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Scope of Managerial Economics | Demand Analysis and Forecasting | Cost and Production Analysis | Pricing Decisions and Techniques | Profit and Capital Management | Objective of Business Firm

The scope of managerial economics means the fields of study in which managerial economics cover. Hence, scope of managerial economics includes the subject matter of managerial economics and relationship of managerial economics with other subjects also fall under the scope of managerial economics.

Managerial economics has a close connection with economic theory, operations research, statistics, mathematics and the theory of decision making. Managerial economics also draws together and relates ideas from various functional areas of management such as production, marketing, finance and accounting, project management, etc. Managerial economics is concerned with the following aspects which constitute its subject matter.
  1. Demand Analysis and Forecasting: Demand analysis theory can be a source of many useful insights for business decision-making. The fundamental objective of demand theory is to identify and analyze the basic determinants of consumer needs and wants. An understanding of the forces behind demand is a powerful tool for managers. Such knowledge provides the background needed to make pricing decisions, forecast sales and formulate marketing strategies. A forecast of future sales is essential before making production schedules for employing resources. The forecast helps the manager in keeping and strengthening the market and increasing profits. Demand analysis and forecasting both are very much essential for business planning and take an important place in managerial economics. Under this topic; determinants of demand, types of demand, elasticity of demand, various statistical and non-statistical methods of demand forecasting are included.
  2. Cost and Production Analysis: The cost estimates are helpful for managerial economics. The cost estimate is essential for planning aims. The factors determining costs are not always known or controllable which gives rise to cost uncertainty. It is required to find out the economic costs and measure them for profit planning, cost control and sound pricing practices. The factors of production are scarce (limited) and have alternative uses. The factors of productions may be allocated in a particular way to get maximum output. Due to this, production analysis is also important in managerial economics. The major topics of study under cost and production analysis are concepts of cost and classification, production function, least-cost combination of inputs, factor of productivity returns to scale, etc.
  3. Pricing Decisions and Techniques: Pricing decisions take up an important place in managerial economics because the main objective of a firm is the maximization of profits that depends on suitable pricing decisions. So, price is the source of the revenue, the success of a firm depends on the correctness of the pricing decisions. The main topics included under it are: Price determination under different market structure, pricing objectives, pricing methods, price discrimination, price of joint products.
  4. Profit and Capital Management: Profit provides the index of success of a business firm. So, the business firms are organized for making profits. Profits analysis is difficult since the knowledge about uncertain future but uncertainty expectations are not always realized which makes the profit planning and measurement difficult that is covered by managerial economics. The important aspects covered under the topics are nature, theories and measurement of profit, profit policies and techniques of profit planning. There is one of difficult problems of a business manager is relating to firm’s capital investments. Hence, capital management is required which in turn, needs considerable time and labor. Capital management means planning and control of capital expenditures. The main aspects covered are: Cost of capital, types of investment decisions, and evaluation of selections of projects.
  5. Objective of Business Firm: A firm should fix its objective at the initiation of the business. The objective may be many ranging from profit maximization to sales maximization to utility maximization to satisfying. It is assumed that manager consistently makes decisions in order to maximize profit. Though a firm may have only one objective at a time. The objective should guide a firm in decisions regarding its prices and outputs.

Traditionally, managerial economics drew heavily upon economic analysis for its decision-making process. But lately, the development of mathematical and statistical techniques for analyzing situations faced by managerial economists have also prompted their use in the decision-making process. Managerial economics is also concentrated on integration of managerial economics and operation research. Hence, many mathematical, statistical as well as other techniques are also regarded as a part of a managerial economics.

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