What is Managerial Economics?

Managerial economics is a stream of management studies that focuses

primarily on solving business problems and making decisions by applying
the theories and principles of microeconomics and macroeconomics.
It is a specialized stream dealing with an organization’s internal issues
using various economic tools. Economics is an indispensable part of any
business. This single concept derives all the business assumptions,
forecasting, and investments.
Nature and Scope of Managerial Economics
You need to know about the various characteristics of managerial economics to
gain more knowledge about it. Let’s read in detail about the nature and scope of
managerial economics.
The concept of nature of managerial economics includes the following:
1. 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.
2. Microeconomics
Managers typically deal with problems relevant to a single entity rather than the
economy as a whole. It is, therefore, considered an integral part of
microeconomics.
3. Uses of Macro Economics
A corporation works in an external world, i.e., serving the consumer, 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.
4. 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.
5. Prescriptive or Normative Discipline
By introducing corrective steps, managerial economics aims to achieve its
objective and solves specific issues or problems.
6. Management Oriented
This serves as an instrument for managers to deal effectively with business-related
problems and uncertainties. This also allows for setting priorities, formulating
policies, and making successful decisions.
7. 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 and prioritize
efficient production.
Recommended Read: Nature and Scope of Macroeconomics
Scope of Managerial Economics
The definition of managerial economics is commonly used to deal with various
business problems within organizations. Both microeconomics and
macroeconomics have an equal effect on the organization and its work. The
following points illustrate the scope of managerial economics:
1) 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
behavior 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.
 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.
2) Macro-Economics Applied to Business Environment
Any organization is greatly affected by the environment in which it operates. The
business climate can be defined as follows:
 Economic Environment: A country’s economic conditions, GDP,
government policies, etc., have an indirect effect on the company and
its operations.
 Social Environment: The society in which the organization works, like
employment conditions, trade unions, consumer cooperatives, etc.,
also affects it.
 Political Environment: A country’s political system, whether
authoritarian or democratic, political stability, and attitude towards
the private sector, impact the growth and development of the
organization.
The Concepts of Managerial Economics
The branch of managerial economics comprises various concepts:
1. Liberal Managerialism
A market is a democratic space where people make their choices and decisions.
The organization and its managers must function according to the customers’
demand and market trends; otherwise, this can lead to business failures.
2. Normative Management
Managerial economics’ normative view states that administrative decisions are
based on experiences and practices of real life. They systematically study demand,
forecasting, cost control, product design and promotion, recruitment, etc.
3. Radical Management
Managers have to have a creative approach to business concerns, i.e., make
decisions to improve the current situation or circumstance. We concentrate more
on the needs and satisfaction of the consumer rather than just the maximization of
income.
4. Managerial Economic Values
The excellent macroeconomist N. Gregory Mankiw has given ten principles to
explain the significance of managerial economics in business operations.
Principles of Managerial Economics
Managerial economics follows several principles. These principles help in assessing
its application in diverse areas. Both conceptual and metrical aspects are dealt
with in this field. Problems often arise due to a disequilibrium in the economic
theory and managerial theory of business organizations. Various analytical tools
enable firms to identify the nature and measure of problems.
The principles of managerial economics are as follows:
1. Principles of How People Decide
Let us go through the following principles to understand how decision-making
takes place in real life:
 Humans face trade-offs: To make decisions, people have to determine
whether to choose from the different options available or not.
 Price of Opportunity: Each decision involves a cost of opportunity,
which is the cost of those options we let go of while choosing the most
appropriate one
 Feel fair about the margin: People typically think about the margin or
income they receive before investing in a specific project with their
money or resources.
 People respond to stimulus: Decisions to be made highly depend on
incentives related to a product, service, or activity. Negative incentives
discourage people, while positive incentives encourage them.
2. Principles of How People Interact
Communication and the market impact business transactions. Let us take a look at
the following related principles to justify the statement:
 Trade could benefit anyone: The theory states that trade is a way to
share. Everyone gets an opportunity to offer the good products or
services they make and buy the products or services that other people
are good at manufacturing.
 Markets usually represent a well-organized economic
activity: Markets serve as a means of customer and product
interaction. Consumers express their desires and expectations
(demands), while producers determine whether or not to
manufacture necessary products or services.
 Governments may often boost market performance: During adverse
market conditions or for the benefit of society, the government
intervenes in business operations. An example of such a circumstance
is when the government agrees on minimum wages for the benefit of
workers.
3. Principles on How Economy Works
The following theory outlines the economic role of an organization’s functioning:
 A country’s standard of living depends on its capacity to generate
goods and services: Companies must be productive enough to
produce products and services to develop a country’s economy.
Ultimately, it meets the customer’s demand and enhances GDP to
increase the standard of living in the country.
 Prices increase when the government prints lots of money: Suppose
surplus money is available to citizens, and their capacity to spend
increases. Eventually, it would lead to a rise in demand. Inflation takes
place when manufacturers are unable to satisfy market demand.
 Society faces a short-term correlation between unemployment and
inflation: The government introduces numerous economic policies to
reduce unemployment. In the short term, such policies target
improving the economy and what kind of practice contributes to
inflation.