INTRODUCTION
Economics is a growing subject. Many new
branches have been developed by various economists from time to time to meet
the requirements of the Time. One such new addition is Managerial Economics. It
is interesting to study the reasons for the emergence of this new branch of
economics. In the last few decades all over the world business has expanded and
diversified at a fast rate. Varieties of goods and services unheard of so far
have been developed. Wide-ranging changes have taken place both in the scope
and the modes of business operation. Government interference in business has
become very common in all nations. Side by side, the business world has become
increasingly complex, challenging and competitive in recent years. Business
uncertainties and fluctuations have become the order of the day. The
traditional micro economic theories have failed to offer solutions to the
problems faced by business units today. In order to help the business
executives to solve their business and managerial problems, a new branch of
economics now popularly known as managerial economics has been developed by
modern economists[1].
Managerial economics as a study is a special
branch of economics involved to bridge the gap between abstract theory and
managerial practice. It deals with the use of economic concepts and principles
for decision-making and forward planning through an uncertain future. Economic
theory provides a number of concepts and analytical tools which are of
considerable significance to the executives in their decision-making process in
an uncertainty framework. But this does not mean that economic provides answers
for all the problems faced by the firm or a business unit. In practice, many
more skills are to be developed in solving the variety of problems faced
by the firm. Only conceptual knowledge is of no use. The executives have to
develop necessary skills to make use of their knowledge in the context of the
firm to achieve maximum performance in terms of goals and objectives of the
firms.
Briefly, managerial economics may be called ‘Economics
applied in decision making’.
It is mainly concerned with classifying problems, organizing and evaluating
information and ultimately comparing the alternative course of action. Managerial
economics is highly pragmatic. It deals mainly with analytical tools that are
useful in decision-making process[2]. It avoids some of the abstract
issues of economic theory, but has also certain complications that are neglected
in theory. Managerial economics, therefore, considers particular environment of
decision-making[3].
Managerial economics borrows only the analytical tools of economic
theory and gives very little importance to the final theorems of
economics. Managerial economics is thus realistic in nature. It is applied to
solve some of the problems faced by the firm so that they achieve to their
maximum performance in terms of goals and objectives so that they can easily
fit in the globalization economy. These problems generally relate to choices and
allocation of recourses which are essentially economic in character and are
experienced by the managers. In other words, managerial decision-making is
influenced not only by economic factors but also by many other
considerations like human and behavior consideration, technological forces and
environment factors.
Eight Element of critical thinking
- Purpose
- Question
- Information
- Inferences
- Concepts
- Assumptions
- Implications
- Pint of view
Scope of managerial economics
- Demand analysis and forecasting
- Cost and production analysis
- Pricing decision, policies and practices
- Profit management
- Capital management and
- Linear programming and the theory of games
Section I: PURPOSE AND QUESTION
Given the rapid technological shifts and the global economy,
business decisions are increasingly more complex, and business managers need
more sophisticated, complex tools and models to aid in the decision making
process. There are just too many business- and technology-related variables to
consider, as well as new variables coming into play every day, making it nearly
impossible for managers to make good decisions based on past experience and
intuition alone. For this reason, according to ReferenceForBusiness.com,
"managerial economics is a discipline that is designed to provide a solid
foundation of economic understanding in order for business managers to make
well-informed and well-analyzed managerial decisions."
The purpose of
managerial economics is to empower the managers
with theories, logic and methodology so that they can deal with the application
of various economic theories, principles, concepts and techniques to business
management in order to solve business and management problems. Managerial
economics deals with the practical application of economic theory and methodology
to decision making problems faced by private, public and nonprofit making
organizations[4].
Questions
- Is Managerial Economics a
Positive or Normative Science?
- What is Managerial Economics?
What is its relevance to Engineers/Managers?
- How the managers will arrive at
the business decision making? And what is a business environment?
- What are firms? And what are
the Objectives and goals of firms.
Section2: INFORMATION AND INFERENCES
“Managerial economics It is the application of economic analysis
to business problems; it has its origin in theoretical microeconomics.”By
Howard Davies and Pun-Lee Lam
According to McNair the Merriam, Managerial Economics consists of
the use of economic modes According to economists like Marshall and Pigou, the
ultimate object of the study of any science is to contribute to human welfare.
Thus economics should be a normative science. It should be able to suggest
policy measure to the politicians. It should be able to prescribe guidelines
for the conduct of economic activities. Not only economists should build up the
economic theory but also at the same time they should provide policy measures.
of thought to analyse business situations.
Spencer and Siegelman have defined Managerial Economics as “the
integration of economic theory with business practice for the purpose of
facilitating decision-making and forward planning by management[5].”
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Fig1: Firms, Economics, business management and managerial economics
The fig above, shows the correspondence of
firms and managers in the global economy; the firms face with different
problems in their carrier of business and they address all those issue to the
managers who practically use the economic theory and business management based
on the politics of state(macroeconomics) and the objectives of the firms(micro
economics) to find out the answers for the firm’s questions and with those
economics theories and business management the firms get the optimal answers
which help them to satisfy their customers and to fit their company in the
global economy.
1. Managerial Economics
a Positive or Normative Science
As Keynes put it, “The main function of economics is not to
provide a body of settled conclusions immediately applicable to policy. It
provides a method or a technique of thinking, which enables its possessor to
draw correct conclusions.”
Managerial economics is a blending of pure or positive science
with applied or normative science. It is positive when it is confined to
statements about causes and effects and to functional relations of economic
variables. It is normative when it involves norms and standards, mixing them
with cause-effect analysis.
One cannot disregard the normative functions of managerial
economics, though the discipline may be treated primarily as a positive
science. Normative approach in managerial economics has ethical considerations
and involves value judgments based on philosophical, cultural and religious
positions of the community. In nutshell Managerial Economics is both a Positive
and Normative Science[6].
2. Managerial Economics: Study of economic
theories, logic and methodology for solving the practical problems of business.
It is used to analyze business problems for rational business decisions. It is
also called as Business Economics or Economics for firms. Relevance to
engineers/Managers: Engineering and Management involves a lot of strategic
decision making situations[7]. Managerial economics helps
in rational decision making. The scopes of managerial economics are (demand and
production decision):
- The selection of the production
or the service to be produced.
- The choice of production
methods and resource combinations
- The choice of best price and
quantity combinations
- Promotional strategy and
activities.
- The selection of location from
which to produce
3. Managerial Decisions/ Decision Analysis is
the Process of selecting the best out of alternative opportunities, open
to the firm. To arrive at a business decision, the managers are supposed to
pass through four main phases which are:
- Determine and define the
objective
- Collection of information
regarding economic, social, political and technological environment; and
foreseeing the necessity and occasion for decision making.
- Inventing, developing and
analyzing possible courses of action.
- Selecting a particular course
of action from the available alternatives.
Business environment-comprises of the economic,
social, political and technological environment
4. Firm is an organization owned
by one or jointly by a few or many people, engaged in a productive activity,
with a definite aim[8].
Objectives of firms:
- Profit maximization
- Maximization of the sales
revenue
- Maximization of firm’s growth
rate
- Maximization of Managers
utility function
- Making satisfactory rate of
Profit
Goals of firms:
- Market share
- Customer satisfaction
- ROI (Return on Investment)
- Technological advancement
- Long run Survival of the firm
- Entry-prevention and
risk-avoidance
- Social/ Environmental concerns
Business environment
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Section3: CONCEPTS AND ASSUMPTIONS
McNair and Meriam in their book Problems in Business Economics
maintain that the managerial economics consists of the use of economic modes of
thought to analyze business situations. According to Milton H. Spencerand Louis
Siegelman, managerial economics is the integration of economic theory with
business practice for the purpose of facilitating decision making and forward
planning by management.
William J. Baumol in his article, ‘What Can Economic
Theory Contribute to managerial Economics? Points out that, it is not the
final theorems of economics that are important to management but rather the
methods of reasoning[9].
Managerial economics is closely related to and draws heavily upon
several areas in economics such as Theory of the Firm, Microeconomics,
Macroeconomics, Industrial Economics, and so on. Managerial economics is
basically micro in nature in that it deals with the firm’s behaviour in three
basic areas:
- Utility analyses,
- Theory of the Firm and
- Factor pricing.
Managerial economics is closely related to other
disciplines. It is intimately related to microeconomic theory, macroeconomic
theory, the theory of decision-making, operations research, mathematics,
statics and accounting. The management executive makes use of the concepts and methods
form all these disciplines.
Managerial Economics and Microeconomic Theory
Managerial economics is mainly microeconomic in
character. Microeconomic theory provides all important concepts and analytical
tools to managerial economics. Managerial economic makes use of such
microeconomic concepts as the elasticity of demand, marginal cost, market structures,
short and long-runs and so on. It also deals with monopoly price, the kinked
demand theory and the price discrimination[10].
Managerial
Economics and Macroeconomic Theory
It is useful to managerial economics mainly in the area of
forecasting. Macroeconomic theory being aggregative in character is immense importance
in forecasting general business conditions. The general theory of income and
employment, which is at the core of macroeconomics, has a direct impact
upon the forecasting of general business conditions. Managerial economics makes
use of such macroeconomic concepts as the National Income and Social
Accounting, Propensity to Consume, Marginal Efficiency of Capital, the
Multiplier, the Accelerator, Liquidity Preference, Business Cycles, Public
Finance and Fiscal Policy; and so on. Since the decisions at a firm level are
taken in the board framework of an economic system, it becomes essential conditions.
It is in this context, macroeconomic theory is useful to managerial economics.
Managerial
Economics and the Theory of Decision Making
Managerial economics is also closely related to the theory
of decision-making. It deals with the processes by which a particular course of
action is selected from out of a number of alternatives available. It details
the processes by which expectations under conditions of uncertainty framework
are constituted. It takes into account of uncertainty the sociological and psychological
factors influencing human behavior[11].
Managerial
Economics and Operations Research
Operations research is one of the most important
developments in the fields of management science. Even though the roots of
operation all areas of administrations requiring planning and control in all
areas of administration requiring planning and control. Operations
research has been broadly defined as the application of mathematical techniques
in solving the business problems. The techniques of operations research are
highly mathematical in character. One of the popular techniques evolved and very
often used is the Linear or Mathematical Programming[12].
Managerial
Economics and Mathematics
Mathematics is another subject with which managerial
economics has a very close relation. Recent advancements have compelled the
business executives to make use of mathematical concepts and techniques. Mathematics
has almost become a part and parcel of the managerial economics. Managerial
economics today has become metrical in character.
But Professors Savage and Small contend that ‘managerial economics
should be both conceptual and metrical; for while measurement without theory
can only lead to false precision, theory without measurement can rarely be
operationally useful’. Mathematics is useful in managerial economics in
estimating various economic relationships, measuring relevant economic
quantities and employing them in decision-making and forward planning.
Managerial
Economics and Statistics
Statistics is also useful in many ways to managerial
economics. Managerial economics obtains the basis for the empirical testing of
theory from statistics. The importance of statistics to managerial economics
also lies in the fact that it provides the individual firm with measures of the
appropriate functional relationship involved in decision-making.
Since management executives take their decisions in an
uncertainly framework, the theory of probability evolved in statistics
provides the logic for dealing with such uncertainty. Therefore, there exists a
very close relation between statistics and managerial economics[13].
Managerial
Economics, Management Theory and Accounting
Management theory and Accounting also exercise a profound
influence on managerial economics. Since decision-making is mainly the function
of management, the developments in management theory do influence managerial
economics which helps the process of decision-making at the firm level. Modern
management theorists now contend that satisfying is the objective of modern
firms’ rather than maximizing as thought earlier. Managerial economics cannot
afford to ignore these development and changing views of management theorists
as they have important bearing on the decision-making process of the firm.
The decision-making process of the firm depends heavily on
accounting information. Accounting has in fact strengthened the applied bias of
managerial economics[14].
Section4: IMPLICATION AND POINTS OF VIEW
Managerial economics can be applied to any business decision where
there is a need to find the most optimal allocation of scarce resources.
However, the most common applications are in the areas of production analysis,
pricing analysis and capital budgeting. Production analysis involves production
line issues, such as what is the optimal amount of inventory to have on hand to
accommodate production while minimizing inventory overhead. Pricing analysis
involves determining the optimal price required competing in a global
marketplace, given constraints such as competition and what consumers are
willing to pay.
In fact, Managerial economics as a study empower the future
managers with the skills, tools and requirements so that they can accomplish
their tasks through decision making to achieve maximum performance of the goals
and objectives of the enterprises, firms and other macro economics agents of
production and exchange of goods and service, both profit and non profit organization;
they have to remember that the business enterprises and public institutions as
well are the organ of society, they do not exist for their own sake, but to
fulfill a specific social purpose and to satisfy a specific need of society,
community, or individual[15].
It has been receiving more attention in business as managers
become more aware of its potential as an aid to decision-making, and this
potential is increasing all the time. This is happening for several reasons:
- It is becoming more important
for managers to make good decisions and to justify them, as their
accountability either to senior management or to shareholders increases.
- As the number and size of
multinationals increases, the costs and benefits at stake in the
decision-making process are also increasing.
- In the age of plentiful data it
is more imperative to use quantitative and rationally based methods,
rather than ‘intuition’.
- The speed of technological
development is increasing with the impact of then ‘new economy’. Although
the exact nature of this impact is controversial, there is no doubt that
there is an increased need for economic analysis because of the greater
uncertainty and the need to evaluate it.
- Improved technologies have also
made it possible to develop more sophisticated methods of data analysis
involving statistical techniques. Modern computers are adept at ‘number crunching’,
and this is a considerable aid to decision-making that was not available
to most firms until recent years.
All managerial decisions are basically economic in nature. The
decisions are either directly related to Economics or have economic
implications; they might not be based simply on economic calculations, and
might involve several non-economic, social, political, legal and technological
considerations as well. Managerial
economics helps not only to analyse the economic content and implications of
the managerial decisions but also to integrate several other aspects leading to
sound decisions.
Managerial economics incorporates elements of both micro and
macroeconomics dealing with managerial problems in arriving at optimal
decisions. It uses analytical tools of mathematical economics with two main
approaches to economic methodology involving ‘descriptive’ as well as
‘prescriptive’ models.
Managerial economics differs from traditional economics in one
important respect that it is directly concerned in dealing with real people in
real business situations. Managerial economics is concerned more about
behaviour on the practical side.
Managerial economics deals with a thorough analysis of key
elements involved in the business decision making.
Most managerial decisions are made under conditions of varying
degrees of uncertainty about the future. To reduce this element of uncertainty,
it is essential to have homework of research/investigation on the problem
solving before action is undertaken.
Knowledge of managerial economics is a boon to the
manager/businessman/entrepreneur. Modern businessman never believes in luck. He
bangs on skilful management and appropriate timely economic decision making.
This art is facilitated by the science of managerial economics.
In fact managerial economics uses different theories and
techniques to be apprise in the decision making of an organization so that the
company can achieve to its objectives and goals; with managerial economics as a
study, the managers are empowered to find the solution of the firms so that
they can satisfy their customers and fit in the global economy with the new and
developed approaches. The theories and techniques of managerial economics are
implemented in all different domain of work for various organization and
institutions whether they are profit or nonprofit organizations.
Section5: CONCLUSION AND RECOMMENDATION
Almost any business decision can be analyzed with managerial
economics techniques, but it is most commonly applied to Risk analysis; Production
analysis - microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the
firm's cost function; Pricing analysis - microeconomic techniques are used
to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity
estimations, and choosing the optimum pricing method; and Capital budgeting -
Investment theory is used to examine a firm's capital purchasing decisions.
Managerial economics is a new and a highly specialized branch of
economics. It brings together economic theory and business practice. It assists
in applying various economic theories and principles to find solutions to
business and management problems.
It is applied economics and makes an attempt to explain how
various economic concepts are usefully employed in business management. It is a
practical subject. It opens up the mind of a managerial economist to the
complex and highly challenging business world. The features of managerial
economics throw light on the nature of the emerging subject and the scope gives
information about the wide coverage of the subject. The concepts of decision
making and forward planning are the two basic functions of a managerial
economist. In a way the entire subject matter of managerial economics is to be
understood in the background of these two functions
A
Managerial economist is an economic adviser to a firm or businessman. A firm or
entrepreneur, in the course of its/his business operations, has to take a
number of decisions which are vital to the survival and growth of the business.
Such decisions may pertain to the nature of the product to be produced, the
quantity, quality, cost, price and its distribution, planning and
diversification of business, renewal of worn out equipments and machinery,
modernization, etc. The Managerial economist helps the businessman or the
manager in arriving at correct decisions.
In
short, the business economist while helping in the decision making process,
measures a number of micro and macro variables (in economics) by applying
intelligently certain quantitative and qualitative techniques to the practical
aspects and problems encountered by a business firm in its business activity.
Forecasting is a fundamental activity of the Managerial economist. Indeed a
business economist is greatly helpful to the management by virtue of his
studies of economic analysis. He is an effective model builder. He deals with
the business problems in a sharp manner with a deep probing.
A Managerial economist in a business
firm may carry on a wide range of duties, such as:
·
Demand
estimation and forecasting.
·
Preparation
of business forecasts; to provide forecasts of changes in costs and business
conditions based on market research and policy analysis.
·
Analysis
of the market survey to determine the nature and extent of competition.
·
Analysing
the issues and problems of the concerned industry.
·
Assisting
the business planning process of the firm.
·
Discovering
new and possible fields of business attempt and its cost-benefit analysis as
well as feasibility studies.
·
Advising
on pricing, investment and capital budgeting policies.
·
Evaluation
of capital budgets.
·
Building
micro and macroeconomic models of particular aspects of the firm’s activities
that are useful in solving specific business problems. Most models may be
prediction oriented.
·
Directing
economic research activity.
·
Briefing
the management on current domestic and global economic issues and challenges.
In nutshell as defined by Douglas -
“Managerial economics is the application of economic principles and
methodologies to the decision-making process within the firm or organization.”
The managers helps the firms to compete
at the global level with integration of
national economies into the international economy through trade, foreign direct
investment, capital flows, migration, the spread of technology, and military
presence-security of the goods.
Done on 10th
April 2012
By Jean Paul NTEZIRYAYO
[1] Sikkim
Manipal University. Meaning and
Importance of Managerial Economics; Unit 1. p1
[15]
notes-The dimension of management-chapter4.p 27
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