Definition and Meaning of Managerial Economics:
economics, used synonymously with business economics. It
is a branch of economics that deals with the application of
microeconomic analysis to decision-making techniques of
businesses and management units. It acts as the via media
between economic theory and pragmatic economics. Managerial
economics bridges the gap between "theory and practice".
Managerial economics can be defines as:
Spencer and Siegelman:
“The integration of
economic theory with business practice for the purpose of
facilitating decision-making and forward planning by
McGutgan and Moyer:
is the application of economic theory and methodology to
decision-making problems faced by both public and private
studies the application of the principles, techniques and
concepts of economics to managerial problems of business and
industrial enterprises. The
term is used
interchangeably with micro economics, macro economics, monetary
Characteristics of Managerial Economics:
(i) It studies the
problems and principles of an individual business firm or an
individual industry. It aids the management in forecasting and
evaluating the trends of the market.
It is concerned with varied
corrective measures that a management undertakes under various
circumstances. It deals with goal determination, goal
development and achievement of these goals. Future planning,
policy making, decision making and optimal utilization of
available resources, come under the banner of managerial
Managerial economics is pragmatic. In pure microeconomic theory,
analysis is performed, based on certain exceptions, which are
far from reality. However, in managerial economics, managerial
issues are resolved daily and difficult issues of economic
theory are kept at bay.
economics employs economic concepts and principles, which are
known as the theory of Firm or 'Economics of the Firm'. Thus,
its scope is narrower than that of pure economic theory.
economics incorporates certain aspects of macroeconomic theory.
These are essential to comprehending the circumstances and
environments that envelop the working conditions of an
individual firm or an industry. Knowledge of macroeconomic
issues such as business cycles, taxation policies, industrial
policy of the government, price and distribution policies, wage
policies and antimonopoly policies and so on, is integral to the
successful functioning of a business enterprise.
economics aims at supporting the management in taking corrective
decisions and charting plans and policies for future.
(vii) Science is a
system of rules and principles engendered for attaining given
ends. Scientific methods have been credited as the optimal path
to achieving one's goals. Managerial economics has been is also
called a scientific art because it helps the management in the
best and efficient utilization of scarce economic resources. It
considers production costs, demand, price, profit, risk etc. It
assists the management in singling out the most feasible
alternative. Managerial economics facilitates good and result
oriented decisions under conditions of uncertainty.
economics is a normative and applied discipline. It suggests the
application of economic principles with regard to policy
formulation, decision-making and future planning. It not only
describes the goals of an organization but also prescribes the
means of achieving these goals.
of Managerial Economics:
The scope of
managerial economics includes following subjects:
(i) Theory of Demand
(ii) Theory of
(iii) Theory of
Exchange or Price Theory
(iv) Theory of Profit
(v) Theory of Capital
Importance of Managerial Economics:
industrial enterprises aim at earning maximum proceeds. In order
to achieve this objective, a managerial executive has to take
recourse in decision making, which is the process of selecting a
specified course of action from a number of alternatives. A
sound decision requires fair knowledge of the aspects of
economic theory and the tools of economic analysis, which are
directly involved in the process of decision-making. Since
managerial economics is concerned with such aspects and tools of
analysis, it is pertinent to the decision making process.
Spencer and Siegelman
have described the importance of managerial economics in a
business and industrial enterprise as follows:
traditional theoretical concepts to the actual business behavior
and conditions: Managerial economics amalgamates tools,
techniques, models and theories of traditional economics with
actual business practices and with the environment in which a
firm has to operate. According to Edwin Mansfield, “Managerial
Economics attempts to bridge the gap between purely analytical
problems that intrigue many economic theories and the problems
of policies that management must face”.
Managerial economics estimates economic relationships between
different business factors such as income, elasticity of demand,
cost volume, profit analysis etc.
relevant economic quantities: Managerial economics assists
the management in predicting various economic quantities such as
cost, profit, demand,
price etc. As a business manager has to function in an
environment of uncertainty, it is imperative to anticipate the
future working environment in terms of the said quantities.
significant external forces: The management has to identify
all the important factors that influence a firm. These factors
can broadly be divided into two categories. Managerial economics
plays an important role by assisting management in understanding
(a) External factors:
A firm cannot exercise any control over these factors. The
plans, policies and programs of the firm should be formulated in
the light of these factors. Significant external factors
impinging on the decision making process of a firm are economic
system of the country, business cycles, fluctuations in national
income and national production, industrial policy of the
government, trade and fiscal policy of the government, taxation
policy, licensing policy, trends in foreign trade of the
country, general industrial relation in the country and so on.
(b) Internal factors:
These factors fall under the control of a firm. These factors
are associated with business operation. Knowledge of these
factors aids the management in making sound business decisions.
(v) Basis of
business policies: Managerial economics is the founding
principle of business policies. Business policies are prepared
based on studies and findings of managerial economics, which
cautions the management against potential upheavals in national
as well as international economy. Thus, managerial economics is
helpful to the management in its decision-making process.