As regards the scope of
managerial economics, there is no general uniform pattern. However, the
following aspects may be said to be inclusive under managerial economics:
- Demand analysis and forecasting.
- Cost and production analysis.
- Pricing decisions, policies and practices.
- Profit management.
- Capital management.
These aspects may also be
defined as the ‘Subject-Matter of Managerial Economics’. In recent years, there
is a trend towards integrations of managerial economics and operations
research. Hence, techniques such as linear programming, inventory models and
theory of games have also been regarded as a part of managerial economics.
Demand Analysis and Forecasting
A business firm is an economic
Organisation, which transforms productive resources into goods that are to be
sold in a market. A major part of managerial decision-making depends on
accurate estimates of demand. This is because before production schedules can
be prepared and resources are employed, a forecast of future sales is
essential. This forecast can also guide the management in maintaining or
strengthening the market position and enlarging profits. The demand analysis
helps to identify the various factors influencing demand for a firm’s product
and thus provides guidelines to manipulate demand. Demand analysis and
forecasting, thus, is essential for business planning and occupies a strategic
place in managerial economics. It comprises of discovering the forces
determining sales and their measurement. The chief topics covered in this are:
- Demand determinants
- Demand distinctions
- Demand forecasting.
Cost and Production Analysis
A study of economic costs, combined
with the data drawn from the firm’s accounting records, can yield significant
cost estimates. These estimates are useful for management decisions. The
factors causing variations in costs must be recognised and thereby should be
used for taking management decisions. This facilitates the management to arrive
at cost estimates, which are significant for planning purposes. An element of
cost uncertainty exists in this because all the factors determining costs are
not always known or controllable. Therefore, it is essential to discover
economic costs and measure them for effective profit planning, cost control and
sound pricing practices. Production analysis is narrower in scope than cost
analysis. The chief topics covered under cost and production analysis are:
- Cost concepts and classifications
- Cost-output relationships
- Economics of scale
- Production functions
- Cost control.
Pricing Decisions, Policies and
Practices
Pricing is a very important
area of managerial economics. In fact price is the origin of the revenue of a
firm. As such the success of a usiness firm largely depends on the accuracy of
price decisions of that firm. The important aspects dealt under area, are as
follows:
- Price determination in various market forms
- Pricing methods
- Differential pricing product-line pricing and price forecasting.
Profit Management
Business firms are generally
organised with the purpose of making profits. In the long run, profits provide
the chief measure of success. In this connection, an important point worth
considering is the element of uncertainty existing about profits. This
uncertainty occurs because of variations in costs and revenues. These are
caused by factors such as internal and external. If knowledge about the future
were perfect, profit analysis would have been a very easy task. However, in a
world of uncertainty, expectations are not always realised. Thus profit
planning and measurement make up the difficult area of managerial economics.
The important aspects covered under this area are:
- Nature and measurement of profit.
- Profit policies and techniques of profit planning.
Capital Management
Among the various types and
classes of business problems, the most complex and troublesome for the business
manager are those relating to the firm’s capital investments. Capital
management implies planning and control and capital expenditure. In this
procedure, relatively large sums are involved and the problems are so complex
that their disposal not only requires considerable time and labour but also
top-level decisions. The main elements dealt with cost management are:
- Cost of capital
- Rate of return and selection of projects.
The various aspects outlined
above represent the major uncertainties, which a business firm has to consider
viz., demand uncertainty, cost uncertainty, price uncertainty, profit
uncertainty and capital uncertainty. We can, therefore, conclude that
managerial economics is mainly concerned with applying economic principles and
concepts to adjust with the various uncertainties faced by a business firm.
MANAGERIAL ECONOMICS AND OTHER
SUBJECTS
Yet another useful method of
explaining the nature and scope of managerial economics is to examine its
relationship with other subjects. The following discussion helps to understand
relationship between managerial economics and economics, statistics,
mathematics, accounting and operations research.
Managerial Economics and
Economics
Managerial economics is defined
as a subdivision of economics that deals with decision-making. It may be viewed
as a special branch of economics bridging the gulf between pure economic theory
and managerial practice. Economics has two main divisions-microeconomics and
Macroeconomics. Microeconomics has been defined as that branch where the unit
of study is an individual or a firm. It is also called “price theory” (or
Marshallian economics) and is the main source of concepts and analytical tools
for managerial economics. To illustrate, various micro-economic concepts such
as elasticity of demand, marginal cost, the short and the long runs, various
market forms, etc., are all of great significance to managerial economics.
Macroeconomics, on the other hand, is aggregative in
character and has the entire economy as a unit of study. The chief contribution
of macroeconomics to managerial economics is in the area of forecasting. The
modern theory of income and employment has direct implications for forecasting
general business conditions. As the prospects of an individual firm often
depend greatly on general business conditions, individual firm forecasts rely
on general business forecasts.
A survey in the U.K. has shown that business
economists have found the following economic concepts quite useful and of
frequent application:
- Price elasticity of demand
- Income elasticity of demand
- Opportunity cost
- Multiplier
- Propensity to consume
- Marginal revenue product
- Speculative motive
- Production function
- Liquidity preference
- Business economists have also found the following main areas of economics as useful in their work. Demand theory
- Theory of firms – price, output and investment decisions
- Business financing
- Public finance and fiscal policy
- Money and banking
- National income and social accounting
- Theory of international trade
- Economies of developing countries.
Thus, it is obvious that
Managerial Economics is very closely related to Economics.
Managerial Economics and
Statistics
Statistics is important to
managerial economics in several ways. Managerial economics calls for the
organising quantitative data and deriving a useful measure of appropriate
functional relationships involved in decision-making. For instance, in order to
base its pricing decisions on demand and cost considerations, a firm should
have statistically derived or calculated demand and cost functions. Managerial
economics also employs statistical methods for experimental testing of economic
generalisations. The generalisations can be accepted in practice only when they
are checked against the data from the world of reality and are found valid.
Managers do not have exact information about the variables affecting decisions
and have to deal with the uncertainty of future events. The theory of
probability, upon which statistics is based, provides logic for dealing with
such uncertainties.
Managerial Economics and
Mathematics
Mathematics is yet another
important subject closely related to managerial economics. This is because
managerial economics is mathematical in character, as it involves estimating
various economic relationships, predicting relevant economic quantities and
using them in decision-making and forward planning. Knowledge of geometry,
trigonometry ad algebra is not only essential but also certain mathematical
tools and concepts such as logarithms and exponential, vectors, determinants,
matrix, algebra, calculus, differential as well as integral, are the most
commonly used devices. Further, operations research, which is closely related
to managerial economics, is mathematical in character. It provides and analyses
data ad develops models, benefiting from the experiences of experts drawn from
different disciplines, viz., psychology, sociology, statistics and engineering.
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very nice information Scope Of Managerial Economics