Question

Define managerial economics and discuss briefly its relationship to microeconomics and other related fields of study such as finance, marketing, and statistics. Discuss the usefulness of Market Value and Econmic Value Added.

Answer 1

Managerial Economics is also known as business economics. It is a branch of economics that involves the application of microeconomic analysis in making decisions of business organisations. The gap between the theory and practice is bridged by managerial economics.

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”.

Relationship between managerial economics and microeconomics:

Microeconomics studies the economics behaviour of individuals and firms. Managerial economics is applied microeconomics. Managerial economics applies microeconomic theories and techniques for making management decisions. It has a more limited scope as compared to microeconomics.

The use of quantitative methods for analysing economic data is encouraged by both managerial economics and microeconomics. The resources available with business organiations are always finite. Managerial economics helps in the efficient allocation and optimum utilization of resources.

Relationship between managerial economics and finance:

Managerial economics is used by finance managers in business organizations for making decisions about the optimal utilization of scarce financial resources. Capital budgeting is one of its most common applications.

Relationship between Managerial Economics and marketing:

Marketing is a means by which we are promoting our products and trying to increase the demand for goods and services. It is a way of persuading the customers to buy over product and find more utility in it rather than in the competitor's product. Managerial economics involves the study of demand, supply and utility. One of the 4 P's in marketing is price and pricing is an important concept in managerial economics. Also managerial economics studies the price sensitivity of customers and suppliers. (demand and supply elasticity)

Relationship between managerial economics and statistics:

Statistical tools are used in managerial economics for decision making. Statistical tools are used in the collection and analysis of data for decision making process. Correlation and multiple regressions are also used by managerial economics to determine the degree of relationship between the related variables such as price and demand.

Market Value Added:

Market value added is the difference betweewn the market value of an organiation and the capital that is contributed to that organization by its investors. The higher the value, the better it is. It epresses the wealth of the shareholders. It is used to measure the performance of the organiation in the direction of the value maximization of the shareholders.

Economic value added:

Economic value added is the incremental difference between the rate of return of a company and its cost of capital. It is the difference between the product of (investment in assets and weighted avergage cost of capital) and operating income after taxes. If EVA is positive then the company has created wealth and if it is negative then the company has consumed capital.