The scope of managerial economics comprehends all those economic concepts, theories and tools of analysis, which can be used to analyze the business environment and to find out solution to practical business problems.
The areas of business issues to which economic theories can be directly applied may be broadly divided into two categories.
Microeconomics has been defined as that branch of economics where the unit of study is an individual or a firm. It provides Micro Economic orientation to Managerial Economics.
It is the study of individual economic behavior where resources are costly. For example, how consumers respond to changes in prices and income, how businesses decide on employment and sales, voters’ behavior and setting of tax policy. This is close to analysis of the decision making aspect of the unit of management at the firm level.
Microeconomics, also known as price theory (or Marshallian economics) is the main source of concepts and analytical tools for managerial economics. To illustrate various micro-economic concepts such as elasticity of demand, marginal cost, the short and the long runs, various market forms, etc., all are of great significance to managerial economics.
Managerial Economics deals with allocating the scarce resources in a manner that minimizes the cost. As we have already discussed, Managerial Economics is different from microeconomics and macro-economics. Managerial Economics has a more narrow scope – it is actually solving managerial issues using micro-economics. Wherever there are scarce resources, managerial economics ensures that managers make effective and efficient decisions concerning customers, suppliers, competitors as well as within an organization. The fact of scarcity of resources gives rise to three fundamental questions-
- to produce?
- How to produce?
- Whom to produce for?
Macroeconomics, on the other hand, is aggregate in character and has the entire economy as a unit of study. It deals with economy as a whole, National Income, Trade Cycles, etc… are in this theme.
The study of aggregate economic variables directly (as opposed to the aggregation of individual consumers and businesses), e.g., issues relating to interest and exchange rates, inflation, unemployment, import and export policies.
The chief contribution of macroeconomics is in the area of forecasting. The modern theory of income and employment has direct implications for forecasting general business conditions.
As the prospects of an individual firm often depend greatly on general business conditions, individual firm forecasts depend on general business forecasts.
Managerial economics helps in decision-making as it involves logical thinking. Moreover, by studying simple models, managers can deal with more complex and practical situations. Also, a general approach is implemented. Managerial Economics take a wider picture of firm, i.e., it deals with questions such as what is a firm, what are the firm’s objectives, and what forces push the firm towards profit and away from profit. In short, managerial economics emphasizes upon the firm, the decisions relating to individual firms and the environment in which the firm operates. It deals with key issues such as what conditions favour entry and exit of firms in market, why are people paid well in some jobs and not so well in other jobs, etc. Managerial Economics is a great rational and analytical tool.
To conclude, macroeconomics studies the economic system in aggregate, while microeconomics studies the behavior of individual decision-making economic unit like a firm, a consumer or an individual supplier of some factor of production.