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.
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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 approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses. 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.
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