Economics and managerial economics

meaning, scope and objectives

Science of wealth and capitalism

i) Capitalism (freedom of trade & enterprise) is the greatest cause of wealth of nations ii) the system is regulated by invisible hand: market mechanism

Science of scarcity
Economics is a science which studies human behavior as a relationship between human wants and scarce resources which have alternative uses

Science of scarcity

Economics/managerial economics addresses three questions: i) What to produce? ii) How to Produce? iii) How to distribute?

Managerial economics

managerial economics is a special subset of economics

Managerial and business economics

The terms mostly used interchangeably Lately, the term managerial economics has become more popular and is displacing the other term With modifications the principles of managerial economics can be applied to the management of nonbusiness, non-profit organizations like schools, hospitals, government organizations Business economics was focused primarily to business decision making Managerial economics applies to both business and non business decision making, as well as to public and private organizations/ institutions.

Nature of managerial economics

Decision making and forward planning Business managers prime function is decision making and forward planning It implies selecting one of the many alternative decisions. Forward planning means establishing plans or future The question of choice arises due to scarcity of resources and their possible alternative uses. Thus decision making function is one of making choices for the most efficient use of resources or desired ends. Once a decision is made or a goal is set, forward planning has to be made to achieve the targets in terms of production, pricing, capital, raw materials, labour etc., Thus decision making and forward planning go hand in hand.

Decision making and uncertainty

Uncertainty is the typical characteristic of decision making This feature makes decision making and forward planning complicated If there was no uncertainty in future, or knowledge about future was perfect, plans could be formulated without any need for subsequent revision. When plan execution begins, new facts come to light requiring alterations in past decisions and plans. Managers are thus engaged in continuous process of decision making through an uncertain future Adjusting to uncertainty is managers main challenge.

Managerial economics and decision making

Economic theory is of considerable help to managers in fulfilling the function of decision-making in an uncertainty frame-work. This is because economics deals with a number of concepts and principles relating to profit, demand, cost, supply, pricing, production, competition,, business cycles, national income, etc., This help is enhanced when economics is aided by disciplines like accounting, statistics, and mathematics. The two together aid the process of business decision making and planning The subject-matter of managerial economics revolves around as to how economic analysis can be used in solving business problems

Definition of managerial economics

According to McNair and Meriam, Business economics consists of the use of economic models/modes of thought to analyze 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 Managerial economics may therefore be defined as the discipline which deals with the application of economic theory to business management. Managerial economic is a bridge between economics and business management. It aims to offer optimum solutions to business problems.

Aspects of application
1.Reconciling traditional theoretical concepts of economics in relation to actual business behavior and conditions. For instance, firms may not always aim at profit maximization. 2. Managerial economics attempts to reconcile accounting concepts with the economic concepts 3. Estimation of economic relationships like various types of elasticity's of demand and supply, cost output relationships, etc. These relationships are used for forecasting purposes., 4. Predicting relevant economic quantities, for example, profit, demand, production, costs, pricing, capital etc. both in numerical terms and with probabilities

Continued
5. Formulating business policies on the basis of economic data and decision making processes. Understanding significant external forces constituting the environment in which the business is operating and to which it must adjust, for example business cycles, fluctuations in national income and government policies In short managerial economics shows how to apply economic concepts and theories to business decision making and planning with the help of real world examples and case studies. It breaths life into abstract concepts of economics.

Chief characteristics
Managerial economics is micro-economic in character Uses broadly theory of consumer and firm behavior concepts Also seeks to apply profit theory which forms part of distribution theories Is pragmatic as it avoids difficult abstract issues of economic theory. But involves dealing with real life complications of business world

Chief characteristics continued

Belongs to normative economics rather than positive economics. It is prescriptive rather than descriptive. It involves judgement as to what is good/bad for business. Managerial economics deals with which decision needs to be made on the basis of its merits and demerits. Economic theory does not go into judging decisions. Managerial economics tells what the aims and objectives of a firm should be. Then it tells how best these can be achieved Managerial economics is therefore described as normative microeconomics of the firm Macro-economics is also useful to managerial economics as it provides an intelligent understanding of the environment in which the business must operate.

Scope of managerial economics

Demand analysis and forecasting Cost analysis Production and supply analysis Pricing decisions, policies and practices Profit management, and Capital management