Fundamental Nature of Managerial Economics

A close relationship between management and economics has led to the development of managerial economics. Management is the guidance, leadership and control of the efforts of a group of people towards some common objective. While this description does inform about the purpose or function of management, it tells us little about the nature of the management process. Koontz and O’Donell define management as the creation and maintenance of an internal environment in an enterprise where individuals, working together in groups, can perform efficiently and effectively towards the attainment of group goals. Thus, management is:

  • Coordination
  • An activity or an ongoing process
  • A purposive process
  • An art of getting things done by other people.

On the other hand, economics as stated above is engaged in analyzing and providing answers to manifestations of the most fundamental problem of scarcity. Scarcity of resources results from two fundamental facts of life:

  • Human wants are virtually unlimited and insatiable, and
  • Economic resources to satisfy these human demands are limited.

Thus, we cannot have everything we want; we must make choices broadly in regard to the following:

  • What to produce?
  • How to produce? and
  • For whom to produce?

These three choice problems have become the three central issues of an economy. Economics has developed several concepts and analytical tools to deal with the question of allocation of scarce resources among competing ends. The non-trivial problem that needs to be addressed is how an economy through its various institutions solves or answers the three crucial questions posed above. There are three ways by which this can be achieved. One, entirely by the market mechanism, two entirely by the government or finally and more reasonably by a combination of the first two approaches. Realistically all economies employ the last option, but the relative roles of the market and government vary across countries.

According to the central deduction of economic theory, under certain conditions, markets allocate resources efficiently. ‘Efficiency’ has a special meaning in this context. The theory says that markets will produce an outcome such that, given the economy’s scarce resources, it is impossible to make anybody better-off without making somebody else worse-off.

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