Uses/Significance of Managerial Economics in Business Decision Making

Management is concerned with decision-making. Decision-making needs a balance between simplification of analysis to be manageable and complications for handling a variety of factors and objectives. Managerial economics accomplished several objectives. Moreover, it also needs common sense and good judgment. Managerial economics helps the decision-making process in the following ways:
  1. Managerial economics presents those aspects of traditional economics, which are relevant for business decision-making in real life. It culls from economic theory the concepts, principles and techniques of analysis, which have a bearing on the decision-making process. These are, if necessary, adopted or modified with a view to enable the manager take better decisions. Thus, managerial economics accomplished the objective of building a suitable took kit from traditional economics.
  2. Managerial economics also incorporates useful ideas from other disciplines such as psychology, sociology, etc; if they are found relevant for decision-making. In fact, managerial economics takes the aid of other academic disciplines having a bearing upon the business decisions of a manager in view of the various explicit and implicit constraints subject to which resource allocation is to be optimized.
  3. Managerial economics helps in reaching a variety of business decisions in a complicated environment such as what products and services should be produced? What inputs and production techniques should be used? How much output should be produced and at what prices it should be sold? What are the best sizes and locations of new plants? When should equipment be replaced? And how should the available capital be allocated?
  4. Managerial economics makes a manager a more competent model builder. Thus, he can capture the essential relationship, which characterizes a situation while leaving out the cluttering details and peripheral relationships.
  5. At the level of the firm, where for various functional areas, functional specialists or functional departments exist, such as finance, marketing, personal, production, etc. Managerial economics serves as an integrating agent by coordinating the different areas and bringing to bear on the decisions of each department or specialist the implications pertaining to other functional areas. It thus, enables business decision-making not in watertight compartments but in an integrated perspective, the significance of which lies in the fact that the functional departments or specialists often enjoy considerable autonomy and achieve conflicting goals.
  6. Managerial economics takes cognizance of the interaction between the firm and society and accomplishes the key role of business as an agent in the attainment of social and economic welfare. It has come to be raised that business, apart from its obligations to shareholders, has certain social obligations. Managerial economics focuses attention on those social obligations as constraints subject to which business decisions are to be taken. It serves as an instrument in furthering the economic welfare of the society through socially oriented business decisions.
  7. Managerial economics is helpful in making decisions such as the following: What should be the product-mix? Which is the production technique and the input-mix that is least costly? What should be the level of output and price for the product? How to take investment decisions? How much should the firm advertise and how to allocate an advertisement fund between different media? It has to concede that good decisions require ability to analyze problems logically and clearly.
In summary, the usefulness of managerial economics lies in borrowing and adopting the took-kit from economic theory, incorporating relevant ideas from other disciplines to achieve better business decisions, serving a catalytic agent in the course of decision-making by different functional departments at the firm’s level and finally accomplishing a social purpose through orienting business decisions towards social obligations.

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