Significance And Scope Of Managerial Economics

Management is concerned with decision-making; Managerial Economics helps the decision-making process in the following ways:

1. Managerial Economics a number of tools and techniques to enable a Manager to become a more competent model builder. With the help of these models, the Manager can capture the essential relationships that represent the real situation while eliminating the relatively less important details.
2. Managerial Economics provides most of the concepts that are needed for the analysis of business problems. Concepts like elasticity of demand, fixed and various costs, short and long-run costs, opportunity costs.net present value etc. help in understand and solving a decision problem.

3. Managerial Economics helps in making decisions such as:

What should be the product mix?
Which is the production technique and the input-mix that is least costly?
What should be the level of output and price for the product?
How to take investment decisions?
How much should a firm advertise and how to allocate the advertisement fund between different Media?


Scope of Managerial Economics

Managerial Economics deals with allocating the scarce resources in a manner that minimizes the cost. As we have already discussed, Managerial Economics is different from microeconomics and macro-economics. Managerial Economics has a more narrow scope - it is actually solving managerial issues using micro-economics. Wherever there are scarce resources, managerial economics ensures that managers make effective and efficient decisions concerning customers, suppliers, competitors as well as within an organization. The fact of scarcity of resources gives rise to three fundamental questions-

1. What to produce?

2. How to produce?

3. For whom to produce?

The first question relates to what goods and services should be produced and in what amount/quantities. The managers use demand theory for deciding this. The demand theory examines consumer behavior with respect to the kind of purchases they would like to make currently and in future; the factors influencing purchase and consumption of a specific good or service; the impact of change in these factors on the demand of that specific good or service; and the goods or services which consumers might not purchase and consume in future. In order to decide the amount of goods and services to be produced, the managers use methods of demand forecasting.

The second question relates to how to produce goods and services. The firm has now to choose among different alternative techniques of production. It has to make decision regarding purchase of raw materials, capital equipment, manpower, etc. The managers can use various managerial economics tools such as production and cost analysis (for hiring and acquiring of inputs), project appraisal methods( for long term investment decisions),etc for making these crucial decisions.

The third question is regarding who should consume and claim the goods and services produced by the firm. The firm, for instance, must decide which is it’s niche market-domestic or foreign? It must segment the market. It must conduct a thorough analysis of market structure and thus take price and output decisions depending upon the type of market.

Managerial economics helps in decision-making as it involves logical thinking. Moreover, by studying simple models, managers can deal with more complex and practical situations. Also, a general approach is implemented. Managerial Economics take a wider picture of firm, i.e., it deals with questions such as what is a firm, what are the firm’s objectives, and what forces push the firm towards profit and away from profit. In short, managerial economics emphasizes upon the firm, the decisions relating to individual firms and the environment in which the firm operates. It deals with key issues such as what conditions favor entry and exit of firms in market, why are people paid well in some jobs and not so well in other jobs, etc. Managerial Economics is a great rational and analytical tool.

Managerial Economics is not only applicable to profit-making business organizations, but also to non- profit organizations such as hospitals, schools, government agencies, etc.