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 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 organisation 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 maximisation. 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 minimise 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. E.g 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.
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 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.
1.Demand Analysis
and Forecasting: A business firm is an economic organisation which is
engaged in transforming productive resources into goods that are to be sold in
the market. A major part of managerial decision making depends on accurate
estimates of demand. A forecast of future sales serves as a guide to management
for preparing production schedules and employing resources. It will help
management to maintain or strengthen its market position and profit base.
Demand analysis also identifies a number of other factors influencing the
demand for a product. Demand analysis and forecasting occupies a strategic
place in Managerial Economics.
2.Cost and production
analysis: A firm’s profitability depends much on its cost of production. A
wise manager would prepare cost estimates of a range of output, identify the
factors causing are cause variations in cost estimates and choose the
cost-minimising output level, taking also into consideration the degree
of uncertainty in production and cost calculations. Production processes
are under the charge of engineers but the business manager is supposed to carry
out the production function analysis in order to avoid wastages of materials
and time. Sound pricing practices depend much on cost control. The main topics
discussed under cost and production analysis are: Cost concepts, cost-output
relationships, Economics and Diseconomies of scale and cost control.
3.Pricing decisions,
policies and practices: Pricing is a very important area of Managerial
Economics. In fact, price is the genesis of the revenue of a firm ad as such
the success of a business firm largely depends on the correctness of the price
decisions taken by it. The important aspects dealt with this area are: Price
determination in various market forms, pricing methods, differential pricing,
product-line pricing and price forecasting.
4.Profit
management: Business firms are generally organized for earning profit
and in the long period, it is profit which provides the chief measure of
success of a firm. Economics tells us that profits are the reward for
uncertainty bearing and risk taking. A successful business manager is one who
can form more or less correct estimates of costs and revenues likely to accrue
to the firm at different levels of output. The more successful a manager is in
reducing uncertainty, the higher are the profits earned by him. In fact,
profit-planning and profit measurement constitute the most challenging area of
Managerial Economics.
5.Capital
management: The problems relating to firm’s capital investments are
perhaps the most complex and troublesome. Capital management implies planning
and control of capital expenditure because it involves a large sum and moreover
the problems in disposing the capital assets off are so complex that they
require considerable time and labour. The main topics dealt with under capital
management are cost of capital, rate of return and selection of projects.
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