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Managerial economics is a branch of economics which deals with the application of economic concepts, theories, tools, and methodologies to solve practical problems in a business. Managerial economics analyzes the economic implications of short- and long-term planning decisions. Its theory mainly focuses on demand, production, cost, markets, and other similar factors. In other words, managerial economics is a 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.
Nature of Managerial Economics
A decision is the choice of the best among many possible alternatives.
(1) Goal setting: When making a decision, we should first make clear what kind of result we want to achieve.
(2) Come up with alternatives: There are many ways to achieve a goal, and our task is to come up with all possible alternatives
(3) Choose the best plan: This is a crucial step. We should compare all the plans and choose the most feasible one, so that the implementation of this plan is most likely to achieve the goal of obtaining the maximum output with a small input.
2. The role of managerial economics in decision-making
Managerial economics studies how to analyze and compare alternative solutions to find the one most likely to achieve business goals. In this decision-making process, the role of managerial economics is to provide relevant analytical tools and analytical methods.
Managerial economics is a discipline combining microeconomics and management practice and Managers usually deal with problems related to a particular organization, not the economy as a whole. Therefore, it is considered part of microeconomics
The main theories of managerial economics
Demand theory mainly analyzes the quantity demanded of products at different price levels and the rate of change in demand when prices, incomes and prices of related commodities change. Its function is to support the enterprise's price decision and market forecast, and to help the enterprise determine the relationship between demand and price.
Production theory mainly involves the selection of production organization form and the combination of production factors.
3. Cost theory
Cost theory involves the nature and cost function of different costs, including the choice of economies of scale and the choice of optimal output.
4. Market theory
Market theory analyzes what behaviours enterprises choose to achieve their expected goals under different market conditions.
Three commonly analytical methods used in managerial economics
Equilibrium refers to the combination of resources and choice of behaviours to obtain the maximum benefits. The behaviour of an enterprise is bound to be constrained by a variety of factors, and these factors often restrict each other. The equilibrium analysis method is to determine the proportional relation of each factor under the condition of considering these constraints, so as to make it most beneficial to the development of the enterprise.
Formula: Sales revenue = Price x Quantity
In economics, margin is the change in output caused by each unit of input. The marginal analysis method has more applications in management economics. It mainly analyzes the impact of each additional unit of product on the total profit of an enterprise at a certain output level.
Formula: Marginal value =△ F (x)/△X, where X represents input, f(x) represents output, represented as a function of X; △ represents a variable
3.Mathematical model analysis
In the development of economics and management, more and more econometric analysis methods are applied. Mathematical model is a kind of econometric analysis tool, which is widely used in management economics. In essence, mathematical model is the abstraction of complex reality, which makes problems simple and intuitive, so as to accurately grasp the relationship between things, understand the nature of things, and thus effectively solve problems.
Overview towards Microeconomics
Managerial decision areas include:
- assessment of investable funds
- selecting business area
- choice of product
- determining the 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 a 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.Both microeconomics and macroeconomics affect firms and their operations.
MicroEconomics applied to operational issues
(a) Operational issues
- Demand decision
- Production decision
- Theory of exchange or price theory
- Profit analysis and Management
- Theory of[Capital and investment decisions
Macroeconomics applied to the business environment.
(b) Environmental issues
- Economic Environment
- Social Environment
- Political Environment
Microeconomics applied to operational issues
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.
The theory is mainly concerned with production capacity, process, capital and labor required, cost involved and so on. Its purpose is to maximize production to meet customer needs
3.Theory of exchange or price theory
Focus on competitors, market conditions, production costs, maximizing sales, etc., and focus on price determination of products.
4.Profit analysis and Management
Organizations work for profit. Therefore, they always aim to maximize profits. It depends on market demand, input costs, level of competition, etc.
5.Theory of Capital and investment decisions
Capital is the most critical factor in an enterprise. This theory prevails in the rational allocation of funds and decisions of organizations to invest in profitable projects or enterprises in order to improve the efficiency of organizations.
Macroeconomics applied to the business environment
A country's economic conditions, GDP, economic policies and another indirect impact on the enterprise and its operation
Organizations are also influenced by the societies in which they operate, such as employment conditions, trade unions, consumer cooperatives, etc.
The political structure of a country, whether authoritarian or democratic; Political stability; And attitudes towards the private sector affect the growth and development of organisations
- Computational Economics. Aims and scope.
- Journal of Economics & Management Strategy. Aims and scope.
- Managerial and Decision Economics
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