Managerial Economics is essentially the study of the application of economic tools and techniques to the economic analysis of business problems. In addition to Economics, there are, however, certain other disciplines from which economic analysis draws its tools. The most important of them are Management theory, Theory of Decision-making, Mathematics, Statistics, Accounting, Computer Science, and Operations Research.
Managerial Economics and Economics
It is customary to divide economics into
“positive” and “normative “economics. Positive economics describes and explains
economic behavior. Normative economics is concerned with prescription or value
judgments as to what should and should not be done. Managerial economics is partially
a normative economics as its focus is more on prescribing choice and action and
less on explaining past events. Managerial economics draws on positive
economics by utilizing the relevant theories as a basis for prescribing choice.
Thus, the system of logic and managerial economic theory uses comes from this
heritage of economic theory. The primary task of managerial economics is to fit
relevant data to this framework of logical analysis so as to reach valid
conclusions as a basis for action. A product- mix decision using the linear
programming approach or a pricing decision using a model of price determination
is illustration of this approach.
Economics
is divided also into Micro and Macro- economics. Micro- economics studies an
economic or decision-making unit and considers in detail the behavior of that
particular unit. It deals with the analysis of the behavior and economic
actions of small individual units of the economy, such as particular consumers,
firms or small group of individual business units. It is the study of individual
firms, particular households, prices of goods and services, wages, incomes, particular
industries, and commodities. The roots of managerial
economics spring from micro-economic theory. Price theory, demand concepts and
theories of market structure, are elements of microeconomics that managerial
economics draws upon. Managerial
economics has an applied bias and an interest in applying economic theory in
order to solve real life problems of enterprises.
Macro-economic
theory on the other hand, has less relevance for managerial economics as it is
concerned with the behavior of the economy as a whole, and the theories about
its operation. It deals with the division of total output among various
industries, products, and firms, the allocation of resources among competing ends.
It focuses problems of income distribution. It is interested in relative prices
of particular goods and services. Thus, the study of the level and
determination of national income, employment and prices and the analysis of
aggregate consumption and balance of payments belongs to macroeconomics.
National
income forecasting, a part of macroeconomics, can contribute to managerial
economics as an important aid to business conditions analysis, which in turn
could be a valuable input for forecasting the demand for specific product
groups. Assumptions and estimates of demand are essential data for most of the
allocation decisions managerial economics is concerned with.
Management
Theory and Accounting
Management
theory and accounting have also exerted a great deal of influence on Managerial
Economics. In theory of the firm maximization of profit is considered as a
pivotal concept. Organization theorists
in recent years have talked about “satisficing” as opposed to “maximizing” as
an objective of the enterprises. (Herbert Simon). Accounting
is the main source of data concerning the performance and functioning of the
firm.
Managerial
Economics and Mathematics
Mathematical
tools are widely used in “model” building for exploring the relationship
between related economic variables.
Managerial
Economics and Statistics
Statistical tools and techniques are of great help in business
decision-making which are used in collection, processing and analysis of
business data, testing the validity of economic laws with the real economic
phenomenon before applying to business analysis. A good deal of business
decisions is based on probable economic events. The statistical tools like
theory of probability, techniques of demand forecasting and regression analysis
help the decision-makers in predicting the probable future course of economic
events and outcomes. Statistics helps in empirical testing of theory. On the
basis of this better decisions are made relating to demand and cost functions,
production, sales or distribution. Managerial Economics is heavily dependent on
statistical methods.
Relation
of Operations Research with Managerial Economics
Much of the development of techniques of managerial economics such
as inventory models, linear programming and game theory is credited to the contribution
of operations research. While economics have given considerable attention to
problems involving maximization of profits and minimization of costs, it was
the operation researchers that focused attention on the concept of optimization
which has been used a great deal in managerial economics, which had originally
started with the marginal analysis borrowed from economic theory. Incremental
or marginal reasoning is closely linked to the logic underlying the models of
operation research.
Similarly,
operations research has influenced managerial economics through its new
concepts and models for dealing with risk and uncertainty. Though economic theory has always recognized
these factors as germane to decision making in the real world, the framework
for taking them into account in the context of actual problems has been
operationalized only through the recent contributions of mathematicians and
statisticians. These scientists have thus done a great deal to sharpen the
tools and analytical models available to managerial economics. However, the
practice of operations research requires highly specialized quantitative skills
whereas managers could master the reasoning underlying managerial economics
even if their mathematical prowess is modest.
Relation
of Computer Science with Managerial Economics
Computers have drastically altered the way business is done today.
Computers are used for maintaining data and accounts, inventory control, demand
and supply predictions. Computerization of several business activities has
curtailed their execution time and work- load of managerial personnel. Today
the management trainees are required to have a basic knowledge of computers.
Theory of
Decision-making and Managerial Economics
Decision theory
has been developed to deal with problems of choice of decision- making under
uncertainty where the probability figures required for the utility calculus are
not available. (Baumol, W.J.)
The theory of decision- making is helpful to business firms to take quick
decisions in the face of multiple goals. Therefore, the theory of decision-
making is more practical and application oriented than naïve economic theories.
Thus, managerial
economics, an offshoot of traditional economics, which has emerged as a
separate branch of knowledge, integrates ideas from various disciplines to gain
a proper perspective for business decision-making. To be a successful
managerial economist, one must have not only the knowledge of economics but also
mathematics, statistics, operations research and theory of decision- making. In
other words, managerial economics, with the help of other allied subjects,
bridges the gap between abstract theory and managerial practice.
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