Meaning of Managerial Economics

Managerial economics is an application of economic theory and method to practice the managerial decision-making or solving business problems. It uses the tools and techniques of economic analysis to solve managerial problems or to achieve the firm’s desired objectives. So that managerial economics is very important to entrepreneurs in decision making and forward planning of a business.
Managerial economics is economics applied in decision making. It is a branch of economics that serves as a link between abstract theory and managerial practice. It is based on economic analysis for identifying problems, organizing information and evaluating alternatives.

Managerial economics is by nature goal oriented and prescriptive and aims at maximum achievement of objectives. Many economists and thinkers have given various definitions of managerial economics in their words. According to Prof. Pappas and Brigham, “Managerial economics is designed to provide a rigorous treatment of those aspects of economic theory and analysis that are most useful for managerial decision analysis.” They more added that, “Managerial economics is the application of economic theory and methodology to business administration practice. More specifically, managerial economic analysis and solve the managerial problems.”

In the words of Prof. D.C. Hague, “Managerial economics is a fundamental academic subject which seeks to understand and to analyze the problems of business decision making.” This definition states that it should be finalized the business problem for decision-making. Prof. Savage and Small defined as, “Managerial economics is concerned with business efficiency, the function of managerial economists being the efficient direction of business organization to make a productive enterprises out of material and human resources.” In the words of Hynes, “Managerial economics is the study of allocation of resources available to a firm among the activities of that unit.” Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management.

Most of the definitions of managerial economics is related to decision making are more acceptable. Managerial economics is the science of decision making which provides a link between two disciplines that are economics and business management.

In short, the use of economic theory and methods to analyze and improve the managerial decision-making process combines the study of theory and practice to gain a useful and practical perspective. From both economics and decision sciences, managerial economics provides an integrative and comprehensive framework for solving managerial decision.

Managerial economics links traditional economics with the decision sciences to develop important tools for managerial decision-making. Although managerial economics is comparatively a new subject in the early part of 1950s, it was known as business economics in the beginning. The term of managerial economics gradually has become popular and displaced the business economics.

It is closely related to traditional economics that is based on the theories and principles such as demand analysis, production analysis, price theories and practice, theory of profit and market structure which are the subject matter of micro economic theory. But there is little bit differences between managerial economics and traditional economics theory because managerial economics seeks the help of other disciplines such as accounting, management, statistics, mathematics to get optimal solutions to the decision problems.

The difference between managerial economics and traditional economics can be summarized as follows:
Managerial EconomicsTraditional Economics
    Managerial economics concerns with the application of economic principles to the problems of the firm.
    Managerial economics is only microeconomics in character. It studies the problems of a firm but it does not concern with the individual unit. It does not also study the macroeconomic phenomenon.
    Only the theory of profit is studied in managerial economics. Because it is concerned primarily with entrepreneurial decision and value theory.
    Managerial economics adopts, modifies and reformulates economic models to suit the specific conditions and serves the specific problem solving process and it also modifies and enlarges it.
    Managerial economics introduces certain feedback such as objectives of the firm, multi-product nature of manufacture, behavioral constraints, environmental aspects, legal constraints, constraints on resources availability etc. It attempts to solve the real life, complex business problems with the aid of tool subjects, e.g., mathematics, statistics, econometrics, accounting, operation research and so on.
    Traditional economics deals with the body to the principles itself.
    But traditional economics consists of both micro and macroeconomics. It studies the individual unit and the economy as a whole.
    In traditional economics, the microeconomics is a branch under which are studied all the theories of factor pricing such as rent, wages, interest and profit.
    Economic theory hypothesizes economic relationships and builds economic models and it also give the simplified model.
    Economic theory makes certain assumptions, thus, embodying a combination of certain complexities assumed away in economic theory.

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