Origin of Managerial Economics
Managerial Economics
Origin of Managerial Economics
Managerial Economics lies on the border line of management and economics. It is a hybrid of the two disciplines and is primarily an applied branch of knowledge. The development of the science of managerial economics is of recent origin. After the Second World War, and particularly after 1950, with rapid expansion of international trade, the Business managers faced numerous delicate problems. As Prof. Ansoff rightly says, “Since the early 1950’s confronted with the growing variability and unpredictably of the business environment, business managers ways of adjusting to an exploiting environmental change.”
There was a gap between economic theory and correct procedure they have to employ to problems. The problems of the business world attracted the attention of academicians and gave rise to a special treatment of business problems. As a result managerial economics came into being.
Meaning of Managerial Economics
Managerial Economics has meant different things to different people. In simple terms Managerial Economics means ‘the application of economic theory to the problems of management’.
Economic theory deals with a number of concepts and principles like ‘Profit’, ‘Demand’, ‘Cost’, ‘Pricing’, ‘Production’, ‘Competition’, ‘Business Cycles’, ‘National Income’, etc. Economics aided by some disciplines like Accounting, Statistics and Mathematics which can be used to solve the business problems. Therefore Managerial Economics as the application of economic theory and decision science tools to problem of managerial decision.
Thus it is clear that the subject matter of Managerial Economics is “the way economic analysis can be used towards solving business problems”. Therefore Managerial Economics is an applied Economics’ concepts applied in management problems (Decision Making & Forward Planning).
To be more accurate, Managerial Economics is a branch of economics which acts as a bridge between economic theory and managerial practice. It is based on economic analysis for identifying problems and evaluation alternatives. Thus Managerial Economics lies on the borderline between Economics and Business management and serves as a bridge between the two disciplines.
Definitions of Managerial Economics
Prof. Spencer and Siegel men defined Managerial Economics as “the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management”.
Prof. Evan. J. Douglas has clearly defined, “Managerial Economics is concerned with the application of economic principles and methodologies to the decision making process within the firm or organization. It seeks to establish rules and principles to facilitate the attainment of the desired economic goals of management”.
From the above two definitions, it is clear that the problems of management are two-fold. They are
- Decision making
- Forward planning.
Decision making is the process of selecting a particular course of action form among a number of options. Decision making arises because of limited or scarce resources availability (Land, Labour, Capital and Management).
Forward planning means preparing for the future or establishing plans for the future. Forward planning arises because of ‘Uncertainty’ in the business.
Distinction between Economics and Managerial Economics
The following are the differences between Economics and managerial economics
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Economics |
Managerial Economics |
|
Managerial Economics is concerned with the practical problems of the firm.
Managerial Economics is Micro-Economics in character
Managerial Economics is basically normative in character
Managerial Economics deals with both the economic and Non-economic aspects of the firm
Managerial Economics deals only with the firm not with the individuals.
Managerial Economics studies mainly with the principles of profit only
The scope of Managerial Economics is limited.
Managerial Economics modifies and enlarges the economics models
Managerial Economics attempts to solve the real life and complex business problems |
Nature (Characteristics) of Managerial Economics
The following are the chief characteristics of Managerial Economics
1. Special Branch of Economics
Managerial Economics is a special branch of economics bridging the gap between theory and practice. “The relation of Managerial Economics to economic theory is much like that of engineering to physics of medicine to biology or bacteriology”
2. Micro-economic in Character
Managerial Economics draws heavily on the propositions of micro economic theory. For example, demand concepts and theories of market structure are elements of micro economics which Managerial Economics uses. The other concepts widely used are
(i) Elasticity of demand (ii) Marginal cost (iii) Marginal Revenue (iv) Opportunity cost etc. but some of these concepts however, provide only the necessary logical base and have to be modified in actual practice to suit special circumstances.
3. Related to Macro-economics Also
Though, basically Managerial Economics is micro-economics in nature, it uses macro economic forecasting. A proper understanding of the functioning of the economic system is of immense importance to the managerial economists in framing suitable policies. Concepts like business cycles, national-income accounting etc are widely used in managerial economics.
4. Pragmatic (Realistic / Practical)
Managerial Economics is pragmatic and essentially an applied branch of knowledge. In economic theory many abstract issues are analyzed on the basis of assumptions which are highly unrealistic. Managerial Economics avoids difficult abstract issues; it is mainly concerned with analytical tools that are useful to firms.
5. Elective in Nature
Managerial Economics is integrative or elective in nature. It combines and synthesizes ideas and methods from various functional fields of business administration like accounting, production management, marketing and finance. Thus it is multi-disciplinary in dimension.
6. Normative
Managerial Economists is prescriptive in character. It recommends what should be done under various alternative conditions. Managerial Economists are generally preoccupied with the optimum allocation of resources among competing ends with a view to obtaining the maximum benefit according to pre-determined criteria. To achieve these objectives, they do not assume that all other things would remain equal, but try to introduce policies which if implemented would achieve the desired results. Thus Managerial Economics is both a light giving and fruit-bearing one.
Scope of Managerial Economics
Managerial Economics studies six important areas in management which may be called the ‘subject mater of Managerial Economics’
1. Demand Analysis and Forecasting
It analyses the various types of demand which enable the manager to arrive at a reasonable estimate of the demand for the products of his firm. When the current demand is estimated, the next logical step is to ascertain the future demand for his products. The main areas covered under demand analysis are demand determinants, demand distinctions and demand forecasting.
2. Cost and Production Function
Cost and production analysis is vital for the efficient allocation of scarce resources. This analysis is also useful for profit planning, project planning, Cost control and pricing of products. While cost analysis is done in monetary terms, production analysis is done in physical units. The major areas covered under cost and production analysis are Cost concepts and Classifications, Cost-Output Relationships, Economies and Diseconomies of scale, and cost control.
3. Pricing Decisions, Policies and Practices
Pricing is an important area in Managerial Economics. While fixing the price of a commodity, a complete knowledge of the price system is essential. The success or failure of a firm mainly depends upon its accurate price decisions. Pricing policy has considerable significance for the management only when there is a considerable degree of imperfection in the market. The main areas covered in this section are Price determination in various market structures, pricing methods and price forecasting.
4. Profit Management
Profit is the life blood of any organization. An element of uncertainty exists about profits due to variations in costs and revenues. If knowledge about the future were perfect, profit analysis would have been much easier. The importance areas covered under this topic are Profit Planning, Profit Management, Profit forecast and Profit measurement.
5. Capital Management
Capital management means planning and control of capital expenditure. Capital measurement is done through capital budgeting, Cost of Capital, Rate of Return and Selection of projects are the important areas covered under Capital management.
6. Decision-Making
It is the process of selecting a particular course of action from among a number of alternatives. In arriving at a decision, the alternative courses of action available have to be weighted for acceptance of rejection. Operational research has developed many techniques which are frequently used in Managerial Economics for this purpose.
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