Managers in all types of organizations are confronted with two types of problems:
- Decision-making
- Forward planning
The business decision-making process has become increasingly complex due to growth of large- scale industries, expansion and diversification of business activities, emergence of multinational enterprises, and mergers and acquisitions.
In such a complex and
dynamic business environment the application of economic ideas, theories and techniques
of economic analysis has became inevitable for business decision- making.
This
requires a clear understanding of different market conditions and a thorough
analysis of product, input and financial markets. So the managerial problems
are related to getting the most out of scarce resources.
Forward planning
is a fundamental process that involves four basic steps that can be adapted to
all planning activities at all organizational levels and becomes an integral
part of the managerial function:
- Establish a goal or set of goalsDefine the current situationIdentify aids and barriers· Develop alternative courses of action.
DEFINITION OF
MANAGERIAL ECONOMICS
Managerial economics is the
combination of Management and Economics. In simple words management is the
process of planning, organizing, directing and controlling the efforts of a
group of people towards some common objective. On the other hand economics is
primarily concerned with analyzing and providing answers to the various
economic problems. Viewed in this sense, Managerial Economics may be taken as
economics applied to “problems of choice” and allocation of scarce resources
among alternative uses by the firms.
‘Managerial
Economics is concerned with the application of economic principles and
methodologies to the decision-making process within the firm or organization
under uncertain conditions. It seeks to establish rules and principles to
facilitate the attainment of the desired economic goals of management. These
economic goals concern to costs, revenues and profits, and are crucial within
both the business and the non-business institutions’ (Evans.J.Douglas)
Managerial
economics is ‘the integration of economic theory with business practice for the
purpose of facilitating decision making and forward planning by management.
(Spencer and Siegleman)
‘Managerial
economics deals with the application of economic theory and methodology to
decision-making problems faced by public, private and non-for-profit
institutions. Managerial economics extracts from economic theory (particularly
microeconomics) those concepts and techniques that enable the decision maker to
allocate efficiently the resources of the organization.’ (McGuigan and Moyer)
Managerial
economics is concerned with application of economic concepts and economic
analysis to the problems of formulating material managerial decisions’.(
E.Mansfield)
“Managerial Economics should be thought of as
applied microeconomics. It is an application of that part of microeconomics
focusing on those topics of greatest managerial interest and importance including
demand, production, costing, pricing, market structure, and government
regulation. The principles that govern the economic behaviour of firms and
individuals is an important managerial talent.” (Peterson and Lewis)
‘Managerial
economics applies economic theory and methods to business and administrative
decision-making. Because it uses the tools and techniques of economic analysis
to solve managerial problems, managerial economics connects traditional
economics with the decision – sciences. (Mark
Hirschey and James Passpas)
‘Managerial
economics applies the principles and methods of economics to analyse problems
faced by management of a business, or other types of organizations and to help
find solutions that advance the best interest of such organizations’ (Davis and
Chang).
A careful
analysis of the above definitions, lead us to state the following main
characteristics of Managerial Economics:
1.
Managerial Economics is applied in
nature.
2.
It integrates economic theory and
business practice.
3.
Managerial economics facilitates
economic decision- making.
4.
It establishes rules and principles to
facilitate the achievement of economic goals.
5.
Managerial economics provides guidance
and direction in the allocation of limited resources and optimization of
results.
Managerial
decision- making is influenced not only by economic but also by human and
behavioural considerations, technological forces and environmental factors.(Mote
and Paul)
MANAGERIAL ECONOMICS: An Integration of Economics, Decision Science and Business Management
Managerial Economics is an allied discipline of management studies which is related to the application of economic theory and techniques to business management. Managerial Economics as a discipline of study has developed out of integrating economic theory and decision sciences with business management in theory and practice for the purposes of optimal solution to business/managerial decision problems. Thus, managerial economics pertains to the overlapping areas of economics along with the tools of decision sciences such as mathematical economics, statistics and econometrics as applied to business management issues. The accompanying figure explains the idea.
Managerial economics is restricted only to a part of business management primarily addressed to the analysis of economizing aspects of business problems and decision making by a business firm or an organization not directed concerned with the managerial problems and activities involving implementation, control conflict resolution and other management strategies in daily operations of the business.
Managerial economics relies heavily for its tools and techniques on traditional economics, and the decision sciences in analyzing the business problems and drawing conclusions about the impact of different courses of action on the optimal allocation of resources. It is, by and large, the application of knowledge of economic concepts, methods and tools of analysis to the material/business decision making process occurring in the firm in conducting the business or carrying out productive activity.
In brief, managerial economics is concerned with the application of economic principles and methodologies to the decision making process within the firm in a given condition. It seeks to formulate rules and principles to enable the attainment of the selected economic goals of business management, such as maximization of revenues and profits, minimization of costs, and so on. It ensue that certain economic theories are closely useful in business analysis and practice of decision making as well as forward planning of management. Managerial economics concerns this sort of knowledge and principles which aggregates those methods and analytical techniques having direct application to business management.
Economic theory assumes a single goal for the sake of simplicity and convenience of analysis. For example, a rational consumer is presumed to maximize the utility or a firm aims to maximize its profits. Economic theory functions on the basis of certain condition.
Consequently, economic theory cannot provide clear-cut solutions to business problems. Nevertheless, economic theory assists in arriving at a better decision. But there may be a number of obstacles and weakness of economic analysis in a decision making exercise in practice.
However, there exists a wide gap between theory and actual practice in business. With the help of economic theory, the decision maker identifies profit maximizing output by equating marginal revenue with marginal revenue. But, in actual practice, this may not be feasible due to attain due to resource constraints. So, the business decision need be taken with the assistance of linear programming for optimization. Again, economic theory of the firm makes an assumption of ‘profit maximization’ to be the ultimate objective. It does not honor the businessman’s ‘psychic income’ and several other aims in conducting a business. In practice, prices are fixed by the firms in view of some standard mark-up on costs, rather than following the rule of equating marginal cost with marginal revenue.
Thus, managerial economics, attempt to bridge the gap between the purely analytical issues treated in economic theory and decision problems faced in real business. It looks for providing power tools of analysis and reasoning approaches for business policy formulation.
Managerial Economics is an allied discipline of management studies which is related to the application of economic theory and techniques to business management. Managerial Economics as a discipline of study has developed out of integrating economic theory and decision sciences with business management in theory and practice for the purposes of optimal solution to business/managerial decision problems. Thus, managerial economics pertains to the overlapping areas of economics along with the tools of decision sciences such as mathematical economics, statistics and econometrics as applied to business management issues. The accompanying figure explains the idea.
Managerial economics is restricted only to a part of business management primarily addressed to the analysis of economizing aspects of business problems and decision making by a business firm or an organization not directed concerned with the managerial problems and activities involving implementation, control conflict resolution and other management strategies in daily operations of the business.
Managerial economics relies heavily for its tools and techniques on traditional economics, and the decision sciences in analyzing the business problems and drawing conclusions about the impact of different courses of action on the optimal allocation of resources. It is, by and large, the application of knowledge of economic concepts, methods and tools of analysis to the material/business decision making process occurring in the firm in conducting the business or carrying out productive activity.
In brief, managerial economics is concerned with the application of economic principles and methodologies to the decision making process within the firm in a given condition. It seeks to formulate rules and principles to enable the attainment of the selected economic goals of business management, such as maximization of revenues and profits, minimization of costs, and so on. It ensue that certain economic theories are closely useful in business analysis and practice of decision making as well as forward planning of management. Managerial economics concerns this sort of knowledge and principles which aggregates those methods and analytical techniques having direct application to business management.
Economic theory assumes a single goal for the sake of simplicity and convenience of analysis. For example, a rational consumer is presumed to maximize the utility or a firm aims to maximize its profits. Economic theory functions on the basis of certain condition.
Consequently, economic theory cannot provide clear-cut solutions to business problems. Nevertheless, economic theory assists in arriving at a better decision. But there may be a number of obstacles and weakness of economic analysis in a decision making exercise in practice.
However, there exists a wide gap between theory and actual practice in business. With the help of economic theory, the decision maker identifies profit maximizing output by equating marginal revenue with marginal revenue. But, in actual practice, this may not be feasible due to attain due to resource constraints. So, the business decision need be taken with the assistance of linear programming for optimization. Again, economic theory of the firm makes an assumption of ‘profit maximization’ to be the ultimate objective. It does not honor the businessman’s ‘psychic income’ and several other aims in conducting a business. In practice, prices are fixed by the firms in view of some standard mark-up on costs, rather than following the rule of equating marginal cost with marginal revenue.
Thus, managerial economics, attempt to bridge the gap between the purely analytical issues treated in economic theory and decision problems faced in real business. It looks for providing power tools of analysis and reasoning approaches for business policy formulation.
SCOPE OF MANAGERIAL ECONOMICS
The scope of managerial economics comprehends all those economic theories, models and techniques of analysis that can be used to analyze the business environment in order to find solutions to practical business problems.
The following key business areas can be considered to be the scope of managerial economics:
1. Demand Analysis :
Demand analysis is a basic activity of the firm as many of the other activities of the firm depend upon the outcome of the demand analysis. Demand analysis deals with individual and market demand, determinants of demand for a product, influence of advertising expenditure on the quantity demanded of a product, demand function, elasticity of demand and its relevance in business decision-making.
2.Demand Forecasting:
Demand forecasting is predicting demand for a product for the future period of time. This information is needed for planning and scheduling production, purchase of raw materials, acquisition of finance and advertising. An accurate demand prediction is essential for a business firm to avoid situations of under and over-production.Resource Allocation :Like traditional economics, managerial economics is related with the problem of optimum allocation of scarce resources among competing ends. Marginal analysis determines the profit maximization level of output. Linear Programming technique is of special help in solving optimization problems.
3. Pricing:
Price theory focuses on the behavior of one price at a time, relative to all others and explains the composition, or allocation of total production- why more of some things are produced than of others. The success of a business firm largely depends on the correctness of the pricing decisions taken by it. Price theory explains various market structures, pricing methods, differential pricing, product-line pricing and price forecasting.
4. Cost and Production Analysis:
Estimation of cost is very essential for a firm in decision-making. There are various elements of costs that need to be recognized and their interrelationship must be understood properly. Cost analysis determines the success of profit planning. The cost of production of an individual firm operating in a market has a significant bearing on the market supply of a commodity. The nature and shape of cost curves show how a change in output affects the costs. Cost analysis facilitates an understanding of cost concepts, relationship of cost and input, economies of scale, production function and cost control. Profit maximization is the major goal of a firm. Discovering economic costs and being able to measure them are essential steps for more effective profit planning, cost control and often for sound pricing practices.
5. Profit Analysis:
Profit earned reflects the financial performance of a business firm. Generally, firms aim at making profits. But the survival of every business firm depends upon its ability to earn profit. Traditionally, profit maximization is considered to be the objective o a business firm. In reality, firms may not aim at maximizing profit but they do have a profit policy. Hence, decisions regarding rate of profit, level of profit, reinvestment of profit etc. are relevant in every business firm nowadays.
Competitive analysis :Competitive-analysis helps the business executives in anticipating the responses of competitors to the firm’s pricing, advertising and marketing strategies and implementing a competitive strategy.
6. Strategic Planning:
Strategic planning provides management with a framework that makes possible an examination of external and internal factors for an organization, results in a set of mission, purpose, objectives, policies, plans and programs for implementation. The firm sets certain long- term goals and objectives and selects the strategy to achieve them. For example, the objective of the firm might be to achieve a maximum return on investment along with high level of customer service and stable work force. Strategic planning, with a global perspective, is now an addition to the scope of managerial economics. The integration of managerial economics and strategic planning has given rise to a new area of study called Corporate Economics.
Profit earned reflects the financial performance of a business firm. Generally, firms aim at making profits. But the survival of every business firm depends upon its ability to earn profit. Traditionally, profit maximization is considered to be the objective o a business firm. In reality, firms may not aim at maximizing profit but they do have a profit policy. Hence, decisions regarding rate of profit, level of profit, reinvestment of profit etc. are relevant in every business firm nowadays.
Competitive analysis :Competitive-analysis helps the business executives in anticipating the responses of competitors to the firm’s pricing, advertising and marketing strategies and implementing a competitive strategy.
6. Strategic Planning:
Strategic planning provides management with a framework that makes possible an examination of external and internal factors for an organization, results in a set of mission, purpose, objectives, policies, plans and programs for implementation. The firm sets certain long- term goals and objectives and selects the strategy to achieve them. For example, the objective of the firm might be to achieve a maximum return on investment along with high level of customer service and stable work force. Strategic planning, with a global perspective, is now an addition to the scope of managerial economics. The integration of managerial economics and strategic planning has given rise to a new area of study called Corporate Economics.
USES OF MANAGERIAL ECONOMICS
Usually the goal-oriented managers
in the following ways can use managerial economics.
(a) The primary role of managerial
economics is in evaluating the implications of alternative courses of action
and choosing the best or optimal course of action from among several
alternatives. Decision-making in this context implies the need for optimizing
behaviour. The essence of efficient and rational management is constrained
optimization. All choices and decisions are subject to limitations, and this is
where the tools of managerial economics are most useful.
(b) The principles of managerial
economics provide a framework for evaluating whether resources are being
allocated efficiently within a firm. For example, economics can assist the
manager determine if reallocating labour from a marketing activity to the
production line could increase profit.
(c) These principles help managers
respond to various economic indicators. For example, an increase in the price
of output or the development of a new lower-cost production techniques and
process the suitable managerial response would be to increase output.
Alternatively, the increase in the price of one input, say labour, may indicate
for the substitution of other inputs.
(d)The tools developed in the
managerial economics increase the effectiveness of decision making by expanding
and sharpening the analytical framework used by managers to make decision.
Thus, a working knowledge of the principles of managerial economics can
increase the value of both the firm and the manager.
(e) Managerial economics helps in
making a variety of business decision in a complicated and dynamic business
environment which include:
(a)
What good and services be produced?
(b)
What inputs and production techniques are
appropriate to be used?
(c)
How much output should be reduced and at
what prices it should be sold?
(d)
What are the most appropriate sizes and locations
of new production facilities?
(e)
When should equipment be replaced?
(f)
How should the available capital be
allocated?
CONCLUSION
The scope of
managerial economics comprehends all those economic concepts, models, theories,
and techniques of analysis that can be used to analyze the business environment
in order to find solutions to practical business problems. Managerial economics
has its relationship with Economics, Management Theory and Accounting,
Mathematics, Statistics, Managerial Economics and Operations Research,
Managerial Economics and Computer Science, Managerial Economics and Theory of
Decision-making. Managerial Economics plays a significant role in
decision-making.
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