One of the important functions of a manager in any organization is decision making and planning. Managerial economic is the application of economic theory to managerial practice. It relates to the use of tools and techniques of economic analysis to solve managerial problems.
Managerial economics applies economic theory and methods to business and administrative decision making
Managerial economics is the science of directing scarce resources to manage cost effectively. It consists of three branches: competitive markets, market power, and imperfect markets. A market consists of buyers and sellers that communicate with each other for voluntary exchange. Whether a market is local or global, the same managerial economics apply.
An organization must decide its vertical and horizontal boundaries. For effective management, it is important to distinguish marginal from average values and stocks from flows. Managerial economics applies models that are necessarily less than completely realistic. Typically, a model focuses on one issue, holding other things equal.
Managerial economics identifies ways to efficiently achieve goals. For example, suppose a small business seeks rapid growth to reach a size that permits efficient use of national media advertising. Managerial economics can be used to identify pricing and production strategies to help meet this short-run objective quickly and effectively
Managerial economics provides production and marketing rules that permit the company to maximize net profits once it has achieved growth objectives.
Managerial economics has applications in both profit and not-for-profit sectors. For example, an administrator of a nonprofit hospital strives to provide the best medical care possible given limited medical staff, equipment, and related resources. Using the tools and concepts of managerial economics, the administrator can determine the optimal allocation of these limited resources. In short, managerial economics helps managers arrive at a set of operating rules that aid in the efficient use of scarce human and capital resources. By following these rules, businesses, nonprofit organizations, and government agencies are able to meet objectives efficiently.
Managerial economics applies economic theory and methods to solve business and administrative problems through the proper use of economic models in decision making. Managerial economics prescribes rules for improving managerial decisions. Managerial economics also helps managers recognize how economic forces affect organizations and describes the economic consequences of managerial behavior. It links traditional economics with the decision sciences to develop vital tools for managerial decision making.
A seller with market power will have freedom to choose suppliers, set prices, and use advertising to influence demand. A market is imperfect when one party directly conveys a benefit or cost to others, or when one party has better information than others
Wherever resources are scarce, a manager can make more effective decisions by applying the discipline of managerial economics. These may be decisions with regard to customers, suppliers, competitors, or the internal workings of the organization. It does not matter whether the setting is a business, nonprofit organization, or home. In all of these settings, managers must make the best of scarce resources.
Almost any business decision can be analyzed with managerial economics techniques. However, the most frequent applications of these techniques are as follows:
1. Risk analysis
Various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk.
2. Production analysis
Microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs and economies of scale. They are also utilized to estimate the firm’s cost function.
3. Pricing analysis
Microeconomic techniques are employed to examine various pricing decisions. This involves transfer pricing, joint product pricing, price discrimination, price elasticity estimations and choice of the optimal pricing method.
4. Capital budgeting
Investment theory is used to scrutinize a firm’s capital purchasing decisions.
The below figure tells us the ways in which Managerial Economics correlates to managerial decisions