Assignment # 1

Topic: Define managerial economics and explain nature and scope of

managerial economics.
Name:

Introduction:
Managerial economics can be defined as amalgamation of economics theory with
business practices so as to ease decision-making and future plaining by management.
Managerial economics assists the managers of a firm in a rational solution of
obstacles faced in the firm’s activities. It makes use of economic theory and concepts. It
helps in formulating logical managerial decisions.
Managerial economics is a science dealing with effective use of scarce resources. It
guides the managers in taking decisions relating to the firm’s customers, competitors,
suppliers as well as relating to the internal functioning of a firm. It makes use of statistical
and analytical tools to assess economic theories in solving practical business problems.
Managerial economics applies micro-economic tools to make business decisions. It
deals with a firm.
The use of managerial economics is not limited to profit-making firms and
organizations. But it can also be used to help in decision-making process of non-profit
organizations (hospitals, educational institutions etc).
Managerial economics uses both Economic Theory as well as Econometrics for
rational managerial decision making. Econometrics is defined as use of statistical tools for
assessing economic theories by empirically measuring relationship between economic
variables. It uses factual data for solution of economic problems.
Managerial economics is associated with the economic theory which constitutes
“Theory of Firm”. Theory of firm states that the primary aim of the firm is to maximize
wealth. Decision making in managerial economics generally involves establishment of firm’s
objectives, identification of problems involved in achievement of those objectives,
development of various alternative solutions, selection of best alternative and finally
implementation of the decision.

The following figure tells the primary ways in which managerial economics correlates to
managerial decision-making.
Definition of managerial economics
“Managerial economics is a stream of management studies that focus on decision-
making and problem-solving. Both micro-economics and macro-economic theories are
applied. It focuses on the efficient utilization of scarce resources”.

According to Salvatore
Managerial economics refers to the application of economics theory and the tools of
analysis of decision science of examine how an organization can achieve its objectives most
effectively.

According to Douglas
Managerial economics is the application of economics principles and methodologies
to the decision-making process within the firm or organization.

Nature of Managerial Economics

Managers study managerial economics because it gives them insight to reign the
functioning of the organization. If managers uses the principles applicable to economics
behavior in a reasonably, then it will result in smooth functioning of the organization.

Managerial economics is a science

Managerial economics is an essential scholastic field. It can be compared to science
in sense that it fulfils the criteria of being a science in following sense:
 Science is a systematic body of knowledge. It is based on the methodical
observation. Managerial economics is also a science of making decisions with
regard to scarce resources with alternative application.
 In science any conclusion is arrived at after continuous experiments. In
managerial economics economist takes decision by utilizing his valuable past
experience and observation.
  Science principles are universally applicable. Similarly, policies of Managerial
economics are also universally applicable partially if not fully. The policies
need to be changed from time to time depending on the situation and attitude
of individuals to those particular situations.

Managerial economics requires art

Managerial economist is required to have an art of utilizing his capability, knowledge
and understanding to achieve the organizational objective. Managerial economist should
have an art to put in practice his theoretical knowledge regarding element of economic
environment.

Managerial economics for administration of organization

Managerial economics helps the management in decision making. These decisions
are based on the economic rational and are valid in the existing economic environment.

Managerial economics is helpful in optimum resource allocation

The resources are scarce with alternative uses. Managers need to use these limited
resources optimally. Each resource has several uses. It is manager who decides with his
knowledge of economics that which one is the preeminent use of the resource.

Managerial economics has component of micro economics

Managers study and manage the internal environment of the organization and work
for the profitable and long-term functioning of the organization. The aspect refers to the
micro economics study. The managerial economics deals with the problems faced by the
individual organization such as main objective of the organization, demand for its product,
price and output determination of the organization, available substitute and complimentary
goods, supply of inputs and raw material, target or prospective consumers of its products
etc.

Managerial economics has components of macro economics

None of the organization works in isolation. They are affected by the external
environment of the economy in which it operates such as government policies, general
price level, income and employment level in the economy, stage of business cycle in which
economy is operating exchange rate, balance of payment, general expenditure, saving and
investment patterns of the consumers, market conditions etc. these aspects are related to
macroeconomics.

Managerial economics is dynamic in nature

 Managerial economics deals with human-being (i.e. human resource, consumers,
producers etc.). the nature and attitude differs from person to person. Thus to cope up with
dynamism and vitality managerial economics also change itself over a period of time.

Scope of managerial economics

Managerial economics deals with allocation the scarce resources in a manner that
minimizes the cost. As we have already discussed. Managerial economics is different form
micro economics and macroeconomics.
Managerial economics has a more narrow scope. It is actually solving managerial
issues using micro economics. Wherever there are scarce resources, managerial economics
ensures that managers make effective and efficient decisions concerning customers,
suppliers, competitors as well as within an organization. The fact of scarcity of resources
gives rise the three fundamental questions.
i. What is produce?
ii. How to produce?
iii. For whom to produce?
To answer these questions, a firm makes use of managerial economics principles.
The first question relates to what good and services should be produced and in what
amount/quantities. The managers use demand theory for deciding this. The demand
theory examines consumer behavior with respect to the kind of purchases they would like
to make currently and in future, the factors influencing purchase and consumption of as
specific good or services, the impact of change in these factors on the demand of that
specific good and service, and the goods or services which consumers might not purchase
and consume in future. In order to decide the amount of goods and services to be
produced, the managers use methods of demand forecasting
The second question relates to how to produce goods and services. The firm has
now to choose among different alternative techniques of production. It has to make
decision regarding purchase of raw materials, capital equipment’s, manpower, etc. the
managers can use various managerial economics tools such as production and cost analysis
(for hiring and acquiring of inputs), project appraisal methods (for long term investment
decisions), etc. for making these crucial decisions.
The third question is regarding who should consume and claim the goods and
services produced by the firm. The firm, for instance, must decide which is its niche market
domestic of foreign? It must segment the market. It must conduct a thorough analysis of
market structure and thus take price and output decisions depending upon the type of
market.
 Managerial economics helps in decision making as it involves logical thinking.
Moreover, by studying simple models, managers can deal with more complex and practical
situations. Also, a general approach is implemented.
Managerial economics take a wider picture of firm. i.e. it deals with questions such as
what is a firm. What are the firm’s objectives, and what forces push the firm towards profit
and away from profit? In short, managerial economics emphasizes upon the firm, the
decision relating to individual forms and the environment in which the firm operates. It
deals with key issues such as what conditions favor entry and exit of firms in market, why
are people paid well in some jobs and not so well in other jobs, etc. managerial economics
is a great rational and analytical tool.