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Managerial economics

The basic functions of management of business unit is to achieve the obective of a achieve  the objectives of a firm managerial economics is necessary. It helps business executives to solve gheir business and managerial problems a new branch of economics

What is managrial economics its features and scope


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Managerial economics was first introduced by Joel Dean. He is considered to be the father of managerial economics. According to him, "Managerial economics is the


use of economic analysis in the formulation of business policies".


Basically, managerial economics is concerned with the art of economising. Managerial economics is the application of the economic theories and analytical tools in managerial decision making. It is a study of allocation of scarce resources available to a firm among various business activities like production, marketing etc. It is a science which deals with the application of economic theories in managerial practice.


According to Spencer and Siegelman, "Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management".


According to Domenick Salvatore, "Managerial economics refers to the application of economic theories and tools of analysis of decision science to examine how an organisation achieves its aims or objectives most efficiently".


Thus, managerial economics is concerned with the application of economic theories to business management. It is the application of economic concepts and theories in the process of managerial decision making. It is a study of how to manage the limited resources to achieve the objectives of business. Thus, it is the economics for business decision-making. In short, managerial economics is the economics for management. Managerial economics is also known as economics of firm, applied economics etc. Managerial economics is popularly known as business economics.

Characteristics (Nature) of Managerial Economics The following characteristics of managerial economics will indicate its nature: micro economic in character. This is




Micro economics: Managerial economics


so because it studies the problems of a particular business unit. It is economics of


firm. It does not study the problems of the entire economy. Normative science: Managerial economics is a normative science. It seeks what is good and what is bad. It is concerned with what management should do under particular circumstances. It determines the goals of the enterprise. Then it develops the ways to achieve these goals. In managerial economics we are interested in what


should happen rather than what does happen.


Pragmatic: Managerial econeconomics is pragmatic. It concentrates on making economic theory more application oriented. It tries to solve the managerial problems in their day-to-day functioning of business enterprise.


4. Prescriptive: business enterprises.Managerial economics is prescriptive rather than descriptive. Prescribes solutions to various business problems. 5. Uses macro economics: Marco economics is also useful to managerial economics. Macro-economics provides an intelligent understanding of the environment in which the business operates. Managerial economics takes the help of macro economics to understand the external conditions such as business cycle, national income, economic policies of Government etc.




Uses theory of firm: Managerial economics largely uses the body of economic


concepts and principles towards solving the business problems. Managerial


economics is a special branch of economics to bridge the gap between economic Theory and managerial practice.


7. Management oriented: The main aim of managerial economics is to help the management in taking correct decisions and preparing plans and policies for future. Managerial economist analyses the problems and gives solutions just as a doctor tries to give relief to the patient.


8. Multi disciplinary: Managerial economics makes use of most modem tools of mathematics, statistics and operation research. In decision making and forward planning, the principles such as accounting, finance, marketing, production, personnel etc. are used.

Art and science:

Managerial economics is both science and art as a science it  establish relation ship between cause and effect by collecting classifying and analysing the facts on the basis of principles. It also the study o f the art of decision making in firm.

Scope of Managerial Economics The scope of any subject indicates the area of study or width and depth of a


It is the vastness of the subject. In short, scope of a subject means the subject matter or the topics to be covered by a subject. The scope of managerial economics is very wide. It covers all those economic theories which are helpful to find out solutions to business problems. The following aspects


generally fall under managerial economics:


Demand Analysis and Forecasting: Goods are produced to be sold in the market. The volume of production depends upon demand. Therefore, the management analyses demand and takes decisions on the basis of this analysis. For analysing demand, the management applies demand theory. The demand theory explains the consumers' behaviour. The knowledge of demand theory can also be helpful for forecasting future demand. Demand forecasting is essential for business planning.


2. Cost and production analysis: As already stated, the resources or means to produce goods are scarce. But they can be put to alternative uses. The limited resources must be utilised in such a way as to obtain maximum output or to minimise total costs. For taking such decisions, theory of production and cost analysis are useful. Theory of production is also known as theory of firm. It explains the various factors which cause variation in costs. Cost analysis is useful for profit planning, cost control and also for sound pricing practices.


3. Pricing policies: Once a product is ready for sale, the firm has to fix its price. The price has to be fixed according to the conditions in the market. Pricing is a very important aspect of managerial economics. Firm's revenue earnings largely depend upon its pricing policy. The success or failure of a firm mainly depends on the correct price decisions taken by it. Price theory can be helpful in determining price policy of the firm. Price theory includes the price determination under different types of market conditions, pricing methods, price forecasting etc.


4. Study of market: After pricing the product, the manager has to introduce the product in the market. Markets are never constant. They go on changing. The manager should offer the products only in those markets where he will get maximum sales. Therefore, he should have a clear knowledge about the markets (including the nature and degree of competition). Study of market is one of the important aspects of managerial economics 5. Profit management: The main motive of a business enterprise is to earn maximum profit. But profit is always uncertain because future costs and revenues are uncertain. Therefore, profit planning and measurement become very difficult. However, profit


theory will guide in the measurement and management of profit to a large extent. 6. Capital budgeting: Capital is the foundation of a business, Like all other inputs, capital is also a scarce factor. Hence it is expensive. Its efficient allocation and management is one of the most important tasks of the managers. The manager has to choose the most profitable investment projects. For this, he has to ascertain the return on capital to be employed.


7. Inventory management: A firm should always keep an ideal quantity of stock. If the stock is too much, the capital is unnecessarily locked up in inventories. At the same time, if the level of inventory is low, production will be interrupted due to non-availability of materials. Hence, a firm always prefers to have an optimum quantity of stock. Therefore, managerial economics will use inventory techniques such as ABC analysis, and other inventory models with a view to minimising the inventory cost.


Linear programming and theory of games: Linear programming and theory of games have come to be regarded as part of managerial economics recently. 9. Business cycles: Business cycles affect business decisions. Business cycles refer to regular fluctuations in economic activities in the country. The different phases of business cycle are depression, recovery, prosperity, boom and recession.




10. Strategic planning Strategic planning is now a new addition to the scope of managerial economics with the emergence of MNCs. Managerial economics provides a framework in which long term decisions can be made. Such long term decisions have impact on the behaviour of the firm. The firm sets certain long term goals and objectives. Then it selects the strategies to achieve the same. It may be noted that the integration of managerial economics and strategic planning has given rise to a new area of study called corporate economics.


Thus, managerial economics comprises both micro and macro-economic theories. Difference between General or Pure Economics and Managerial Economics


Managerial economics may be described as economics applied to decision making. It is a special branch of economics. If economics is the entire tree, managerial economics is a branch of it.


The relation between economics and managerial economics is somewhat that between physics and mechanical engineering, chemistry and chemical engineering,The basic function of management of a business unit is to achieve the objectives of the organisation. To achieve the objectives, management has to take so many decisions on different business problems. Many of the decisions are taken under the conditions of uncertainty. Therefore, decisions involve the everchanging environmental conditions. In order to help business executives to solve their business and managerial problems, a new branch of economics had been developed in 1951. This new branch of economics is known as Managerial Economics.

Managerial economics is the use of economic analysis in the formulation of business policies

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