𝐌𝐈𝐂𝐑𝐎 𝐀𝐍𝐃 𝐌𝐀𝐂𝐑𝐎 𝐄𝐂𝐎𝐍𝐎𝐌𝐈𝐂𝐒
𝐌𝐚𝐧𝐚𝐠𝐞𝐫𝐢𝐚𝐥 𝐄𝐜𝐨𝐧𝐨𝐦𝐢𝐜𝐬 : 𝐃𝐞𝐟𝐢𝐧𝐢𝐭𝐢𝐨𝐧, 𝐍𝐚𝐭𝐮𝐫𝐞, 𝐒𝐜𝐨𝐩𝐞
Managerial Economics may be defined as the study of economic theories,
logic and methodology which are generally applied to seek solution to the
practical problems of business. Managerial Economics is thus constituted
of that part of economic knowledge or economic theories which is used as a
tool of analysing business problems for rational business decisions.
Managerial Economics is often called as Business Economics or Economic for
Firms.
Definition of Managerial Economics:
“Managerial Economics is economics applied in decision making. It is a
special branch of economics bridging the gap between abstract theory and
managerial practice.” – Haynes, Mote and Paul.
“Business Economics consists of the use of economic modes of thought to
analyse business situations.” - McNair and Meriam
“Business Economics (Managerial Economics) is the integration of economic
theory with business practice for the purpose of facilitating decision
making and forward planning by management.”
- Spencerand Seegelman.
“Managerial economics is concerned with application of economic concepts
and economic analysis to the problems of formulating rational managerial
decision.” – Mansfield
Nature of Managerial Economics:
- The primary function of management executive in a business organisation is decision making and forward planning.
- Decision making and forward planning go hand in hand with each other. Decision making means the process of selecting one action from two or more alternative courses of action. Forward planning means establishing plans for the future to carry out the decision so taken.
- The problem of choice arises because resources at the disposal of a business unit (land, labour, capital, and managerial capacity) are limited and the firm has to make the most profitable use of these resources.
- The decision making function is that of the business executive, he takes the decision which will ensure the most efficient means of attaining a desired objective, say profit maximisation. After taking the decision about the particular output, pricing, capital, raw-materials and power etc., are prepared. Forward planning and decision-making thus go on at the same time.
- A business manager’s task is made difficult by the uncertainty which surrounds business decision-making. Nobody can predict the future course of business conditions. He prepares the best possible plans for the future depending on past experience and future outlook and yet he has to go on revising his plans in the light of new experience to minimise the failure. Managers are thus engaged in a continuous process of decision-making through an uncertain future and the overall problem confronting them is one of adjusting to uncertainty.
- In fulfilling the function of decision-making in an uncertainty framework, economic theory can be, pressed into service with considerable advantage as it deals with a number of concepts and principles which can be used to solve or at least throw some light upon the problems of business management. E.g are profit, demand, cost, pricing, production, competition, business cycles, national income etc. The way economic analysis can be used towards solving business problems, constitutes the subject-matter of Managerial Economics.
- Thus in brief we can say that Managerial Economics is both a science and an art.
Scope of Managerial Economics:
The scope of managerial economics is not yet clearly laid out because it
is a developing science. Even then the following fields may be said to generally fall
under Managerial Economics:
1. Demand Analysis and Forecasting
2. Cost and Production Analysis
3. Pricing Decisions, Policies and Practices
4. Profit Management
5. Capital Management
These divisions of business economics constitute its subject matter.
Recently, managerial economists have started making increased use of
Operation Research methods like Linear programming, inventory models,
Games theory, queuing up theory etc., have also come to be regarded as
part of Managerial Economics.
1.Demand Analysis and Forecasting: A business firm is an economic organisation which is engaged in
transforming productive resources into goods that are to be sold in the
market. A major part of managerial decision making depends on accurate
estimates of demand. A forecast of future sales serves as a guide to
management for preparing production schedules and employing resources.
It will help management to maintain or strengthen its market position
and profit base. Demand analysis also identifies a number of other
factors influencing the demand for a product. Demand analysis and
forecasting occupies a strategic place in Managerial Economics.
2.Cost and production analysis: A firm’s profitability depends much on its cost of production. A wise
manager would prepare cost estimates of a range of output, identify the
factors causing are cause variations in cost estimates and choose the
cost-minimising output level, taking also into consideration the degree
of uncertainty in production and cost calculations. Production
processes are under the charge of engineers but the business manager is
supposed to carry out the production function analysis in order to avoid
wastages of materials and time. Sound pricing practices depend much on
cost control. The main topics discussed under cost and production
analysis are: Cost concepts, cost-output relationships, Economics and
Diseconomies of scale and cost control.
3.Pricing decisions, policies and practices: Pricing is a very important area of Managerial Economics. In fact,
price is the genesis of the revenue of a firm ad as such the success of
a business firm largely depends on the correctness of the price
decisions taken by it. The important aspects dealt with this area are:
Price determination in various market forms, pricing methods,
differential pricing, product-line pricing and price forecasting.
4.Profit management: Business firms are generally organized for earning profit and in
the long period, it is profit which provides the chief measure of
success of a firm. Economics tells us that profits are the reward for
uncertainty bearing and risk taking. A successful business manager is
one who can form more or less correct estimates of costs and revenues
likely to accrue to the firm at different levels of output. The more
successful a manager is in reducing uncertainty, the higher are the
profits earned by him. In fact, profit-planning and profit measurement
constitute the most challenging area of Managerial Economics.
5.Capital management: The problems relating to firm’s capital investments are perhaps
the most complex and troublesome. Capital management implies planning
and control of capital expenditure because it involves a large sum and
moreover the problems in disposing the capital assets off are so complex
that they require considerable time and labour. The main topics dealt
with under capital management are cost of capital, rate of return and
selection of projects.
Conclusion: The various aspects outlined above represent the major
uncertainties which a business firm has to reckon with, viz., demand
uncertainty, cost uncertainty, price uncertainty, profit uncertainty, and
capital uncertainty. We can, therefore, conclude that the subject-matter
of Managerial Economics consists of applying economic principles and
concepts towards adjusting with various uncertainties faced by a business
firm.
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