Managerial economics is a rule/ theory that deals with the application of economic theory to business management. It discusses how to make business decisions using economic theories and principles. Managerial Economics has replaced the previous name of "Business Economics," which has been removed. In this blog, we'll learn everything there is to know about Managerial economics as well as their types, nature, and importance.
Definition, Meaning, and Nature of Managerial Economics:
The study of economics examines how products and services are produced, distributed, and consumed globally or within a specific geographic area. Using economic theories and principles to decide how to distribute limited resources is known as managerial economics.
Managers use economic frameworks so that they can optimize profits, resource allocation, and the overall output of the firm, although for improving efficiency and minimizing unproductive activities. These frameworks can be used by organizations to make rational, progressive decisions, by analyzing practical problems at both microeconomic and macroeconomic levels.
Managerial decisions involve forecasting (making decisions about the future), which involves levels of risk and uncertainty, however, the assistance of Managerial economic techniques helps in informing managers about such types of decisions. In short managerial economics can be defined as the application of economic theory to the problem of management.
Economic ideas, guidelines, and analytical techniques are the core of managerial economics. These are frequently used by businesses when making decisions. The word "economics" is a broad concept that derives from the Greek word "Oikos," which means "home." This illustrates how households are analyzed from several perspectives in economics.
Economics is always regarded as a social science because it uses scientific methods to build theories that can help in explaining the behavior of individuals, groups, and organizations. Economics aims to explain the economic behavior, which arises when scarce resources are exchanged.
Types of managerial economics
Liberal Managerial economics
Due to the open and democratic nature of the market in terms of decision-making, liberal managerial economics states that consumers have the freedom to select the goods they genuinely desire. Thus, the businessman needs to conduct research into what clients want, who their competitors are, and what is currently popular. Without it, firms risk suffering a massive loss. As a result, there is a critical need for businesses to adapt their policies in line with customer needs and market developments.
Normative managerial economics
Normative Managerial economics states that decisions should be made by business owners in the way that they must be normal, based on real-life experiences and practices. This decision reflects a practical approach regarding product design, forecasting, marketing, supply and demand analysis, recruitment, and everything else that is needed for the growth of a business. Again it includes the study of customers' demands, needs, and trends going on these days. These studies must be done very carefully to know all about this. this may take your business up to great heights. Otherwise, the business is going down.
Radical managerial economics
The word "radical" means relentlessly knowing the roots of a problem and finding the solution for that particular problem. Marx's economics served as the foundation for radical economics. Inequality of incomes and wealth are seen as the sources of disequilibrium in market economies. According to Marx, the growth of the capital coefficient is higher than the growth of labor productivity. This indicates that the rate of return on capital will gradually decline until the system fails. Radical managerial economics actually means that the customer's needs are kept over the profit. The business owners would like to provide better quality goods to customers.
Features of Managerial economics
Micro Economic Character
Managerial economics is microeconomic in its character because it is a unit of study i.e. firm. It only deals with the problems of firms but does not deal with the entire economy as a unit of study. However, it takes the help of macroeconomics to understand and adjust to the environment the firm operates.
Choice and Allocation
Managerial economics is concerned with the decision-making of economic nature. This implies that managerial economics deals with the identification of economic choices and the allocation of inadequate resources.
Managerial economics is goal-oriented. It deals with how decisions should be put together by managers to achieve organizational goals.
Managerial economics is pragmatic. It is focused on those analytical tools that can help make better decisions. Economic theory properly ignores the variety of backgrounds and training found in individual firms but managerial economics considers the particular environment of decision-making.
Instead of being a branch of positive economics, managerial economics is normative in nature. This means that it is directive rather than illustrative. The main body of economic theory encloses itself to descriptive theory, attempting to conclude the relations among different variables without judgment about what is desirable or undesirable.
Statistics, mathematics, management, operational research, psychology, and other disciplines are all relevant to managerial economics in some way. For managerial decision-making, managerial economics serves as a bridge between traditional theories and the decision sciences.
Scope of managerial economics
Given that managerial economics is a new field of study, it is constantly expanding. The study of managerial economics also includes profit management, capital management, and demand analysis and forecasting.
Since every asset a company holds is considered to be part of its capital, it becomes crucial to follow this process. A fundamental executive job is the planning and control of capital expenditures, which makes use of the Equi-marginal principle. Making sure that capital is used sustainably is the main goal. Capital management primarily addresses the cost of capital, rate of return, and project selection.
A company's success may be measured by its profitability, which is why businesses are created with that goal in mind. Everything comes down to profits after all the analyses. The management of key factors, such as pricing, cost considerations, resource allocation, and long-term decisions, is necessary for a company to maximize profits. This would entail that the company start from scratch, review its investment choices, and develop the optimal capital budgeting procedures. The nature and measurement of profit, profit policies, and profit planning techniques including break-even analysis, cost-volume-profit analysis, etc. are among the major topics discussed in this subject.
The study of managerial economics is important in business organizations. It provides a clear understanding of market conditions as well as analytical tools through which the competition that is currently prevailing in the markets can be studied, at the same time allowing the market behavior to be predicted. This makes it very effective for management in decision-making and forward planning in relation to the internal operations of a business. It makes it possible to study data pertaining to the commercial setting in which a business is operated. By transforming the economic reality into viable business possibilities for business organizations, management economics helps to promote the profitable growth of a corporation and provides efficient answers to business difficulties