Question

How does managerial economics as a branch of economics differ from economics? Explain.

Answer 1

• Managerial economics involves application of economic principles to the problems of the firm, Economics deals with the body of the principles itself.
• Managerial economics is micro-economic in character economics is both macro-economic and micro-economic.
• Managerial economics, though micro in character, deals only with the firm and has nothing to do with an individual’s economic problems. But micro economics as a branch of economics deals with both economics of the individual as well as economics of the firm.
• Under micro-economics as a branch of economics, distribution theories, viz., wages, interest and profit, are also dealt with but in managerial economics, mainly, profit theory is used; other distribution theories are not used much in managerial economics, thus, the scope of economics is wider than that of managerial economics given the simplified model, whereas managerial economics modifies and enlarges it.
• Economic theory hypothesizes economic relationships and builds economic models but managerial economics adopts, modifies, and reformulates economic models to suit the specific conditions and serves the specific problem solving process. Thus, economics gives the simplified model, whereas managerial economics modifies and enlarges it.
• Economic theory makes certain assumptions whereas managerial economics introduces certain feedbacks on multi-product nature of manufacture, behavioral constraints, environmental aspects, legal constraints, constraints on resource availability, etc., thus, embodying a combination of certain complexities assumed away in economic theory and then attempts to solve the real-life, complex business probable with the aid of tool subjects, e.g., mathematics, statistics, econometrics, accounting, and operations research.

Managerial economics involves application of economic principles to the problems of the firm, Economics deals with the body of the principles itself.