Managerial Economics

We all know economics as a subject being equipped with various concepts.

Apart from being a subject, concepts in economics also act as a tool that
make organizations capable of surviving in a market.

Managerial economics is one such concept of economics. It can be defined as

the incorporation of economic theories with business practices. This
makes the process of decision making easy for organizations, as they can
leverage the concepts of economics to change the dynamics of the market.

Managerial economics is considered as an essential scholastic field. This field

of economics exhibits many characteristics that make it crucial for
businesses. Managerial economics is in no way different from a science as it
fulfills the criteria of being a science.

Managerial economics is used by organizations to solve multiple business

problems. It is also reckoned as the scope of managerial economics.
What is Managerial Economics?

Managerial economics is a subject that was first introduced by Joel Dean in

1951. This branch of economics is essentially concerned with the
application of various economic concepts in decision-making.

We can also look at managerial economics as economics that is applied to

problem-solving at the level of the firm. Managerial economics works as a
bridge between economics theories and business practices. It is based on
economic analysis for identifying problems, organizing information, and
evaluating alternatives.

Resource allocation is a major challenge for any organizations managerial

economics involves an analysis of the allocation of the resources available to
a firm, or a unit of management among the activities of that unit. It makes
use of economic theories and concepts and assists managers to make
rational decisions.

Managerial economics is the study of how businesses are managed using

economic theories, tools, and concepts. It is simply the amalgamation of

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management principles and economic theories for better problem solving
and decision making. It is a branch of economics that analyses, assumes, and
predicts business conditions using economic theories.
Managerial economics bridges the gap between economics in theory and
economics in practice. It helps managers in solving business problems
logically and making rational decisions. The most important function of
managerial economics is efficient decision making, which selects the best
course of action from two or more options. It keeps track of and ensures
that all scarce resources, such as labour, capital, and
land, are used effectively to achieve better results.
Evan J. Douglas has defined managerial economics as - “Managerial
economics is concerned with the application of economic principles and
methodologies to the decision-making process within the firm or
organization. It seeks to establish rules and principles to facilitate the
attainment of the desired economic goals of management.”
Thus, managerial economics is the study of how economic theory and
business practices interact. Economic tools are available. These tools are
used in business management by managerial economics. Simply put,
managerial economics is the application of economic theory to management
problems.

Examples of Managerial Economics

Different tools of managerial economics can be used to achieve all the goals
of a business organization in an efficient manner. The examples of
managerial economics applications are:

 Managerial economics finds its use in deciding the price of a product.

 It also helps firms to decide on the manufacturing of a product or to
purchase it from another manufacturer.
 To decide on the production technique to be used in the
manufacturing of a product
 It also helps in inventory management. A firm can decide on the level
of inventory it will maintain of a product or a raw material.
 Decide on the advertising media and the intensity of advertising
campaigns.
 Managerial economics is used by businesses to decide on employment
and training.
 After all the analyses, the management looks at the opportunities for
further investment.

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Significance of Managerial Economics

For profit and non-profit organisations, managerial economics is a critical

tool for analysing and solving problems. Even though managerial economics
is an amalgamation of various subjects, the common core is the application
of the fundamental principles of economics to analyse and solve problems
faced by
organisations in a mixed economy.

The following highlights the significance of Managerial economics:

• Business Planning and Forecasting: Managerial economics contributes to
the formulation of business policies by forecasting future demands and
uncertainties. It greatly helps an organization in effective decision-making
by providing all information using economic tools and techniques.

• Analysing Cost and Production level: Managerial economics is concerned

with lowering business costs. It calculates the costs associated with various
business processes and determines the most cost-effective level of output.
Managerial economics assists business managers in ensuring that no
resources are wasted, thereby lowering overall costs. Formulating pricing
policies: It helps organisations in deciding the best pricing policies. The
pricing method has an impact on the profitability and revenue of a business,
so setting the right price is critical. Managerial economics investigates
market pricing structures and pricing strategies for firms.

• Managing profit: Those who study managerial economics are concerned

with monitoring and controlling a company's profitability. Profit is the
ultimate goal of every business, and it is what determines the success or
failure of the enterprise. A profit forecast ensures that an organisation earns
the desired profit by estimating the revenue and expenses of the
organisation at various levels of output.

• Managing Capital: One of the most important functions performed by

managerial economics is the management of capital. It manages and
analyses all capital expenditures of a company, which can be extremely
expensive and time-consuming. Before investing any money anywhere, it
assesses the profitability of the source from which the money will be
allocated.

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Nature of Managerial Economics (characteristics)

One need to know about the various characteristics of managerial

economics. For that one need to know about the nature of managerial
economics.
• Art and Science: Management theory requires a lot of critical and logical
thinking and analytical skills to make decisions or solve problems. Many
economists also find it a source of research, saying it includes applying
different economic concepts, techniques, and methods to solve business
problems.
• Microeconomics: Managers typically deal with the problems relevant to a
single entity rather than the economy as a whole. It is therefore considered
an integral part of microeconomics.
• Uses of Macro Economics: A corporation works in an external world, i.e.,
it serves the consumer, which is an important part of the economy. For this
purpose, managers must evaluate the various macroeconomic factors such as
market dynamics, economic changes, government policies, etc., and their
effect on the company.
• Multidisciplinary: Managerial economics uses many tools and principles
that belong to different disciplines, such as accounting, finance, statistics,
mathematics, production, operational research, human resources,
marketing, etc.
• Prescriptive or Normative Discipline: By introducing corrective steps
managerial economics aims at achieving the objective and solves specific
issues or problems.
• Management Oriented: This serves as an instrument in managers’ hands
to deal effectively with business-related problems and uncertainties. This
also allows for setting priorities, formulating policies, and making successful
decisions.
• Pragmatic: The solution to day-to-day business challenges is realistic and
rational.
Different individuals take different views of the principles of managerial
economics. Others may concentrate more on customer service, while others
may prioritize efficient production.
Subject Matter of Managerial Economics:

Managerial Economics covers the following topics:

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1. Demand Analysis and Forecasting: A firm is an economic organisation
that converts inputs into output to be sold in a market. Accurate demand
estimation, based on an analysis of the forces acting on demand for the
firm's product, is critical to making effective decisions at the firm level. A
large part of managerial decision-making is based on accurate demand
estimates. When estimating demand, the manager does not stop at assessing
current demand: he or she also estimates future demand. This is what
demand forecasting entails.

This forecast can also be used by management to help them maintain or

improve their market position and increase profits. Demand analysis assists
in identifying the various factors that influence a company's product demand
and thus, provides guidelines for managing demand. Demand Determinants,
Demand Distinctions, and Demand Forecasting are the main topics covered.

2. Cost and Production Analysis: Another function of managerial economics

is the analysis of costs and the production of goods. Cost estimates play a
vital role in decision-making. In order to arrive at cost estimates that are
useful for long-term planning, management must take into account the
factors that influence cost variability. To succeed, a business must
understand the factors that go into determining costs and profits, as well as
the relationship between those factors and output. Uncertainty exists
because many factors that affect costs are unknown or uncontrollable. A
firm's success hinges on its ability to effectively use this knowledge, which is
a cornerstone of managerial economics.

Physical terms are frequently used in the course of production analysis. The
economics of production relies heavily on inputs. Inputs, or factors of
production, can be combined in a specific way to maximise output. Instead,
when input costs rise, a company is forced to devise a new input mix in
order to ensure that this new mix is the lowest-cost option available at the
time. Cost and production analysis covers a wide range of topics, including
production function, the least expensive combination of input factors, the
productivity of input factors, returns on scale, cost concepts and
classification, the cost-output relationship, linear programming, and many
others.

3. Inventory Management: A company's inventory management refers to the

stock of raw materials that the company maintains. The issue now is
determining how much of the current inventory is ideal. High levels indicate

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that capital is being held in a sluggish, non-productive manner. Low
inventories have a negative impact on production. As a result, managerial
economics will employ techniques like the EOQ approach and ABC analysis in
an effort to keep inventory costs as low as possible. Other topics covered
include the reasons for keeping inventory and the costs associated with
doing so, as well as inventory control and management's most common
methods.

4. Advertisement: Producing and marketing a commodity are two different

things. However, before the consumer considers purchasing the product, the
message about it must reach him. As a result, advertising is an integral part
of making decisions and planning ahead. Economists refer to advertising and
related promotional activities as "selling costs.” Setting an advertising
budget can be done in several ways: The percent of sales approach, the all-
you-can-afford approach, the competitive parity approach, the objective,
and task approach, and the return-on-investment approach are all options.

5. Pricing Policy, Procedures, and Practices: Pricing is a crucial component

of managerial economics. A company's control functions include not only
production but also pricing. The cost of production must be considered when
pricing a commodity. Market structure and market structure that has
evolved as a result of the nature of competition present in the market have
a significant impact on business decisions. The consideration of cost plan
pricing and public enterprise policies actually guide pricing. It is also
necessary to understand how to price a product in an oligopolistic
environment. The pricing system assists the manager in making rational and
profitable decisions.

6. Management of Capital: The primary executive function is to plan and

control capital expenditures. Economic analysis is used to shed light on the
managerial challenge of capital budgeting and management. Each industry
has its own unique way of doing capital budgeting. Equi-marginality is a key
component of this theory. The objective is to ensure that funds are used in
the most profitable way possible, which means that funds should not be
used if the managerial returns are lower than those of alternative uses.
Topics covered include: the cost of capital, return on investment (ROI), and
project selection. In this way, we can see that a company is dealing with
uncertainty. As a result, we can conclude that the focus of managerial
economics is on applying

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7. Management of Profits: It is the primary objective of a business to make
profit, so it is called a "business firm." Profitability is a key indicator of a
company's overall success. We must first understand how a company makes
money before we can properly evaluate it. When making a decision at the
company level, the concept of profit maximisation is extremely helpful in
narrowing down the options. Planning a company's future profits is an
absolute necessity for any manager. Analysis of current and expected
company behaviour, as well as sales volume, prices, and competitors'
strategies, are all part of this process. Profit policies of particular
importance to managerial decision-making and their nature and
measurement are two of the most important aspects covered in this area.
Using data and logic, managers in the field of managerial economics seek to
determine the links between variables and the outcomes they produce. In
economics, a significant portion of the analysis of the deductive proposition
that profits are maximised when marginal revenue equals marginal cost is
aimed at determining what should be done. Mathematical formulas are used
as a basis for linear programming's reasoning. Economic management is a
branch of normative theory that draws on both descriptive and deductive
logic that have been around for a long time.

Micro-economics applied to Operational Matters

The various theories or principles of microeconomics used to solve the
internal problems of the organization arising in the course of business
operations are as follows:
• Demand Theory: Demand Theory emphasizes the consumer’s behaviour
toward a product or service. This considers the customers’ desires,
expectations, preferences, and conditions to enhance the manufacturing
process.
• Decisions on Production and Production Theory: This theory is primarily
concerned with the volume of production, process, capital and labour, costs
involved, etc. It aims to optimize the production analysis to meet customer
demand.
• Market Structure Pricing Theory and Analysis: It focuses on assessing a
product’s price considering the competition, market dynamics, production
costs, optimizing sales volume, etc.
• Exam and management of profit: the companies are operating for assets;
hence, they aim to maximize profit. It also depends on demand from the
market, input costs, level of competition, etc.

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• Decisions on capital and investment theory: Capital is the most
important business element. This philosophy takes priority over the proper
distribution of the resources of the company and investments in productive
programs or initiatives to boost operational performance.
Managerial Economics at a Glance
• Managerial Economics amalgamates economic theories with managerial
practices. It is a tool used by organizations to formulate various managerial
decisions. It aids the organization in numerous decision-making processes.
• Business organizations curate strategies for management planning by using
the various tools and techniques of economics.
• Managerial economics can be defined as the branch of economics which
combines economic theories with business and management practices. It
helps business organizations in taking various managerial decisions.
• The characteristics of managerial economics are Art as well as Science,
Microeconomics, Macro Economic Usage, Multidisciplinary, Prescriptive
Discipline, Management Oriented, and Pragmatic.
• The concepts of managerial economics include Liberal Managerialism,
Normative Managerialism, Radical Managership, and Managerial Economic
Values.
• Principles of how to decide, how to interact, and how an economy works.
• The scope of managerial economics includes business analysts, jobs in the
banking sector, cost accountants, economic analysts, financial controllers,
risk managers, professors, government services, and many more.
• Profit management, capital management, and demand analysis &
forecasting are the main importance of managerial economics.