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Managerial Economics- Definition, Scope and Nature

Managerial Economics
According to McNair and Meriam
“Managerial economics…… is the use of economic modes of thought to analyse business situation”.

According to Mansfield:
“Managerial economics is concerned with the application of economic concepts and economics analysis to the problems of formulating rational decision making”.

Managerial economics is the study of economic theories, logic and tools of economic analysis that are used in the process of business decision making. Economic theories and techniques of economic analysis are applied to analyse business problems, evaluate business options and opportunities with a view to arriving at an appropriate business decision. Managerial economics is thus constituted of that part of economic knowledge, logic, theories and analytical tools that are used for rational business decision-making.
Managerial economics is that subject which describes how economic analysis is used in taking business decisions. The purpose of Managerial Economics is to show how economic analysis can be used in formulating business policies.
Managerial economics is that discipline which uses economic concepts, principles and economic analysis in taking business decision and formulating future plans. It integrates economic theory with business practice for choosing business policies. Managerial economics lies on the borderline between economics and business management and bridges the gap between the two.

Nature or Characteristics of Managerial Economics
1. Managerial Economics is a Science: Managerial economics is a science because it establishes relationship between causes and effects. It studies the effects of a change in price of a commodity factors and forces on the demand of a particular product. It also studies the effects and implications of the plans, policies and programmes of a firm on its sales and profit.

2. Managerial Economics is an Art: Managerial economics may also be called an art. Because it also develops the best way of doing things. It helps management in the best and most efficient utilization of limited economic resources of the firm.

3. Managerial Economics is a Micro Economics: Entire study of economics may be divided into two segments- Macro economics and Micro economics. Managerial economics is mainly micro-economics. Micro-economics is the study of the behaviour and problems of individual economic unit. In managerial economics unit of study is firm or business organization and an individual industry. It is the problem of business firms such as problem of forecasting demand, cost of production, pricing, profit planning, capital, management etc.

4. Managerial Economics is the Economics of firms: Managerial economics largely use that body of economic concepts and principles which is known as ‘Theory of the Firm’ or ‘Economics of the Firm’.

5. Managerial Economics uses Macro-Economic Analysis: Managerial economics also uses macro-economics to analysis and understand the general business environment in which the business firm must operate. Business management must have the adequate knowledge of external forces that affect the business of the firm. The important macro-factors that affect the firm are trends in national income and expenditure, business cycles, economic policies of the government, trends in foreign trade etc.

6. Managerial Economics is Pragmatic: It is concerned with practical problems and results. It has nothing to do with abstract economic theory which has no practical application to solve the problems faced by business firms.

7. Managerial Economics is Normative Science: There are two types of science-Normative Science and Positive Science .Positive science studies what is being done. Normative science studies what should be done. From this point of view, it can be concluded that managerial economics is normative science because it suggests what should be done under particular circumstances.

Scope of Managerial Economics
Managerial economics is the application of economic theories in the process of decision-making and formulation of future plans. The management will have to analyse the business problems that are faced by the firm. Thus, the principles relating to following topics constitute the scope of subject matter of managerial economics:
1 Demand Analysis: A business firm is in an economic organization which is engaged in transforming productive resources into goods that are to be sold in the market. A major part of managerial decision-making depends on accurate estimates of demand. A forecast of future sales serves as a guide to management for preparing production schedules and employing resources. It will help management to maintain or strengthen its market position and profit-base. Demand analysis also identifies a number of other factors influencing the demand for a product. Demand analysis and forecasting occupies a strategic place in Managerial Economics.

2 Cost Analysis: Cost estimates are most useful for management decisions. The different factors that cause variations in cost estimates should be given due consideration for planning purposes. There is the element of uncertainty of cost as other factor influencing cost are either uncontrollable or not always known.

3 Pricing Practices and Policies: As price gives income to the firm, it constitutes as the most important field of Managerial Economics. The success of a business firm depends very much on the correctness of the price decision taken by it. The various aspects that are dealt under it cover the price determination in various market forms, pricing policies, pricing method, different pricing, productive pricing and price forecasting.

4 Profit Management: The chief purpose of a business firm is to earn the maximum profit. There is always an element of uncertainty about profits because of variation in cost and revenue. If knowledge about the future were perfect, profit analysis would have been very easy task. But in this world of uncertainty expectations are not always realized. Hence profit planning and its measurement constitute the most difficult area of managerial economics. Under profit management we study nature and management of profit, profit policies and techniques of profit planning like Break Even Analysis.

5 Capital Management: The problems relating to firm’s capital investments are perhaps the most complex and the troublesome. Capital management implies planning and control of capital expenditure. The main topics dealt with under capital management are cost of capital, rate of return and selection of projects.

6 Analysis of Business Environment: The environmental factors influence the working and performance of a business undertaking. Therefore, the managers will have to consider the environmental factors in the process of decision-making. The factors which constitute economic environment of a country include the following factors:
• Economic System of the Country
• Business Cycles
• Fluctuations in National Income and National Production
• Industrial Policy of the Government
• Trade and Fiscal Policy of the Government
• Taxation Policy
• Licensing Policy etc.
• Political Environment
• Social Factors
• Trend in labour and capital markets.

Some important term used in Managerial Economics
• Short-Run
• Long-Run
• Business Firm
• Industry
• Classification of Goods
• Classification of Markets
• Opportunity Cost
• Risk
• Uncertainty
• Profit
• Nature of Marginal Analysis.

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