Q.No. 1: What is Managerial Economics.? Explain the nature and scope of Managerial Economics.? Answer:
Managerial Economics generally refers to the integration of economic theory with business practice. While economics provides the tool which explain various concepts such as demand, supply, price, competition etc. Managerial economics applies these tools to the management of business, in this sense managerial economics is also understood to refer to business economics or applied economics.
Managerial economics lies on the border line of management and economics. It is a hybrid of two disciplines and it is primarily an applied branch of knowledge. Management deals with principles which help in decision making under uncertainty and improve effectiveness of organisation. Economics on the other hand provides a set of propositions for optimum allocation of scare resources to achieve the desired objectives.
Nature of Managerial Economics:
It is true that managerial economics aims at providing help in decision making by firms. For this purpose it draws heavily on the prepositions of micro economic theory. Note that micro economics studies the phenomenon at the individuals level and behavior of consumers, firms. The concepts of micro economics used frequently in managerial economics are elasticity, marginal cost, managerial revenue, market structure and their significance in primary policies. Some of these concepts however provide only the logical base and have to be modified in practice.
Micro economics assists firms in forecasting. Note that micro economics theory studies the economy at the aggregative level and ignores the distinguishing features of individual observations. For example micro economics indicates the relationship between the
• Magnitude of Investment and Level of National Income • Level of National Income and Level of Employment
• Level of Consumption and National Income etc.
Therefore the postulates of microeconomics can be used to identify the level of demand at some future point in time, based on the relationship between the level of national income and demand for electric motors. Also the demand for durable goods such as refrigerators, air-conditioners, motor cars depends upon the level of national income.
Managerial economics is decidedly applied branch of knowledge. Therefore the emphasis is laid on those prepositions which are likely to be useful to the management. The precision of a scientist is not motivating factor in research activity. Improvement in the quality of results is attempted, provided the additional cost is not very high and the decision maker can wait. For example it may be possible to have more accurate data on demand for the firm’s product by taking into consideration, additional factors. But this may not be the attempted because the decision has to be made without delay. Besides more accurate forecasts may not be justified on cost considerations.
Management economics is perspective in nature and character. It recommends that it should be done alternate conditions. For example if the price of the synthetic yarn falls by 50% it may be desirable to increase its use in producing different types of textiles. Thus managerial economics is one of the normative sciences and reflects upon the desirability or otherwise of the prepositions. For example if the analysis suggests that the benefit-cost ratio is used as the criterion for project appraisal it is recommended that the firm should not install a large plant. Contract this with the positive sciences which state the prepositions without connecting upon what should be done. For example if the distribution of income has become more uneven it is stated without indicating what should be done to correct this phenomenon.
Managerial economics to the extent that it is uses economic thought is a science, but it is an applied science. Economic thought uses deductive logic (if X is true, then Y is true). For...
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