Can We Use Applied Economics and Managerial Economics Interchangeably?

Many economists use managerial, business and applied economics interchangeably. However, the last term has not only longer history but also bears broader meaning than the two others.

The idea of such a Department was floated at the University of Cambridge in 1939. However, it couldn’t be actualized due to World War II. In 1944, a steering committee was instituted under renowned economist Keynes which led to the creation of the department under its first director Richard Stone in 1945. While discussing the objectives of the department, Stone said:

“The department will concentrate simultaneously on the work of observations, i.e. the discovery and preparation of data; the theoretical appraisal of problems, i.e. the framing of hypotheses in a form suitable for quantitative testing; and the development of statistical methods appropriate to the special problems of economic information. The special character of the Department’s approach to problems of the real world will lie in this attempt at systematic synthesis."

Now coming down from the department to the discipline, we may go through a couple of views of top economists:

What Big Names Say?

1- Iain Begg and Brian Henry say:

“Applied economics is a dark art. A skilled applied economist has to use the tools of economic theory to articulate question, and to identify and analyse the data needed to generate convincing answers.”

2- Department of Applied Economics Cambridge follows this definition:

“Applied economics is bringing together of economic theory, measurement and methods of statistical and econometric analysis, and interpretation of such analytical work to elucidate economic phenomena and to inform economic policy” (Iain Begg, S. G. B. Henry, University of Cambridge)

3- S. Nicholas Samuel, Desh B. Gupta say:

“Pure theory provides a professionally valid basis for the postulation of hypotheses for finding relevant empirical information, often through the application of statistical methods, that can be used for decision making for problem solving in public and private entities.”

4- Roger Backhouse says:

“This term has the special merit that it does not suggest a definite body of principles with scientifically demarcated limits… It must be pointed out, however, that the name applied economics is also not altogether free from ambiguity”.

5- N. B. Ghodke says:

“Applied economics is concerned with the application of economic principles in real life in a given set of conditions. It refers to the use of economic theory to examine practical economic problems or policies and reach conclusions”. 

6- Michael Eugene Wetzstein says:

“Although applied economics is closely related to normative and positive economics, it belongs to neither category but instead to a third category called the art of economics.”

7- Robert Scott Gassler says:

“ It is the mixture of science, experience, ethics and judgment that is seen necessary in dealing with matters of practical policy. Whereas the best scientists are the ones who act skeptical even when they are absolutely sure they know the answer, the best decision-makers are those who act sure of themselves even when they are not sure they have the faintest idea what is going on.”

8- Lars Udehn

“Pure economics is the theory of prices and of the allocation of scarce resources, or social wealth. Applied economics is a theory of industry and the production of wealth.”

9- Gary Richard Hawke says:

“Applied economics is characterized by the intelligent deployment of some simple concepts, the understanding of which is not beyond anybody who has mastered techniques regarded as commonplace by historians”

10- Taylor & Francis say:

“The primary purpose of Applied Economics is to encourage the application of economics analysis to specific problems in both the private and the public sector. It particularly hopes to foster quantitative studies the results of which promise to be of use in the practical field and help to bring economic theory nearer the realities of life.”

11- N. B. Harte says:

“It is nearly true to say that applied economics is the economic history of the contemporary world, while economic history is just the applied economics of earlier ages.”

Aspects of Used in Managerial Economics

Managerial economics is applied to make choices out of alternative options. It involves such tools and analysis which are useful in decision making process for the businesses and governments. Some important aspects include:

1- Integration of Theory with Business

2- Measurement of Elasticities

3- Forecasting Economic Output

4- Formulating Policies

5- Impact of External Factors on Policies

Integration of Theory

Whether it is health, business or law, the primary purpose of this discipline of economics is to integrate traditional theoretical concepts of economics with the actual practices being pursued in the concerned field. In the managerial economics, the integration is sought between the abstract theories and business practices.

Model building techniques may be used in managerial economics. Then certain assumptions are made which may or may not fit into the behavior of the subject organization. The managerial economist has to reconcile theoretical concepts based on these assumptions with the practices of the organization.

Measurement of Elasticities

Measurement of Elasticities

Measurement of various elasticities is another aspect of managerial economics. Without that you can’t forecast demand and supply. Being a managerial economist, you may have to measure demand elasticities of price, income, cross elasticity etc, to decide which product is to be promoted.

Forecasting Economic Output

It is another aspect which is used in managerial economics. Being a managerial economist, you are required to predict relevant economic outputs like profits, demands, production, costs, pricing, investment, etc. However, you are going to predict in a situation of uncertainty. There are specific probabilities which may affect your forecasts. You need to beware of them as well.

Formulating Policies

The managerial economics also helps the governments and businesses to formulate policies and forward business planning by these forecasts. As discussed above, it is possible that the economic projections may not generate the expected results. You have to use your judgment to help to develop a policy or future planning.

Impact of External Factors

What are external factors going to constitute an environment which may lead your economics predictions and policies to fail? Managerial economics helps you to study business cycles, national income, government policies, global economic situations, public finance, fiscal policies, taxation, etc. Most of these factors are from macroeconomics.

Economics is a social science so there can be a number of interpretations. But no argument can be termed as final. From above discussion, we can safely say that terms managerial economics and applied one may be used interchangeably at times.

But it invites your creative juices to spill the beans…!