Managerial Economics refers to a branch of study under which the economic tools, particularly the tools related to micro economic analysis are used to explain the managerial activities in a business organisation. A business manager has to perform a number of functions like decision making, demand forecasting, policy formulation, business planning etc.
In order to perform these functions in an efficient manner, the business managers take help of various economic theories. The application of these economic theories for managerial decision making is the core of managerial economics.
Nature Of Managerial Economics
The important points about the nature of managerial economics or the basic features of managerial economics have been discussed here-under:
(1) Micro Economic Nature: Managerial economics is micro economic in nature. In micro analysis, the problem of choice is centred to single unit like firm, consumer, market etc. S.K. Deo has rightly said. “Managerial economics application of economic theory, particularly of micro economic theory, is an practical problem solving.
(2) Aid from Other Disciplines : As we have discussed earlier, the core of the managerial economics is to use the economic theory for business decision making. In fact, while making business decisions, the managerial economist also seeks help from various other disciplines. These disciplines mainly include mathematics, statistics, management, etc.
(3) Decision Making : Economic activity is the constant effort to match ends to means because most of the resources are scarce. Decision making by management is truly economic in nature because it involves choices among a set of alternatives. The optimal decision making is an act of optimal economic choice by considering objectives and constraints. This justifies evaluation of managerial decisions through concepts, tools and techniques of economic analysis.
(4) Positive and Normative Analysis : A positive analysis is related to ‘what is’ whereas a normative analysis explains ‘what should be.’ In positive economic analysis, the problem is analysed in objective terms based on principles and theories, On the contrary, in normative economic analysis, the problem is analysed on the basis of value judgement. Managerial economics not only studies the activities and problems of a firm, but it also finds solutions. Thus, it is both positive and normative in nature.
(5) Applied Science : Managerial economics is an the sense that the theories formulated under it have an applied science in empirical use and universal application. It provides help in evaluating the efficiency of managers. At the same time, it helps the managers to apply the economic tools for the benefit of the firm.
(6) Use of Macro Economics : Managerial economics also makes a use of macro economics. Generally, the economic conditions are studied whole under macro economics. Its includes inflation, disinflation, trade cycles, as a fiscal policy, monetary policy etc. All these topics have their relevance in managerial economics. Thus, the knowledge of overall business environment is essential in order to make business decisions in managerial economics.
(7) Economic Concepts : Various economic principles and concepts are used in managerial economics. These economic principles and concepts are known as Theory of Firm’ or ‘Economics of Firm’. These economic concepts include cost, revenue, factor price etc. related concepts. Thus, managerial economics is a mixture of these economic concepts.
Scope Of Managerial Economics
We know that managerial economics is multi-disciplinary in nature i.e. it includes a number of disciplines under it. As a result of it, the scope of managerial economics has become very vast. The following concepts are covered under its scope:
(1) Objectives of a Business Firm : Business firm is a unit engaged in the production of goods and services mainly with the objective of maximising the profits. There are various types of business units such as individual proprietorship, partnership, joint stock company etc. In an individual proprietorship, an individual has the sole ownership and the main objective of this firm is to maximise its profits but these days, the importance of joint stock companies is increasing. In these companies, there is separation between ownership and management. The shareholders are the owners of the company and they bear the risk but price and output decisions are taken by the appointed managers. The managers are not interested only in profit maximisation. They manage firms in their own interest rather than in the interest of shareholders. Thus, modern firms are motivated by various alternative objectives which are studied under managerial economics
(2) Market Structures : Market means the entire area in which buyers and sellers of a commodity spread over and commodities are bought and sold. Market structure depends upon various determinants like number of buyers and sellers, nature of a commodity, degree of price control etc. On the basis of competition, market is divided into three forms:(1) Perfect Competition, (2) Monopoly, and (3) Imperfect Competition. Managerial economist makes study of all these market structures.
(3) Pricing Practices : Pricing has much significance in determining the market performance of a firm. Various practices are adopted by different firms in order to determine the prices of their products in an appropriate manner. The sales, profits etc. of a firm are directly affected by the price of its product. So, a firm has to make price decision very carefully.
(4) Choice Under Risk and Uncertainty : Most of the theories of consumer behaviour like utility approach, indifference curve analysis, revealed preference analysis etc. deal with such situations in which the consumer makes his choice under an environment of certainty but in reality, there are a number of decisions which are made by the consumers in situations which involve risk. Such decisions or choices are studied under the ‘Theory of Consumer Choice’ Under Risk which is an important part of this subject.
(5) Business Cycles : Business cycles are an important feature of the modern economic world. Any economy in the world never remains in the same situation. Every economy faces changes in the extent of market activity. At one time, there is a situation of high sales and profits whereas at some other time, the business activity comes to a halt. All such situations are parts of cyclical changes in business. These changes are studied under the theory of business cycles. Business cycles are also included in the scope of managerial economics.