Businesses run on various theories that are explained in Economics. Managerial Economics is the stream of management studies that emphasizes solving problems in businesses using the theories in micro and macroeconomics. This branch of economics is used by firms to not only find a solution to problems in daily running but also for long-term planning. We can also say that Managerial economics is a practical application of theories in economics.
“Managerial economics is concerned with the application of economic concepts and economic analysis to the problems of formulating rational managerial decisions.”
- Edwin Mansfield, Economics Professor, University of Pennsylvania
We should also look here at What is economics? Economics is an inevitable part of any business. All the business assumptions, forecasting, and investments are based on this one single concept. Investopedia explains “Economics is a social science concerned with the production, distribution, and consumption of goods and services. It studies how individuals, businesses, governments, and nations make choices about how to allocate resources.” So, theories in economics are not just some statements written but rather they act as fuel for a firm. In the broader picture, economics also helps nations in policy formation.
So, in this blog, we will discuss the branch of economics that helps businesses to find a solution to almost every problem they may face. We will discuss the definition of managerial economics, its nature, its scope in businesses, and the principles of managerial economics.
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Definition of Managerial Economics
Managerial economics is defined as the branch of economics which deals with the application of various concepts, theories, methodologies of economics to solve practical problems in business management. It is also reckoned as the amalgamation of economic theories and business practices to ease the process of decision making. Managerial economics is also said to cover the gap between the problems of logic and problems of policy.
Managerial economics is used to find a rational solution to problems faced by firms. These problems include issues around demand, cost, production, marketing, and it is used also for future planning. The best thing about managerial economics is that it has a logical solution to almost every problem that may arise during business management and that too by sticking to the microeconomic policies of the firm.
When we talk of managerial economics as a subject, it is a branch of management studies that emphasizes solving business problems using theories of micro and macroeconomics. Spencer and Siegelman have defined the subject as “the integration of economic theory with business practice to facilitate decision making and planning by management.” The study of managerial economics helps the students to enhance their analytical skills, developing a mindset that enables them to find rational solutions.
Nature of Managerial Economics
We know about managerial economics like what it is and how different people define it. Managerial Economics is an essential scholastic field. It can be termed as a science in the sense that it fulfills the criteria of being a science.
We all know science as a systematic body of knowledge and it is based on methodological observations. Similarly, Managerial Economics is also a science of making decisions and finding alternatives, keeping the scarce of resources in mind.
In science, we arrive at any conclusion after continuous experimentation. Similarly, in managerial economics policies are formed after constant testing and trailing.
In science, principles are universally acceptable and in managerial economics, policies are universally applicable at least partially if not fully.
Nature of Managerial Economics
We will now look at the characteristics of managerial economics in brief.
Art and Science
Managerial Economics requires a lot of creativity and logical thinking to come up with a solution. A managerial economist should possess the art of utilizing his capabilities, knowledge, and skills to achieve the organizational objective. Managerial Economics is also considered as a stream of science as it involves the application of different economic principles, techniques, and methods, to solve business problems.
In managerial economics, problems of a particular organization are looked upon rather than focusing on the whole economy. Therefore it is termed as a part of microeconomics.
Any organization operates in a market that is a part of the whole economy, so external environments affect the decisions within the organization. Managerial Economics uses the concepts of macroeconomics to solve problems. Managers analyze the macroeconomic factors like market conditions, economic reforms, government policies to understand their impact on the organization.
Managerial Economics uses different tools and principles from different disciplines like accounting, finance, statistics, mathematics, production, operation research, human resource, marketing, etc. This helps in coming up with a perfect solution.
Management oriented and pragmatic
Managerial economics is a tool in the hands of managers that aids them in finding appropriate solutions to business-related problems and uncertainties. As mentioned above, managerial economics also helps in goal establishment, policy formation, and effective decision making. It is a practical approach to find solutions.
Types of Managerial Economics
Everyone has their perceiving ability, so the same goes with managerial economics. All managers perceive the concept of managerial economics differently. For some, customers’ satisfaction can be the priority while some may focus on efficient production. This leads us to different types of managerial economics. So, let us explore the different approaches to managerial economics.
Market is a free and democratic place in terms of decision making. Customers get a lot many options to choose from. So, companies have to modify their policies according to consumers’ demands and market trends. If not done so, it may result in business failures. This is what we call liberal managerialism.
The normative view of managerial economics means that the decisions taken by the administration would be normal, based on real-life experiences and practices. The decisions reflect a practical approach regarding product design, forecasting, marketing, supply and demand analysis, recruitments, and everything else that is concerned with the growth of a business.
Radical managerialism means to come up with revolutionary solutions. Sometimes, when the conventional approach to a problem doesn’t work, radical managerialism may have the solution. However, it requires the manager to possess some extraordinary skills and thinking to look beyond. In radical managerialism, consumer needs and satisfaction are prioritized over profit maximization.
So, these were the three different types of managerial economics. These are decided based on the different approaches by managers.
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Principles of Managerial Economics
The great macroeconomist N. Gregory Mankiw has given ten principles to explain the significance of managerial economics in business operations which can be further classified into three categories.
Principles of Managerial Economics
Principles of How People Make Decisions
Based on the real-life decision-making processes, four principles are recalled in Managerial Economics.
1. People Face Tradeoffs
There are enormous options in the market. So, people have to make choices among the various options available.
2. Opportunity Cost
Every decision involves an opportunity cost that is the cost of those options which we let go of while selecting the most appropriate one.
3. Rational People Think at the Margin
When we make choices from the various options available and before investing the capital or resources we look at the profit margin we would make in the investment.
4. People Respond to Incentives
It is human nature to look for something extra while purchasing something. Decision-making is affected by the incentives attached to a particular product or service. Positive incentive motivates people to opt for the particular product while negative incentive discourages.
Principles of How People Interact
Communication with the audience plays a vital role in good performance. Over the years, organizations have realized the need to communicate well with their audience. Based on this, three principles are given in Managerial Economics.
1. Trade can Make Everyone Better Off
This principle states that trade is a medium to exchange services and products. Everyone gets a fair chance to offer products and services which they are good at making and also to purchase those products and services. Also Read: The success story of Delhivery
2. Markets Are Usually A Good Way to Organize Economic Activity
Market is a place where buyers and sellers interact with each other. Consumers put in their demands and requirements and the producers decide on the production and supply of those products and services.
3. Government can better the market outcomes
Government intervenes in business operations whenever there are unfavorable market conditions like the current pandemic situation or also for the welfare of society. One example of the latter is deciding the minimum wage for laborers.
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Principle of How Economy Works as a Whole
Three principles are given to explain the role of the economy in the functioning of an organization.
1. A Country’s Standard of Living Depends on the Goods and Services produced
The role of organizations in the economic growth of a country is one of the major, so, the organizations must be capable enough to produce goods and services for the population. This ultimately raises the standard of living and also contributes to GDP growth.
2. Price Rises When Government Prints Too Much Money
If there is surplus money available with people, their spending capacity increases, ultimately leading to a rise in demand. When the producers are unable to meet the consumer’s demand, inflation takes place. Referred blog: What does the 24% shrink in India’s GDP mean?
3. Society Faces a Short-Run Tradeoff between Inflation and Unemployment
Government bring-in policies to tackle the problem of unemployment and boost the economy in the short run as well. This further leads to inflation.
Scope of Managerial Economics
Managerial Economics has a more narrow scope. It solves a firm’s problem using microeconomics. In the situation of scarce resources, managerial economics ensures that managers make effective and efficient decisions that are equally beneficial to customers, suppliers, and the organization. The fact of scarcity of resources gives rise to three fundamental questions-
What to produce?
How to produce?
For whom to produce?
To answer these questions, a firm makes use of managerial economics principles.
Managerial Economics is not only applicable to profit-making business organizations, but also to non- profit organizations such as hospitals, schools, government agencies, etc.
Read this article to know about the scope of Managerial Economics in detail.
We tried to explain Managerial Economics through this blog. The definition of Managerial Economics says that it is a branch of economics that deals with the application of various theories, concepts, and methodologies to solve business problems. It is said to cover the gap between problem of logic and problem of policy.
For any firm to be successful, it needs to solve its problems logically and rationally. Managerial Economics helps the managers to make effective and efficient decisions using the concepts of microeconomics. One of the top characteristics of Managerial Economics is that it uses the different factors of macroeconomics helping firms to act according to the market trends.