Meaning And Nature Of Managerial Economics

What is 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.

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.

“The integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management”.
-Spencer and Siegelman

“Managerial economics is the application of economic theory and methodology to decision-making problems faced by both public and private institutions”.
-McGutgan and Moyer

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.

Managerial Economics is economics applied in decision-making. It is that branch of economics that serves as a link between abstract theory and managerial practice. Managerial economics is concerned with the business firm and the economic problems that every management need to solve.

Economics as a science is concerned with the problem of allocation of scarce resources among competing ends. These problems of allocation are on a regular basis confronted by individuals, households, firms as well as economies. Economics provide us with a number of concepts and analytical tools to help us understand and analyze such problems. Managerial Economics may be taken as economics applied to problems of choice of alternatives of economic nature and allocation of the resources by the firms. In other words, managerial economics involves analysis of allocation of the resources available to a firm or a unit of management among the activities of that unit. It is thus concerned with choice or selection among alternatives.

Definition of Managerial Economics

Some of the popular definitions of managerial economics are:

“Managerial economics…is the integration of economics theory with business practice for the purpose of facilitating decision-making and forward planning by management.” Spencer and Siegelman.

“Managerial economics… is the use of economics mode of thought to analyze business situation.” McNair and Meriam.

“A fundamental academic subject which seeks to understand and to analyse the problems of business decision-making.” Hague.

As is evident, there are different projections of the subject matter on managerial economics by different authorities, but the following features seem common to these viewpoints.

Concerned with decision-making of economic nature.
This implies that managerial economics deals with identification of economic choices and allocation.

Micro-economic in character, where the unit of study is a firm. It concentrates on the study of the firm and not on the working of the economy.
The chief source of concepts and analytical tools for managerial economics is micro-economic theory, also known as price theory, some of the popular micro- economic concepts are the elasticity of demand, marginal cost, the long-run economies and diseconomies of scale, opportunity cost, present value and market structures. Managerial economics also uses some of the well-accepted models in price theory, such as model for monopoly price, kinked demand model, the model of price discrimination and the behavioral and managerial models.

Concerned with normative micro-economics, where the economist says what he thinks should happen rather than what does happen to the firm.
When applies that the decisions of the firm are made almost always within the broad framework of economic environment within which thee firm operates, known as maco-economic conditions. With regards to these conditions, we may stress these points.

Takes the help of macro-economics to understand and adjust to the environment in which the firm operates.
We know that the decisions of the firm are made almost always within the broad framework of economic environment within which firm operates, known as micro-economic conditions. With regards to these conditions, we may stress these points.

i) The economy in which the business operates is predominantly a free enterprise economy using price and market.

ii) The present-day economy is the one undergoing rapid technological and economic changes.

iii) The intervention of government in economic affairs has increased in recent times and there is no likelihood that this intervention will stop in future.

These external conditions are beyond the control of the firm, hence the firm needs to adjust itself to the changes in these conditions to survive and grow. This sort of a management is called a progressive management.

Goal-oriented and prescriptive
It deals with how decisions should be mad e by managers to achieve the organizational goals. Knowledge of managerial economics helps in making wise choices—as managrs continue to face the problem of scarcity of resources and making suitable choices to allocate them appropriately in order to achieve organizational goals.

Pragmatic
Managerial Economics concentrate on making economics theory more application- oriented. It is concerned with those analytical tools which are useful in improving decision-making.

Both ‘conceptual’ and ‘Metrical’
An intelligent application of quantitative techniques to business presupposes considered judgement and hard and careful thinking about the nature of the particular problem to be solved. Managerial Economics provides necessary conceptual tools to achieve this. Moreover, it helps the decision makers by providing measurement of various economic entities and their relationships. This material dimension of managerial economics is complementary to its conceptual framework.