What is managerial economics?
Prof. Stigler says “economics is the study of the principles governing the allocation of scarce means among competing ends.”
Following this definition, we can safely say that the economics for managers is an application of this study in critical business decisions.
That’s why some call it business economics and others as applied economics. Some like to say it as economics for managers.
Can these terms be used interchangeably?
But the term managerial economics seems more appropriate as economics principles are applied by the managerial economists and the managers. A lot of material has been written so far but crux of the discipline is analytical decision making process for allocation of scarce resources to the best possible alternatives.
The process may take place in private business or public policies; ultimately the managers have to decide what is better for the competing ends. They are recruited to apply logic and economic analysis tools to evaluate their options to make the best choices for their employers.
If not, then what we are for?
There is a dispute on the question whether managerial economics is an art or science. Some may get soft the tone and term it as a social science. Others may stick to their guns to prove that it is an art. But leaving the debate aside, let’s see how big names in the field of economics define it:
1- Mansfield says:
“... is concerned with the application of economic principles and methodologies to the decision process within the organization. It seeks to establish rules and principles to facilitate the attainment of the desired economic goals of management.”
2- Spencer and Siegelman think:
It is “the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management.”
3- Joel Dean declares:
"The purpose of managerial economics is to show how economic analysis can be used in formulating business policies".
4- McNair & Meriam calculate:
“Managerial economics deals with the use of economic modes of thought to analyse business situation".
5- Henry and Hayne say:
“Managerial economics is economics applied in decision making. It is a special branch of economics. That bridges the gap between abstract theory and managerial practice.”
6- E.J.Douglas finds:
“Managerial Economics seeks to establish rules & principles to facilitate the attainment of the desired economic goals of management.”
7- Pappas & Hirschey think:
“Managerial economics applies economic theory and methods to business and administrative decision-making.”
8- Salvatore terms:
“Managerial economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organisation can achieve its objectives most effectively.”
9- Howard Davies and Pun-Lee Lam define:
“It is the application of economic analysis to business problems”
10- Davis & Chang say:
“Managerial economics applies the principals and methods of economics to analyze problems faced by the management of a business, or other types of organizations and to help and to help find solutions that advance the best interests of such organizations.”
11- Best of all, Prof. Evan J. Douglas defines so:
“Managerial economics is concerned with the application of economic principles and methodologies to the decision-making process within the firm or organization under the conditions of uncertainty.”
If you analyze these definitions you may reach the following key points:
1. It is application/integration of principles and methodologies of economics
2. on business issues
3. to make choices
4. for the attainment of desired economic goals, and
5. future policies/planning
6. under the current condition of uncertainty.
The economists who term managerial economics as an applied economics seem correct here. In fact, economics contains a lot of abstract theories and ideas. Unless these abstract concepts are used in real life, they remain just academics. The managerial economics provide analytical techniques which help us to apply economic principles in our sphere of work, private or public. We can witness results of the application and even come up with new conclusions.
It is evident for managers in the private sector.
What about the public managers?
It means a lot to them too!
Governments are involved with economic issues like subsidies, price ceilings, price flooring, tariffs, quotas, taxes, grants, consumer price index, national income, budgets, revenue generation, money spending, health, education, waste management, etc. The list is long even if you don’t think of government-run public entrepreneurs.
So, underlying principles of managerial economics are equally applicable to the public sector.
(We are differing here with the maxim, “the government had no business to do business”. )
So, Managerial economics is an analytical engine with tools to apply to economic issues in public or private sectors.
Naturally, when managers apply economic principles on business situations, they find some alternatives. You may have to use the managerial economics principles and tools for analysis of production, risks and pricing, demand forecasting, capital budgeting, minimization of costs, opportunity costs, etc. You have to make choices amongst from the available options with the scarce resources.
The primary goal of a firm, industry, a factory, a company and an organization is profit maximization. If a manager is not facing principal-agent relationship problem, then he has to make choices which can help the organization for profit maximization.
In public sectors, the goals may be slightly different from reducing the cost, best use of resources, proper allocation of resources, business and agricultural policies, etc.
Not only governments but also the private companies and organizations have to plan for future.
They may be using demand forecasting tools to know which product shall have better demand within the next quarter.
They may be thinking which durable raw material is going to be costlier during the next couple of months.
They might be worried about 3D printing (or nano-technology) and how it is going to affect their mass production of items.
The managerial economics helps the managers to come forward with such policies and planning which can help the organization to attain its desired goal-- the maximization of profit.
You know the conditions of risk and uncertainty are involved in all business situations. Uncertainty is a condition where there is a possibility of more than one result. You can talk about the probability of outcomes, but no judgment can be given. The managerial economics provides us tools which help us to make the best choice.
In a nutshell, we may define managerial economics as an application of economics analytical tools to make the best choices for the attainment of desired goals and future policies, under the condition of uncertainty.
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Definition of Managerial Economics Not rated yet
It can be defined as ways by which managers can make decisions that can be favorable to them.