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.

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.

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
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