The terms Managerial Economics
and Business Economics are often used interchangeably. However, the terms
Managerial Economics has become more popular and seems to displace Business
Economics.
DECISION-MAKING AND FORWARD
PLANNING
The chief function of a
management executive in a business firm is decision-making and forward
planning. Decision-making refers to the process of selecting one action from
two or more alternative courses of action. Forward planning on the other hand
is arranging plans for the future. In the functioning of a firm the question of
choice arises because the available resources such as capital, land, labour and
management, are limited and can be employed in alternative uses. The decision-making
function thus involves making choices or decisions that will provide the most
efficient means of attaining an organisational objectives, for example profit
maximization. Once a decision is made about the particular goal to be achieved,
plans for the future regarding production, pricing, capital, raw materials and
labour are prepared. Forward planning thus goes hand in hand with
decision-making. The conditions in which firms work and take decisions, is
characterised with uncertainty. And this uncertainty not only makes the
function of decision-making and forward planning complicated but also adds a
different dimension to it. If the knowledge of the future were perfect, plans
could be formulated without error and hence without any need for subsequent
revision. In the real world, however, the business manager rarely has complete
information about the future sales, costs, profits, capital conditions. etc.
Hence, decisions are made and plans are formulated on the basis of past data,
current information and the estimates about future that are predicted as
accurately as possible. While the plans are implemented over time, more facts
come into the knowledge of the businessman. In accordance with these facts the
plans may have to be revised, and a different course of action needs to be
adopted. Managers are thus engaged n a continuous process of decision-making
through an uncertain future and the overall problem that they deal with is
adjusting to uncertainty.
To execute the function of ‘decision-making in an uncertain
frame-work’, economic theory can be applied with considerable advantage.
Economic theory deals with a number of concepts and principles relating to
profit, demand, cost, pricing, production, competition, business cycles and
national income, which are aided by allied disciplines like accounting.
Statistics and Mathematics also can be used to solve or at least throw some
light upon the problems of business management. The way economic analysis can
be used towards solving business problems constitutes the subject matter of
Managerial Economics.
DEFINITION
According to McNair the
Merriam, Managerial Economics consists of the use of economic modes of thought
to analyse business situations.
Spencer and Siegelman have defined Managerial Economics as
“the integration of economic theory with business practice for the purpose of
facilitating decision-making and forward planning by management.”
The above definitions suggest that Managerial economics is
the discipline, which deals with the application of economic theory to business
management. Managerial Economics thus lies on the margin between economics and
business management and serves as the bridge between the two disciplines
