• Managerial Economics

 
Definition, Nature, Scope
• Managerial economics is a discipline which deals with the application
of economic theory to business management.
• It deals with the use of economic concepts and principles of business
decision making.
• Formerly it was known as “Business Economics” but the term has now
been discarded in favour of Managerial Economics.
• Managerial Economics may be defined as the study of economic
theories, logic and methodology which are generally applied to seek
solution to the practical problems of business.
• Managerial Economics is thus constituted of that part of economic
knowledge or economic theories which is used as a tool of analysing
business problems for rational business decisions.
• Managerial Economics is often called as Business Economics or
Economic for Firms.
• Definition:
• Managerial economics is a stream of management studies which
emphasizes solving business problems and decision-making by
applying the theories and principles of microeconomics and
macroeconomics.
• It is a specialized stream dealing with the organization's internal
issues by using various economic theories.
• Economics is an inevitable part of any business. All the business
assumptions, forecasting and investments are based on this one
single concept.
• Content: Managérial Economics

• Nature
• Types
• Principles
• Scope
• More Definitions of Managerial Economics:

• “Managerial Economics is economics applied in decision making. It is

a special branch of economics bridging the gap between abstract
theory and managerial practice.” – Haynes, Mote and Paul.

• “Business Economics consists of the use of economic modes of

thought to analyse business situations.” - McNair and Meriam
• “Business Economics (Managerial Economics) is the integration of
economic theory with business practice for the purpose of facilitating
decision making and forward planning by management.” - Spencerand
Seegelman.

• “Managerial economics is concerned with application of economic

concepts and economic analysis to the problems of formulating
rational managerial decision.” – Mansfield
 Nature of Managerial Economics:

• The primary function of management executive in a business

organization is decision making and forward planning.
• Decision making and forward planning go hand in hand with each
other.
• Decision making means the process of selecting one action from two
or more alternative courses of action.
• Forward planning means establishing plans for the future to carry out
the decision so taken.
• The problem of choice arises because resources at the disposal of a
business unit (land, labour, capital, and managerial capacity) are
limited and the firm has to make the most profitable use of these
resources.
• The decision making function is that of the business executive, he
takes the decision which will ensure the most efficient means of
attaining a desired objective, say profit maximization.
• After taking the decision about the particular output, pricing, capital,
raw-materials and power etc., are prepared.
• Forward planning and decision-making thus go on at the same time
• A business manager’s task is made difficult by the uncertainty which
surrounds business decision-making.
• Nobody can predict the future course of business conditions.
• He prepares the best possible plans for the future depending on past
experience and future outlook and yet he has to go on revising his
plans in the light of new experience to minimize the failure.
• Managers are thus engaged in a continuous process of decision-
making through an uncertain future and the overall problem
confronting them is one of adjusting to uncertainty.
• In fulfilling the function of decision-making in an uncertainty framework,
economic theory can be, pressed into service with considerable advantage
as it deals with a number of concepts and principles which can be used to
solve or at least throw some light upon the problems of business
management.
• Examples are profit, demand, cost, pricing, production, competition,
business cycles, national income etc.
• The way economic analysis can be used towards solving business problems,
constitutes the subject-matter of Managerial Economics.
• Thus in brief we can say that Managerial Economics is both a science and an
art.
• To know more about managerial economics, we must know about its
various characteristics. Let us read about the nature of this concept in
the following points:
• Art and Science: Managerial economics requires a lot of logical
thinking and creative skills for decision making or problem-solving.
• It is also considered to be a stream of science by some economist
claiming that it involves the application of different economic
principles, techniques and methods, to solve business problems.
• Micro Economics: In managerial economics, managers generally deal
with the problems related to a particular organization instead of the
whole economy.
• Therefore it is considered to be a part of microeconomics.
• Uses Macro Economics:
• A business functions in an external environment, i.e. it serves the
market, which is a part of the economy as a whole.

• Therefore, it is essential for managers to analyze the different factors

of macroeconomics such as market conditions, economic reforms,
government policies, etc. and their impact on the organization.
• Multi-disciplinary:
• It uses many tools and principles belonging to various disciplines such
as accounting, finance, statistics, mathematics, production, operation
research, human resource, marketing, etc.
• Prescriptive / Normative Discipline:
• It aims at goal achievement and deals with practical situations or
problems by implementing corrective measures.
• Management Oriented:
• It acts as a tool in the hands of managers to deal with business-
related problems and uncertainties appropriately.
• It also provides for goal establishment, policy formulation and
effective
• Pragmatic:
• It is a practical and logical approach towards the day to day business
problems. Decision making.
 Types of Managerial Economics

• All managers take the concept of managerial economics differently.

• Some may be more focused on customer’s satisfaction while others
may prioritize efficient production.
• The various approach to managerial economics can be seen in detail
below:
• Liberal Managerialism:-
• A market is a democratic place where people are liberal to make their
choices and decisions.
• The organization and the managers have to function according to the
customer’s demand and market trend; else it may lead to business
failures.
• Normative Managerialism:-
• The normative view of managerial economics states that administrative
decisions are based on real-life experiences and practices.
• They have a practical approach to
• demand analysis,
• forecasting,
• cost management,
• product design and promotion,
• recruitment, etc.
• Radical Managerialism:-
• Managers must have a revolutionary attitude towards business
problems, i.e. they must make decisions to change the present
situation or condition.
• They focus more on the customer’s requirement and satisfaction
rather than only profit maximization.
 Principles of Managerial Economics

• The great macroeconomist N. Gregory Mankiw has given ten

principles to explain the significance of managerial economics in
business operations.

• These principles are classified as follows:

• Principles of How People Make Decisions:-
• To understand how the decision making takes place in real life, let us
go through the following principles:
• People Face Tradeoffs
• To make decisions, people have to make choices where they have to
select among the various options available.
• Opportunity Cost
• Every decision involves an opportunity cost which the cost of those
options which we let go while selecting the most appropriate one
• Rational People Think at the Margin
• People usually think about the margin or the profit they will earn
before investing their money or resources at a particular project or
person.
• People Respond to Incentives
• Decisions making highly depends upon the incentives associated with
a product, service or activity. Negative incentives discourage people,
whereas positive incentives motivate them.
 Principles of How People Interact

• Communication and market affect business operations. To justify the

statement, let us see the following related principles:
• Trade Can Make Everyone Better off
• This principle says that trade is a medium of exchange among people.
Everyone gets a chance to offer those products or services which they
are good at making. And purchase those products or services too,
which others are good at manufacturing.
• Markets Are Usually A Good Way to Organize Economic Activity
• Markets mostly act as a medium of interaction among the consumers
and the producers.
• The consumers express their needs and requirement (demands)
whereas the producers decide whether to produce goods or services
required or not.
• Governments Can Sometimes Improve Market Outcomes
• Government intervenes business operations at the time of unfavorable
market conditions or for the welfare of society. One such example is
when the government decides minimum wages for labor welfare.
 Principles of How Economy Works As A
Whole
• The following principle explains the role of the economy in the
functioning of an organization:
• A Country’s Standard of Living Depends on Its Ability to Produce
Goods and Services
• For the growth of the economy of a country, the organizations must
be efficient enough to produce goods and services.
• It ultimately meets the consumer’s demand and improves GDP to
raise the country’s standard of living.
• Prices Rise When the Government Prints Too Much Money
• If there are surplus money available with people, their spending
capacity increases, ultimately leading to a rise in demand. When the
producers are unable to meet the consumer’s demand, inflation takes
place.
• Society Faces a Short-Run Tradeoff Between Inflation and
Unemployment
• To reduce unemployment, the government brings in various economic
policies into action. These policies aim at boosting the economy in the
short run. Such practices lead to inflation.
 Characteristics of Managerial Economics:

• 1] Micro Economics-
• Managerial Economics is Micro Economics in character as it is
concerned with smaller units of the economy.
• It studies the problems and principles of an individual business firm or
an individual industry.
• It assists the management in forecasting and evaluating the trends of
market.
• 2] Normative Economics-
• It belongs to Normative Economics.
• It is concerned with what management should do under particular
circumstances.
• It deals with the future planning, policy making, and decision making
and making full utilization of the available resources of the enterprise.
• 3] Pragmatic-
• It is pragmatic as it tries to solve the managerial problems in their day
to day functioning and avoids difficult issues of economic theory.
• 4] Uses Theory of Firm-
• It uses economic concepts and principles which are known as the
theory of Firm or Economics of the Firm.
• 5] Takes the Help of Macro Economics-
• Issues of Macro Economics whose knowledge is necessary for the
successful management of a firm or an industry are:
• Business Cycles,
• Taxation Policies,
• Industrial Policy,
• Price and Distribution Policy,
• Wage Policy and
• Anti-Monopoly Policies etc.
• 6] Aims at Helping the Management-
• It aims at helping the management in taking correct decisions and
preparing plans and policies for future.
 Scope of Managerial Economics:

• The scope of managerial economics is not yet clearly laid out because
it is a developing science.
• Even then the following fields may be said to generally fall under
Managerial Economics:
• 1. Demand Analysis and Forecasting
• 2. Cost and Production Analysis
• 3. Pricing Decisions, Policies and Practices
• 4. Profit Management
• 5. Capital Management
• These above mentioned divisions of business economics constitute its
subject matter.
• Recently, managerial economists have started making increased use
of Operation Research methods like Linear programming, inventory
models, Games theory, queuing up theory etc., have also come to be
regarded as part of Managerial Economics.
• Managerial economics is widely applied in organizations to deal with
different business issues.
• Both the micro and macroeconomics equally impact the business and
its functioning.
• Following points illustrate its scope:
Micro-Economics Applied to Operational Issues

• To resolve the organization's internal issues arising in business

operations, the various theories or principles of microeconomics
applied are as follows:
• Theory of Demand: The demand theory emphasizes on the
consumer’s behavior towards a product or service.
• It takes into consideration the needs, wants, preferences and
requirement of the consumers to enhance the production process.
• Theory of Production and Production Decisions:
• This theory is majorly concerned with the volume of production,
process, capital and labor required, cost involved, etc.
• It aims at maximizing the output to meet the customer’s demand.
• Pricing Theory and Analysis of Market Structure:
• It focuses on the price determination of a product keeping in mind the
competitors, market conditions, cost of production, maximizing sales
volume, etc.
• Profit Analysis and Management:
• The organizations work for a profit. Therefore they always aim at
profit maximization. It depends upon the market demand, cost of
input, competition level, etc.
• Theory of Capital and Investment Decisions:
• Capital is the most critical factor of business. This theory prevails the
proper allocation of the organization's capital and making investments
in profitable projects or venture to improve organizational efficiency.
 Macro-Economics Applied to Business Environment

• Any organization is much affected by the environment it operates in.

The business environment can be classified as follows:
• Economic Environment:
• The economic conditions of a country, GDP, economic policies, etc.
indirectly impacts the business and its operations.
• Social Environment:
• The society in which the organization functions also affects it like
employment conditions, trade unions, consumer cooperatives, etc.
• Political Environment:
• The political structure of a country, whether authoritarian or
democratic; political stability; and attitude towards the private sector,
influence organizational growth and development.
• Managerial economics provides an essential tool for determining the
business goals and targets, the actual position of the organization,
and what the management should do fill the gap between the two.
• Thank You