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Managerial Economics deals with the application of the economic concepts, theories, tools, and methodologies to solve practical problems in a business. In other words, managerial economics is the combination of economics theory and managerial theory. It helps the manager in decision-making and acts as a link between practice and theory. It is sometimes referred to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units.
As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis, correlation and calculus. If there is a unifying theme that runs through most of managerial economics, it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of operations research, mathematical programming, game theory for strategic decisions, and other computational methods.
Overview towards Microeconomics
Managerial decision areas include:
- assessment of investable funds
- selecting business area
- choice of product
- determining optimum output
- sales promotion
Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:
- Risk analysis – various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk.
- Production analysis – microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm's cost function.
- Pricing analysis – microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.
- Capital budgeting – investment theory is used to examine a firm's capital purchasing decisions.
At universities, the subject is taught primarily to advanced undergraduates and graduate business students. It is an integration of concepts and theories taken from management and economic subjects primarily used to teach students how to create and analyze optimized business decisions or strategies. In many countries it is possible to read for a degree in Business Economics which often covers managerial economics, financial economics, game theory, business forecasting and industrial economics.
Managerial economics to a certain degree is prescriptive in nature as it suggests course of action to a managerial problem. Problems can be related to various departments in a firm like production, accounts, sales, etc.and it can also help in decision making.
(a) Operational issues
- Demand decision
- Production decision
- Theory of exchange or price theory
- All human economic activity
(b) Environmental issues
- Nature and trend of domestic business/ international environment
- Nature and impact of social costs and government policy
Demand is the willingness of potential customers to buy a commodity. It defines the market size for a commodity, and at a disaggregated level the composition of the customer base. Analysis of demand is important for a firm as its revenue, profits, and income of its employees depend on it.
- Computational Economics. Aims and scope.
- Journal of Economics & Management Strategy. Aims and scope.
- Managerial and Decision Economics
- W. B. Allen, Managerial Economics Theory, Applications, and Cases, 7th Edition. Norton. Contents.
- • William J. Baumol (1961). "What Can Economic Theory Contribute to Managerial Economics?," American Economic Review, 51(2), pp. 142-46. Abstract.
• Ivan Png and Dale Lehman (2007, 3rd ed.). Managerial Economics. Wiley. Description and chapter-preview links.
• M. L. Trivedi (2002). Managerial Economics: Theory & Applications, 2nd ed., Tata McGraw-Hill. Chapter-preview links.
- NA (2009). "managerial economics," Encyclopædia Britannica. Cached online entry.
- • Carl Shapiro (1989). "The Theory of Business Strategy," RAND Journal of Economics, 20(1), pp. 125-137.
• Thomas J. Webster (2003). Managerial Economics: Theory and Practice, ch. 13 & 14, Academic Press. Description.
- For a journal on the last subject, see Computational Economics, including an Aims & Scope link.
- • James O. Berger (2008)."statistical decision theory," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
• Keisuke Hirano (2008). "decision theory in econometrics," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
• Vassilis A. Hajivassiliou (2008). "computational methods in econometrics," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
- • Trefor Jones (2004). Business Economics and Managerial Decision Making, Wiley. Description and chapter-preview links.
• Nick Wilkinson (2005). Managerial Economics: A Problem-Solving Approach, Cambridge University Press. Description and preview.
• Maria Moschandreas (2000). Business Economics, 2nd Edition, Thompson Learning. Description and chapter-preview links.
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- Edward Lazear (2008). "personnel economics," The New Palgrave Dictionary of Economics. 2nd Edition. Abstract.
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- Elmer G. Wiens The Public Firm with Managerial Incentives
- Khan Ahsan (2014). "Managerial Economics and Economic Analysis", 3rd edition, Pakistan.
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