Concept of Managerial Economics
The discipline of managerial economics deals with aspects of economics and tools of analysis, which are employed by business enterprises for decision-making. Business and industrial enterprises have to undertake varied decisions that entail managerial issues and decisions. Decision-making can be delineated as a process where a particular course of action is chosen from a number of alternatives. This demands an unclouded perception of the technical and environmental conditions, which are integral to decision making. The decision maker must possess a thorough knowledge of aspects of economic theory and its tools of analysis. The basic concepts of decision-making theory have been culled from microeconomic theory and have been furnished with new tools of analysis. Statistical methods, for example, are pivotal in estimating current and future demand for products. The methods of operations research and programming proffer scientific criteria for maximising profit, minimising cost and determining a viable combination of products.
Decision-making theory and game theory, which recognise the conditions of uncertainty and imperfect knowledge under which business managers operate, have contributed to systematic methods of assessing investment opportunities. Almost any business decision can be analysed with managerial economics techniques. However, the most frequent applications of these techniques are as follows: • 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 analyse production efficiency, optimum factor allocation, costs and economies of scale. They are also utilised to estimate the firm's cost function. • Pricing analysis: Microeconomic techniques are employed to examine various pricing decisions. This involves transfer pricing, joint product pricing, price discrimination, price elasticity estimations and choice of the optimal pricing method. • Capital budgeting: Investment theory is used to scrutinise a firm's capital purchasing decisions.
MEANING OF MANAGERIAL ECONOMICS
Managerial economics, used synonymously with business economics, is a branch of economics that deals with the application of microeconomic analysis to decision-making techniques of businesses and management units. It acts as the via media between economic theory and pragmatic economics. Managerial economics bridges the gap between 'theoria' and 'pracis'. The tenets of managerial economics have been derived from quantitative techniques such as regression analysis, correlation and Lagrangian calculus (linear). An omniscient and unifying theme found in managerial economics is the attempt to achieve optimal results from business decisions, while taking into account the firm's objectives, constraints imposed by scarcity and so on. A paradigm of such optmisation is the use of operations research and programming. Managerial economics is thereby a study of application of managerial skills in economics. It helps in anticipating, determining and resolving potential problems or obstacles. These problems may pertain to costs, prices, forecasting future market, human resource management, profits and so on.