested capital, substantial profit margins and consistent growth. How do you think Bill Gates and Warren Buffet were able to make it on the Forbes top millionaires list? Successful leaders focus on the economics of a business for decision making.

economic feasibility

Economic Aspects of a Market

Managerial economics is a science that gives you more idea about the economic aspects of a market and how they affect your decision making. This is very important because economic profits play a crucial role in a market based economy., While above normal profits are indicators of expansion and growth, below normal profits cautions you about tightening or retrenchment. Business economics is comprised of several tools of micro and macro economic analysis which are useful in management decision-making that act as facilitators to solve business problems. Micro economic instruments used in this context include demand analysis, production and cost analysis, breakeven analysis, theory of pricing, technical progress, location decisions and capital budgeting .

Factors Influencing Management Decisions

The macroeconomic concepts that are directly or indirectly related to management decisions include analysis of national income, business cycles, monetary policy, fiscal policy, central banking, public finance, economic growth, international trade, balance of payments, protectionism, free trade, exchange rates and international monetary system. The scope of management science is broad and is closely linked with economic theory, decision sciences and accounting.

Traditional economics deals with theory and methodology of management, while managerial or business economics applies these theories to solve business problems. The tools and analytical techniques are useful in providing optimal solutions to business problems.

  • Relationship with economics :

Managerial economics borrows concepts from economics to idealize the strategic actions needed for decision making in a problem situation. The analysis of micro and macro economic concepts adds valuable information for the organization. Say, for example, national income forecasting is an important aid for the analysis of business conditions that in turn could be an invaluable contribution to forecast demand for specific product groups. Theories of market structure can be analyzed for market segmentation. Managers have the freedom to choose between the decision alternatives that best suits the objectives of the business enterprise. The challenge is to justify the alternative in terms of cost and benefit.

  • Relationship with decision sciences :

Decision models are created to format solutions for problem situations and the process uses techniques such as, optimization, differential calculus and mathematical programming. This also helps to analyze the impact of alternative courses of action and evaluate the results of the model. Economic models provide the organizations with the necessary insight concerning value maximization

  • Relationship to Accounting

The accounting data and statements constitute the language of business. The accounting profession has a significant impact on cost and revenue information and classification. A manager therefore must be familiar with the generation, interpretation and use of accounting data. Accounting is also seen as a decision management tool and not as a mere practice of book-keeping. The concepts and practices of accounting can be well applied to improve the economic scope of a project.

Economic theory is all about allocating scarce resources between competing ends and managerial economics advocates rules for improving managerial decisions and for efficiently achieving the goals of an organization.