Meaning of Managerial Economics
Managerial economics refers to the management of business using economic theories, tools, and concepts. It is simply the amalgamation of management principles and economic theories for better problem solving and decision making. It is a branch of economics that applies economic theories for analysis, assumption, and prediction of business conditions.
Managerial economics bridges the gap between economics in theory and economics in practice. It assists the managers in logically solving business problems and rational decision making. The key function of managerial economics is efficient decision making and chooses the most suitable action out of two or more alternatives. It monitors and ensures that all scarce resources like labor, capital, land, etc. are properly utilized to derive better results.
Managerial economics performs three important roles for business organizations: Demand analysis and forecasting, capital management and profit management. Firms with the application of managerial economics optimally decide what to produce, how to produce and for whom to produce.
Nature of Managerial Economics
- Art and Science: Managerial economics is termed as both art and science. The application of managerial economics in decision making requires creativity and lots of analytical thinking. It is regarded as science as it uses various economic theories and concepts for managing business and solving problems.
- Management oriented: Managerial economics is a management-oriented concept. It helps the management in rational decision making and solving all business problems logically by supplying all relevant information.
- Multi-disciplinary: Managerial economics is multidisciplinary in nature. It uses principles and theories from various subjects like economics, finance, statistics, marketing, accounting, mathematics, human resource, etc.
- Close to Micro Economics: Managerial economics analyses and solves problems of a particular firm or organization only but not of the whole economy. It focuses on individual units of the economy and provides optimum solutions for facing problems.
- Uses Macro Economics: Managerial economics properly studies macro or external environment within which business operates for better management of the business. It analyses different external factors that affect the business organization like economy state, government policies, market conditions, etc.
- Prescriptive discipline: Managerial economics defines course of action for business for attaining goals and objectives. It chooses the best option among all alternatives available for solving the problems.
- Conceptual: Managerial economics is conceptual in nature as it is based on economic theories and concepts. It does not work on an arbitrary collection of prescriptions but analyze all business problems on the basis of well-established economic concepts.
Scope of Managerial Economics
- Decision making: Managerial economics helps business organizations in taking effective decisions. It tells how management can use various quantitative tools and economic theories for formulating policies and various managerial decisions.
- Production and cost analysis: It helps in estimating the cost of production and determines factors causing variations in cost estimates. Managerial economics properly analyses and decides production activities and costs associated with them. It ensures that all resources are efficiently utilized which reduces the overall cost.
- Demand Analysis and Forecasting: Managerial economics enables the business in analyzing demand and forecasting future uncertainties. An accurate estimate of demand will help in preparing the right production schedules and employing resources accordingly.
- Pricing policies: Pricing is one of the key decision to be taken by every business organization for earning desired profits and attaining desired growth. Managerial economics supplies all relevant data to managers for deciding right prices for products. Key aspects covered under this area are Pricing methods, product-line pricing, differential pricing and price determination in various market forms.
- Profit management: Managerial economics helps in managing the profit of business organizations. Profit is the main measure for the success or growth of firm in the long run. It helps in making correct estimates of all cost and revenue at different levels of outputs which helps in earning the desired profit.
- Capital management: Capital investment decisions is one of the most challenging and complex tasks before every manager. Managerial economics helps in planning and managing all capital expenditures of business which requires huge investment. It properly analyses investment avenues before investing any amount into it to ensure the profitability of an investment.