Let us discuss about managerial economics.
Managerial economics is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units.
It bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis and correlation.
Managerial economics attempts to optimize business decisions given the firm's objectives and given constraints imposed by scarcity.
Let us see the scope of economics
Managerial Economics as defined by Edwin Mansfield is "concerned with application of economic concepts and economic analysis to the problems of formulating rational managerial decision."
It is sometimes referred to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units.
As such, it bridges economic theory and economics in practice.
It draws heavily from quantitative techniques such as regression analysis and correlation, calculus.
If there is a unifying theme that runs through most of managerial economics, it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of operations research, mathematical programming, game theory for strategic decisions, and other computational methods.
Managerial decision areas include:
•Assessment of investable funds
•Selecting business area
•Choice of product
•Determining optimum output
•Determining price of product
•Determining input-combination and technology
•Capital budgeting - Investment theory is used to examine a firm's capital purchasing decision.
Let us discuss about the characteristics of Managerial Economics
Managerial Economics is a discipline which deals with the application of economic theories in business management.
The characteristics of managerial economics are as follows:
1.It involves application of economic principles to the problems of the firm.
2.It is micro economic in character.
3.Though micro economic in character, it has nothing to do with an individual's economic problems.
4.The scope is narrow, i.e., it deals with mainly project theory.
5.Management economics modifies and enlarges economic theory to suit specific conditions.
Let us discuss the nature of Managerial Economics
The main function of the manager in a business organization is decision making and forward planning.
Decision making is the process of selecting a particular course of action from among a number of alternatives. Forward planning means establishing plans for the future.
Forward planning goes hand in hand with decision making. Economics is a decision making and to make decision making effective,the principles and theories of economics are applied in business practice.
The subject matter of Management Economics covers the following topics.
1.Demand Analysis and Forecasting.
3.Production and Supply Analysis.
4.Pricing Decisions, Policies and Practices.
5.Profit Management, and
1.Demand Analysis and Forecasting
A business firm is an economic organism which transforms productive resources into goods that are to be sold in a market.
A major part of managerial decision-making depends on accurate estimates of demand. Before production schedules can be prepared and resources employed, a forecast of future sales is essential.
This forecast can also serve as a guide to management for maintaining or strengthening market position and enlarging profits.
Demand analysis helps identify the various factors influencing the demand for a firm's product and thus provides guidelines to manipulation demand.
Demand Analysis and Forecasting therefore, is essential for business planning and occupies a strategic place in managerial economics.
It mainly consists of discovering the forces determining sales and their measurement. It covers Demand Determinants, Demand Distinctions and Demand Forecasting.
A study of economic costs, combined with the data drawn from the firm's accounting records, can yield significant cost estimates that are useful for management decisions.
The factors causing variations in costs must be recognised and allowed for ,if the management is to arrive at cost estimates which are significant for planning purposes.
An element of cost uncertainty exists because all the factors determining costs are not always known or controllable.
Discovering economic costs and being able to measure them are the necessary steps for more effective profit planning, cost control and often for sound pricing practices.
The topics covered under cost analysis are: Cost Concepts and Classifications, Cost-Output Relationship, Economics and Diseconomies of Scale and Cost Control and Cost Reduction.
3.Production and Supply Analysis
Production analysis is narrower in scope than cost analysis.Production analysis frequently proceeds in physical terms while cost analysis proceeds in monetary terms.
Production analysis mainly deals with different production functions and their management uses.Supply analysis deals with various aspects of supply of a commodity. Certain important aspects of supply analysis are: Supply schedule, curves and function.
4.Pricing Decisions, Policies and Practices
Pricing is a very important area of Managerial Economics.
In fact, price is the genesis of the revenue of a firm and as such the success of a business firm largely depends on the correctness of the price decisions taken by it.
The important aspects dealt under this are are: Price Determination in various Market Forms, Pricing Methods, Differential Pricing, Product-line Pricing and Price Forecasting.
Business firms are generally organized for the purpose of making profits and in the long run, profits provide the chief measure of success.
In this connection, an important point worth considering is the element of uncertainty existing about profits because of variations in costs and revenues which in turn, are caused by factors both internal and external to the firm.
If knowledge about the future were perfect, profit analysis would have been a very easy task. However, in a world of uncertainty, expectations are not always realized so that profit planning and measurement constitute the difficult area of managerial economics.
The important aspects covered under this area are: Nature and Measurement of Profit. Profit Policies and Techniques of Profit Planning like Break-Even Analysis.
Of the various types and classes of business problems, the most complex and troublesome for the business manager are likely to be those relating to the firm's capital investments.
Relatively large sums are involved and the problems are so complex that their disposal not only requires considerable time and labour but is a matter for top-level decision.
Briefly, capital management implies planning and control of capital expenditure. The main topics covered under this are: Cost of Capital, Rate of Return and Selection of Projects.
Uses of Managerial Economics
1. It presents those aspects of traditional economics which are relevant for business decision making in real life. For the purpose, it calls from economic theory of concepts, principles and techniques of analysis which leave a bearing on the decision making process.These are, if necessary, adapted or modified with a view to enable the manager take better decisions. Thus, managerial economics accomplishes the objective of building that are suitable on kit from traditional economies. The usefulness of managerial economics lies in incorporating relevant ideas from other disciplines to achieve better business decisions.
2.It also incorporates useful ideas from other disciplines such as psychology, sociology, etc. If they are found relevant for decision making.
3.Managerial economics helps in reaching a variety of business decisions in a complicated environment. Certain examples are:
i)What products and services should be produced?
ii)What inputs and production techniques should be used?
iii)How much output should be produced and at what prices it should be sold?
iv)What are the best sizes and locations of new plants?
v)When should equipment be replaced?
vi)How should the available capital be allocated?
4.Managerial economics makes a manager a more competent model builder. Thus he can capture the essential relationships which characterize a situation, while leaving out the cluttering details and peripheral relationships.
5.At the level of the firm, where for various functional areas, functional specialists or functional departments exist, e.g., finance, marketing, personnel, production, etc., managerial economics serves as an integrating agent by department or specialist the implications pertaining to other functional areas.
6.Managerial economics takes cognizance of the interaction between the firm and society.
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