SCOPE OF MANAGERIAL ECONOMICS

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.