Managerial economics is a branch of
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
involving the application of economic methods in the managerial decision-making process.
[• Trefor Jones (2004). ''Business Economics and Managerial Decision Making'', Wiley]
Description
and chapter-preview
links
• Nick Wilkinson (2005). ''Managerial Economics: A Problem-Solving Approach'', Cambridge University Press
Description
an
preview.
• Maria Moschandreas (2000). ''Business Economics'', 2nd Edition, Thompson Learning.
Description
and chapter-previe
links
Economics is the study of the production, distribution and consumption of goods and services. Managerial economics involves the use of economic theories and principles to make decisions regarding the allocation of scarce resources.
Managers use economic frameworks in order to optimise profits, resource allocation and the overall output of the firm, whilst improving efficiency and minimising unproductive activities.
These frameworks assist organisations to make rational, progressive decisions, by analysing practical problems at both micro and macroeconomic levels.
Managerial decisions involve forecasting (making decisions about the future), which involve levels of risk and uncertainty, however, the assistance of managerial economic techniques aid in informing managers in these decisions.
The two main purposes of managerial economics are:
# To
optimize decision making when the firm is faced with problems or obstacles, with the consideration and application of
macro and
microeconomic
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
theories and principles.
# To analyze the possible effects and implications of both short and long-term planning decisions on the revenue and profitability of the Business.
The core principles that managerial economist use to achieve the above purposes are:
* monitoring operations management and performance,
* target or goal setting, and
* talent management and development.
In order to optimize economic decisions, the use of
operations research
Operations research ( en-GB, operational research) (U.S. Air Force Specialty Code: Operations Analysis), often shortened to the initialism OR, is a discipline that deals with the development and application of analytical methods to improve deci ...
,
mathematical programming
Mathematical optimization (alternatively spelled ''optimisation'') or mathematical programming is the selection of a best element, with regard to some criterion, from some set of available alternatives. It is generally divided into two subfi ...
, strategic decision making,
game theory
Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...
and other
computational methods are often involved. The methods listed above are typically used for making quantitate decisions by data analysis techniques.
The theory of Managerial Economics includes a focus on;
incentive
In general, incentives are anything that persuade a person to alter their behaviour. It is emphasised that incentives matter by the basic law of economists and the laws of behaviour, which state that higher incentives amount to greater levels of ...
s, business organization,
biases
Bias is a disproportionate weight ''in favor of'' or ''against'' an idea or thing, usually in a way that is closed-minded, prejudicial, or unfair. Biases can be innate or learned. People may develop biases for or against an individual, a group, ...
,
advertising
Advertising is the practice and techniques employed to bring attention to a product or service. Advertising aims to put a product or service in the spotlight in hopes of drawing it attention from consumers. It is typically used to promote a ...
,
innovation
Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entity ...
,
uncertainty
Uncertainty refers to epistemic situations involving imperfect or unknown information. It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable or ...
,
pricing
Pricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acqui ...
,
analytics
Analytics is the systematic computational analysis of data or statistics. It is used for the discovery, interpretation, and communication of meaningful patterns in data. It also entails applying data patterns toward effective decision-making. It ...
, and
competition
Competition is a rivalry where two or more parties strive for a common goal which cannot be shared: where one's gain is the other's loss (an example of which is a zero-sum game). Competition can arise between entities such as organisms, indivi ...
. In other words, managerial economics is a combination of economics and managerial theory. It helps the manager in decision-making and acts as a link between practice and theory.
Furthermore, managerial economics provides the device and techniques for managers to make the best possible decisions for any scenario.
Some examples of the types of problems that the tools provided by managerial economics can answer are:
* The price and quantity of a good or service that a business should produce.
* Whether to invest in training current staff or to look into the market.
* When to purchase or retire fleet equipment.
* Decisions regarding understanding the competition between two firms based on the motive of profit maximization.
* The impacts of consumer and competitor incentives plan on business decisions
Managerial economics is sometimes referred to as
business economics
Business economics is a field in applied economics which uses economic theory and quantitative methods to analyze business enterprises and the factors contributing to the diversity of organizational structures and the relationships of firms with ...
and is a branch of
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
that applies
microeconomic
Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics fo ...
analysis to decision methods of businesses or other management units to assist managers to make a wide array of multifaceted decisions. The calculation and quantitative analysis draws heavily from techniques such as
regression analysis
In statistical modeling, regression analysis is a set of statistical processes for estimating the relationships between a dependent variable (often called the 'outcome' or 'response' variable, or a 'label' in machine learning parlance) and one ...
,
correlation
In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistics ...
and
calculus
Calculus, originally called infinitesimal calculus or "the calculus of infinitesimals", is the mathematical study of continuous change, in the same way that geometry is the study of shape, and algebra is the study of generalizations of arithm ...
.
Economic Theories relevant to Managerial Economics
Microeconomics is the dominant focus behind managerial economics, some of the key aspects include:
* ''Supply and Demand''
The law of supply and demand describes the relationship between producers and consumers of a product.
The law suggests that price set by the producer and quantity demanded by a consumer are inversely proportional, meaning an increase in the price set is met by a reduction in demand by the consumer.
The law further describes that sellers will provide a large quantity of the good if it sells at a high price.
Excess demand exists when the quantity of a good demanded is greater than the quantity supplied. Where there is excess demand, sellers can benefit by increasing the price. The converse applies to excess supply.
* ''
Production theory
Production is the process of combining various inputs, both material (such as metal, wood, glass, or plastics) and immaterial (such as plans, or knowledge) in order to create output. Ideally this output will be a good or service which has value an ...
''
Production theory describes the quantity of a good a business chooses to produce due to multiple factors.
These factors include; raw material inputs, labor, machinery costs, capital, etc.
The production theory states that a business will strive to employ the cheapest combination of inputs to produce the quantity demanded.
The production function can be described by the function