| The relationship between managerial economics and economic theory is very much like the relation of engineering to physics and of medicines to biology. It is in fact the relation of an applied field to its more fundamental and conceptual counterpart. Economics provides certain basic concepts and analytical tools which are applied suitably to a business situation. |
The relationship between managerial economics and traditional economics is facilitated by considering the structure of traditional study. The traditional fields of economic study about theory. Micro economics focuses on individual consumers firms and industries. Macro economics focuses on aggregations of economic units, especially national economics. The traditional fields are agricultural economics, comparative economic system, economic development, economic history, industrial organization, international trade, labor economics, money and banking, public economics, urban and regional economics and so on. The emphasis on normative economics focuses on prescriptive statements that are established rules on the specified field. Positive economics focuses on description that describe that manner in which economic forces operate without attempting to state how they should operate. The focus of each fields of study is sufficiently well defined to warrant the breakdown suggested.
Since each area of economics has some bearing on managerial decision making, managerial economics draws from them all. In practice, some are more relevant to the business firm than others and hence to managerial economics. Both micro economics and macro economics are important in managerial economics but the micro economic theory of the firm is especially significant. The theory of firm is the single most important element in managerial economics. However, because the individual firm is influenced by the general economy, that is domain of macro economics. Managerial economics is certainly on normative theory. We want to establish decision rules that will help managers attain the goals of their firm, agency or organization; this is the essence of the word normative. If managers are to establish valid decision rules, however, they must thoroughly know the environment in which they operate for this reason positive or descriptive economics is important.
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