Managerial Economics
Managerial Economics can be defined as amalgamation of economic theory with
business practices so as to ease decision-making and future planning 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. The key of
Managerial Economics is the micro-economic theory of the firm. It lessens the gap
between economics in theory and economics in practice. 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.
Study of Managerial Economics helps in enhancement of analytical skills, assists in
rational configuration as well as solution of problems. While microeconomics is the
study of decisions made regarding the allocation of resources and prices of goods and
services, macroeconomics is the field of economics that studies the behavior of the
economy as a whole (i.e. entire industries and economies). 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). It enables optimum utilization
of scarce resources in such organizations as well as helps in achieving the goals in
most efficient manner. Managerial Economics is of great help in price analysis,
production analysis, capital budgeting, risk analysis and determination of demand.
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.
Management study guide