Managerial economics is concerned with the application of economic concepts and analysis to the problem of formulating rational managerial decisions. There are four groups of problems in both decision-making and forward planning.
1. Resource Allocation
Scare resources have to be used with utmost efficiency to get optimal results. These include production programming, problem of transportation, etc.
2. Inventory and Queuing Problem
Inventory problems involve decisions about holding of optimal levels of stocks of raw materials and finished goods over a period. These decisions are supply conditions, queuing problems involve decisions about installation of additional machines or hiring of extra labour in order to balance the business lost by not undertaking these activities.
3. Pricing Problems
Fixing prices for the products of the firm is an important part of the decision-making process. Pricing problems involve decisions regarding various methods of pricing to be adopted.
4. Investment Problems
Forward planning involves investment problems. These are problems of allocating scarce resources overtime. For example, investing in new plants, how much to invest, sources of funds etc.
Study of Managerial economics essentially involves the analysis of certain major subjects like:
- Demand analysis and methods of forecasting.
- Cost analysis
- Pricing theory and policies
- Profit analysis with special reference to Break-Even point
- Capital budgeting for investment decisions
- The business firm and objectives
Demand analysis and forecasting help a manager in the earliest stage in choosing the product and in planning output levels. A study of demand elasticity goes a long way in helping the firm to fix prices for its products.
The theory of cost also forms an essential part of their subject. Estimation is necessary for making output variations with fixed plants or for the purpose of new investment in the same line of production or in different venture.
The firm works for profits and optimal or near maximum profits depend up on accurate price decisions.
Theories regarding price determination under various market conditions enable the firm to solve the price fixation problems.
Control of costs, proper pricing policies, break-even point analysis, alternative profit policies are some of the important techniques in profit planning for the firm which has to work under conditions of uncertainty. Thus managerial economic tries to find out which course is likely to be the best for the firm under a given set of conditions.