Concept of Managerial Economics
The development of managerial economics as a distinct discipline is relatively new. Although managerial economics emerged in the early 1950s, it was initially known as business economics. However, the term managerial economics grew in popularity and eventually supplanted the term business economics. Managerial economics is the study of all economic activities in for-profit and not-for-profit organizations. It is closely related to traditional economics, which is based on theories and principles such as demand analysis, production analysis, price theories, profit theory, and market structure, all of which are covered by microeconomics theory.
Different economists have defined managerial economics differently.
According to Spencer & Siegelman, "Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by the management."
In the words of Papas and Brigham, "Managerial economics is the application of economic theory and methodology to business administration practice. More specifically, managerial economics is the use of tools and techniques of economic analysis to analysis and solve managerial problems.
According to Dean Jeol, "Use of economic analysis in formulating policies is known as managerial economics."
According to Reckie & Crook, "To the businessmen, managerial economics is the branch of economics which can assist him in finding optimal solutions to business problems.
The definitions of managerial economics related to decision-making have received the most acceptances. In a nutshell, it is a practical approach to traditional economics that aids managerial decision-making. It connects two disciplines: economics and business management. Thus, managerial economics is the study of how an organization can achieve its goals most efficiently using economic theory and decision-making tools.
Managerial economics examines the issues that arise during the organization's business decision-making process. The goal of managerial economics is to study the economic activities of the firm from a practical standpoint. Thus, managerial economics is the application of economic theory and methods to managerial decision-making problems in business. Traditional economics is concerned with the body of principles themselves. Traditional economics is concerned with the underlying assumptions of economic theories. Microeconomics, macroeconomics, and some specific areas such as agricultural economics, development economics, environmental economics, labor economics, public finance, and so on are included. Traditional economics is concerned with the cause and effect relationship of economic variables. It does, however, deal with value judgments such as what should be done to correct economic problems.
Features of Managerial Economics
The characteristics or features of managerial economics can be outlined by different economists' definitions. The following are some of the major characteristics or features of managerial economics:
Managerial economics is microeconomic in nature because it deals with the behavior and economic activities of individual firms. It is not concerned with the aggregate of economic variables or the economy as a whole. Managerial economics is concerned with individual output, product pricing, firm strategy, and so on. It investigates how a company chooses between numerous alternatives. Managerial economics is microeconomic in nature because it deals with the business unit rather than the economy as a whole.
Use of Macroeconomics: Microeconomics and macroeconomics are inextricably linked. Managerial economics employs macroeconomics to comprehend and adapt to the firm's operating environment. Macroeconomic policies include the business cycle, tax policy, business policy, industrial policy, wage policy, pricing policy, and so on. These policies help managers understand the business environment. As a result, managerial economics employs the concept of macroeconomics to guide managers.
Managerial economics, as opposed to positive economics, has a normative character. Positive economics is concerned with the facts without making value judgments. Normative economics makes value judgments and is concerned with 'what ought to be' and 'what ought to be done' to solve economic problems. Managerial economics studies managerial decision making and includes value judgement. It advises managers on firm objectives and deals with methods of achieving those objectives in a given situation.
Managerial economics is a practical rather than a theoretical discipline. It disregards traditional economics' complex and rigid concerns in favor of tools that are necessary to solve firm problems. It enables business executives to implement the best policies and make the best decisions in any given situation.
Managerial economics is both goal-oriented and descriptive. It is concerned with how managers should formulate decisions in order to achieve organizational goals.
Managerial economics is a multidisciplinary field that combines economics, management, statistics, mathematics, psychology, and other disciplines. It bridges the gap between traditional economics and the decision-making tools of the decision sciences.
Narrow Scope: The managerial scope is narrower than the traditional economic scope. Managerial economics is an expanded version of traditional economics' firm theory. It primarily focuses on the firm's profit analysis.
Application of Economics to Business Decisions
Business decision-making is essentially a process of selecting the best out of alternative opportunities open to the firm. The process of decision- making comprises four main phases:
- Determining and defining the goal to be achieved,
- Gathering and analyzing business-related data and other information about the economic, social, political, and technological environments, and anticipating the need and occasion for decision-making;
- Inventing, developing, and analyzing potential courses of action; and
- Choosing a specific course of action from among the available options.
This decision-making process, however, is not as simple as it appears. Steps (ii) and (iii) are critical in making business decisions. In the modern business world, these steps put managers' analytical abilities to the test, determining the appropriateness and validity of decisions. Personal business sense, intuition, and experience may not be sufficient to make appropriate business decisions in today's fast-changing, competitive, and complex business environment. Decision-makers' personal intelligence, experience, intuition, and business expertise must be supplemented with quantitative analysis of business data on market conditions and the business environment. Economic theories and tools of economic analysis make significant contributions to decision-making in this area.
Assume a company intends to launch a new product for which there are close substitutes on the market. Obtaining the services of business consultants or seeking expert opinion is one method of deciding whether or not to launch the product. If the matter must be decided by the firm's managers, the following areas must be thoroughly investigated and analyzed:
• Production-related issues, and
• Sales prospects and problems.
In terms of production issues, managers will be required to collect and analyze data on:
• Available production techniques,
• Production costs associated with each production technique,
• Input supply position,
• Price structure of inputs,
• Cost structure of competing products, and
• Availability of foreign exchange if inputs are to be imported
Managers must collect and analyze data on:
• Market size, general market trends, and demand prospects for the products,
• Trends in the industry to which the planned product belongs,
• Major existing and potential competitors and their respective market shares,
• Prices of competing products, and
• Prospective competitors' pricing strategy;
• Market structure and degree of competition; and
• supply position of complementary goods.
The application of economic theories and tools of economic analysis helps significantly in the decision-making process in this type of analysis of input and output markets.
