Managerial economics

Managerial economics as defined by Edwin Mansfield is "concerned with application of economic concepts and economic analysis to the problems of formulating rational managerial decision." It is sometimes referred to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression analysis and correlation, calculus. If there is a unifying theme that runs through most of managerial economics, it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of operations research, mathematical programming, game theory for strategic decisions, and other computational methods.

Managerial decision areas include:

• assessment of investible funds
• selecting business area
• choice of product
• determining optimum output
• determining price of product
• determining input-combination and technology
• sales promotion.

Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:

• Risk analysis - various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk.
• Production analysis - microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm's cost function.
• Pricing analysis - microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.
• Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions.

At universities, the subject is taught primarily to advanced undergraduates and graduate business schools. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses. In many countries it is possible to read for a degree in Business Economics which often covers managerial economics, financial economics, game theory, business forecasting and industrial economics.

Scope of Managerial economics

Managerial economics to a certain degree is prescriptive in nature as it suggests course of action to a managerial problem. Problems can be related to various departments in a firm like production, finance, accounts, sales, marketing etc.

1. Demand decision
2. Production decision

Demand decision

Demand refers to the willingness to buy a commodity. Demand, here, defines the market size for a commodity i.e. who will buy the commodity. Analysis the demand is important for a firm as it's revenue, profits, income of the employees depends on it.

Production decision

A firm needs to answer four basic questions - what to produce, how to produce and how much to produce and for whom to produce.

What to produce?

A firm will produce according to its perception of the customer demand. It can either produce consumer goods like food, clothing etc. (which are for consumption purpose) or it can produce capital goods like machinery etc. (which are for investment purposes).

How to produce?

Goods can be produced by certain techniques. Firms have the option of producing goods by labour intensive technique and capital intensive technique. Labour intensive technique is the one in which manual labour is used to produce goods. Capital intensive technique is the one in which machinery like forklift, assembly belts etc. are used to produce goods.

How much to produce?

A firm has to decide its production capacity and also how much of their good a consumer needs and produce accordingly.

For whom to produce?

A firm has to decide its target population (i.e. to whom they will serve products and/or services). Example, it will not be viable to produce luxurious goods or middle income or low income group if they can't afford it and produce basic necessity goods for rich class if they don't need it. Therefore, a firm needs to match its produce according to the target population it is serving.

See also

* Business economics

* Personnel economics

* Management science

Finding related topics

list of economics topics list of finance topics list of international trade topics list of production list of accounting topics list of management topics list of human resource management topics list of marketing topics

list of information technology management topics list of business law topics list of business ethics, political economy, and philosophy of business topics list of business theorists list of economists list of corporate leaders

References

• Alan Hughes (1987). "managerial capitalism," The New Palgrave: A Dictionary of Economics, v. 3, pp. 293–96.
• Edward Lazear (2008). "personnel economics," The New Palgrave Dictionary of Economics. 2nd Edition. Abstract.
• Keith Weigelt (2006). Managerial Economics
• Elmer G. Wiens The Public Firm with Managerial Incentives

External links

1. http://www.edushareonline.in/Management/eco%20new.pdf 2.http://www.swlearning.com/economics/hirschey/managerial_econ/chap01.pdf