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Managerial Economics bridges the gap between economic theory and business practice

Managerial Economics can be defined as amalgamation of economic theory with business practices so as to ease decision making and future planning by management. Managerial Economics is a science dealing with effective use of scarce resources. Study of Managerial Economics helps in enhancement of analytical skills, assists in national configuration as well as solution of problems. The key of Managerial Economics is the micro economic theory of the firm. It lessens the gap between economics in theory and economics in practice.

Scope of the Study:

i. ii. iii. iv. v. vi. vii. viii. Introduction. Justification of the study. Objectives of the study. Limitations of the study. Role of Managerial Economics as a bridge between economic theory and business practice. Explanation with examples. Conclusion. References.

Managerial Economics assists the managers of a firm in a rational solution of obstacles faced on the firms activities. It makes use of economic theory and concepts. It helps in formulating logical managerial decisions. Managerial Economics applies microeconomic tools to make business decisions. It deals with a firm. Managerial Economics is of great help in price analysis, production analysis, capital budgeting, risk analysis and determination of demand. Managerial Economics uses both Economic theory as well as Econometrics for rational managerial decision making. Econometrics is defined as use of statistical tools for assessing economic theories by empirically measuring relationship between economic variables. Managerial Economics is associated with the economic theory. Thus, Managerial Economics establish a communication between economic theory and business practice.
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Justification of the Study:

In order to broaden our knowledge on the role of Managerial Economics, more and more study is required. The more we will study on this, the more we will be able to identify and recognize the role of Managerial Economics as a bridge between economic theory and business practice.

Objectives of the Study:

i. ii. iii. iv. v. To fulfill the academic requirement. To know about Managerial Economics. To know about economic theory. To know about the relationship between economic theory and business practice. To know how Managerial Economics minimizes the gap and establishes communication between economic theory and business practice.

Limitations of the Study:


Time Constraint. Resource Constraint.

Role of Managerial Economics as a bridge between Economic theory And Business practice:
Managerial Economics applies economic theory and methods to business and administrative decision making. Because it uses the tools and techniques of economic analysis to solve managerial problems. Managerial Economics links traditional economics with the decision sciences to develop vital tools for managerial decision making. The value of Managerial Economics can be appreciated by examining its prescriptive and descriptive components. Managerial Economics prescribes rules for improving managerial decisions. It tells managers how things should be done to achieve organizational objectives efficiently. Managerial Economics also helps managers to recognize how economic forces affect organizations and describes the economic consequences of managerial behavior.

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The role of Managerial Economics in managerial decision making:

Managerial Economics uses economic concepts and decision science techniques to solve managerial problems. Management Decision Problems
       Product, Price and Output Make or Buy Production Technique Inventory level Advertising Media and Intensity Labor Hiring and Training Investment and Financing

Economic Concept
Framework for Decisions  Theory of consumer behavior  Theory of the firm  Theory of Market structure &pricing

Decision Sciences
Tools and Techniques of Analysis  Numerical Analysis  Statistical Estimation  Forecasting  Game Theory  optimization

Managerial Economics
Use of economic concepts and Decision Science Methodology to solve Managerial decision Problems.

Optimal Solutions to Managerial Decision Problems

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Managerial Economics can be used to identify ways to efficiently achieve virtually of the organizations goals. Managerial Economics describes how economic forces affect and are affected by managerial decisions. The use of managerial Economics is not limited to profit making firms and organizations. But it can also be used to help in decision making process of non-profit organizations. The following figure tells the primary ways in which Managerial Economics correlates to Managerial decision making.

Managerial Decision Issues

Economic Theory and concepts

Quantitative Approach

Managerial Economics (Using both economic theory/concepts and quantitative approach to make Managerial decision)

In short, Managerial Economics helps managers to arrive at a set of operating rules that aid in the efficient use of scarce human and capital resources. By following these rules, businesses, nonprofit organizations and government agencies are able to meet their objectives efficiently. By using the economic theory of economic optimization we can take effective decisions. Thus, Managerial Economics bridges the gap between optimization theory and business practice. Once the essentials of economic relations are understood, the tools and techniques of optimization can be applied to find the best course of action to solve any given managerial decision problem.

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Economic risk is the chance of loss due to the fact that all possible outcomes and their probability of occurrence are unknown. Uncertainty occurs when the outcomes of managerial decision cannot be predicted with absolute accuracy but all possibilities and their associated probabilities of occurrence are known. The economic concepts of risk, uncertainty and probability are used to make effective managerial decisions where managerial economics plays vital role. Demand analysis; demand estimation, forecasting etc are some other important economic concepts. Managerial Economics uses these concepts in order to determine correct managerial decision. The concepts of demand, supply and market equilibrium or the balance of demand and supply contribute the bases necessary to analyze the markets for all goods and services. Production and cost analysis are also regarded as important economic concepts. The acquisition of capital resources and its efficient employment are parts of production, as are the design and use of appropriate accounting control and management information system. Production analysis also enhances appreciation for the intergraded nature of the firm. No other topic in Managerial Economics so clearly lays out the connection between the market demand signals from the customers and supply responds from firms. With its prescriptive and descriptive components, Managerial Economics provides a comprehensive application of economic theory and methodology to managerial decision making.

Explanation with Examples:

Example No. 1: Managerial Economics can be used to identify ways to efficiently achieve any organizations goals. For example, let us assume that a small business seeks rapid growth in order to reach a size that will permit efficient use of national media advertising. The firms managers can use managerial economics to identify pricing and production strategies that will help meet this short run objective as quickly and effectively as possible. Similarly, managerial economics provides production and marketing rules that will permit the company to maximize net profits once it has achieved its growth objectives. Example No. 2: Managerial Economics has prescriptive applications for both profit and not-for-profit sectors. For example, an administrator of a nonprofit hospital strives to provide the best medical care possible given medical staff, equipment and related resources. Using the tools and concepts of managerial economics, the administrator can determine the optimal allocation of these limited resources.

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Example No. 3: Managerial Economics describes now economic forces affect and are affected by managerial decisions. For example, a grocery retailer may offer consumers a highly price-sensitive product, such as milk, at an extremely low markup over cost say, 1% to 2% - while offering less price-sensitive products, such as nonprescription drugs, at markups of as high as 40% over cost. Managerial Economics describes the logic of this pricing practice with respect to the goal of profit maximization. Example No. 4: Managerial Economics reveals that imposing auto import quotas reduces the availability of substitutes for domestically produced cars, raises auto prices, and creates the possibility of monopoly profits for domestic manufacturers. It does not tell us whether imposing quotas is good public policy: that is a decision involving broader political considerations. Managerial Economics only describes the predictable economic consequences of such actions.

Managerial Economics guides the managers in taking decisions relating to the firms customers, competitors, suppliers as well as relating to the internal functioning of a firm. It makes use of statistical and analytical tools to assess economic theory in solving practical business problems. It enables optimum utilization of scarce resources in such organizations as well as helps in achieving the goals in most efficient manner.

1. Managerial Economics, Concepts & Applications. - Mark Hirschey & James L. Pappas ISBN: 0-03-011303-2 2. 3. 4.

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