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 assists the
managers of a firm in a rational solution of obstacles faced in the firm’s activities. It makes use of
economic theory and concepts. It helps in formulating logical managerial decisions. 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. Managerial Economics is a science dealing with effective use of
scarce resources. It guides the managers in taking decisions relating to the firm’s 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 theories in solving practical business problems.

Study of Managerial Economics helps in enhancement of analytical skills, assists in rational configuration
as well as solution of problems. While microeconomics is the study of decisions made regarding the
allocation of resources and prices of goods and services, macroeconomics is the field of economics that
studies the behavior of the economy as a whole (i.e. entire industries and economies). Managerial
Economics applies micro-economic tools to make business decisions. It deals with a firm.

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 (hospitals, educational
institutions, etc). It enables optimum utilization of scarce resources in such organizations as well as helps
in achieving the goals in most efficient manner. 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. It uses factual data for solution of
economic problems. Managerial Economics is associated with the economic theory which constitutes
“Theory of Firm”. Theory of firm states that the primary aim of the firm is to maximize wealth. Decision
making in managerial economics generally involves establishment of firm’s objectives, identification of
problems involved in achievement of those objectives, development of various alternative solutions,
selection of best alternative and finally implementation of the decision.

The following figure tells the primary ways in which Managerial Economics correlates to managerial
decision-making.

Managerial Economics deals with allocating the scarce resources in a manner that minimizes the cost. As
we have already discussed, Managerial Economics is different from microeconomics and macro-
economics. Managerial Economics has a
more narrow scope - it is actually solving managerial issues using micro-economics. Wherever there are
scarce resources, managerial economics ensures that managers make effective and efficient decisions
concerning customers, suppliers, competitors as well as within an organization. The fact of scarcity of
resources gives rise to three fundamental questions-

a. What to produce?

b. How to produce?

c. For whom to produce?

To answer these questions, a firm makes use of

managerial economics principles.

The first question relates to what goods and services should be produced and in what amount/quantities
. The managers use demand theory for deciding this. The demand theory examines consumer behaviour
with respect to the kind of purchases they would like to make currently and in future; the factors
influencing purchase and consumption of a specific good or service; the impact of change in these
factors on the demand of that specific good or service; and the goods or services which consumers might
not purchase and consume in future. In order to decide the amount of goods and services to be
produced, the managers use methods of demand forecasting.

The second question relates to how to produce goods and services. The firm has now to choose among
different alternative techniques of production. It has to make decision regarding purchase of raw
materials, capital equipments, manpower, etc. The managers can use various managerial economics
tools such as production and cost analysis (for hiring and acquiring of inputs), project appraisal methods(
for long term investment decisions),etc for making these crucial decisions.

The third question is regarding who should consume and claim the goods and services produced by the
firm. The firm, for instance, must decide which is it’s niche market-domestic or foreign? It must segment
the market. It must conduct a thorough analysis of market structure and thus take price and output
decisions depending upon the type of market.

Managerial economics helps in decision-making as it involves logical thinking. Moreover, by studying

simple models, managers can deal with more complex and practical situations. Also, a general approach
is implemented. Managerial Economics take a wider picture of firm, i.e., it deals with questions such as
what is a firm, what are the firm’s objectives, and what forces push the firm towards profit and away
from profit. In short, managerial economics emphasizes upon the firm, the decisions relating to
individual firms and the environment in which the firm operates. It deals with key issues such as what
conditions favour entry and exit of firms in market, why are people paid well in some jobs and not so
well in other jobs, etc. Managerial Economics is a great rational and analytical tool.

Managerial Economics is not only applicable to profit-making business organizations, but also to non-
profit organizations such as hospitals, schools, government agencies, etc.
Managers study managerial economics because it gives them insight to reign the functioning of the
organization. If manager uses the principles applicable to economic behaviour in a reasonably, then it
will result in smooth functioning of the organisation.

Managerial Economics is a Science

Managerial Economics is an essential scholastic field. It can be compared to science in a sense that it
fulfils the criteria of being a science in following sense:

Science is a Systematic body of Knowledge. It is based on the methodical observation. Managerial

economics is also a science of making decisions with regard to scarce resources with alternative
applications. It is a body of knowledge that determines or observes the internal and external
environment for decision making.

In science any conclusion is arrived at after continuous experimentation. In Managerial economics also
policies are made after persistent testing and trailing. Though economic environment consists of human
variable, which is unpredictable, thus the policies made are not rigid. Managerial economist takes
decisions by utilizing his valuable past experience and observations.

Science principles are universally applicable. Similarly policies of Managerial economics are also
universally applicable partially if not fully. The policies need to be changed from time to time depending
on the situation and attitude of individuals to those particular situations. Policies are applicable
universally but modifications are required periodically.

Managerial Economics requires Art

Managerial economist is required to have an art of utilising his capability, knowledge and understanding
to achieve the organizational objective. Managerial economist should have an art to put in practice his
theoretical knowledge regarding elements of economic environment.

Managerial Economics for administration of organization

Managerial economics helps the management in decision making. These decisions are based on the
economic rationale and are valid in the existing economic environment.

Managerial economics is helpful in optimum resource allocation

The resources are scarce with alternative uses. Managers need to use these limited resources optimally.
Each resource has several uses. It is manager who decides with his knowledge of economics that which
one is the preeminent use of the resource.

Managerial Economics has components of micro economics

Managers study and manage the internal environment of the organization and work for the profitable
and long-term functioning of the organization. This aspect refers to the micro economics study. The
managerial economics deals with the problems faced by the individual organization such as main
objective of the organization, demand for its product, price and output determination of the
organization, available substitute and complimentary goods, supply of inputs and raw material, target or
prospective consumers of its products etc.

Managerial Economics has components of macro economics

None of the organization works in isolation. They are affected by the external environment of the
economy in which it operates such as government policies, general price level, income and employment
levels in the economy, stage of business cycle in which economy is operating, exchange rate, balance of
payment, general expenditure, saving and investment patterns of the consumers, market conditions etc.
These aspects are related to macro economics.

Managerial Economics is dynamic in nature

Managerial Economics deals with human-beings (i.e. human resource, consumers, producers etc.). The
nature and attitude differs from person to person. Thus to cope up with dynamism and vitality
managerial economics also changes itself over a period of time.

Managerial Economics is basically a blend of Economics and Management. Two branches of economics
i.e. micro economics and macro economics are the major contributors to managerial economics.

Micro Economics is the study of the behaviour of individual consumers and firms whereas
microeconomics is the study of economy as a whole.

Managerial Economics and Micro Economics

All the firms operating in the market have to take under consideration the constituent of the economic
environment for its proper functioning. This economic environment is nothing but the Micro economics
elements.

Micro Economics is a broader concept as compare to Managerial Economics. Micro Economics forms the
foundation of managerial economics . Almost all the concepts of Managerial Economics are the
perceptions of Micro Economics concepts.

Managerial economics can be perceived as an applied Micro Economics. Demand Analysis and
Forecasting, Theory of Price, Theory of Revenue and Cost, Theory of Supply and Production are major
bare bones of Micro Economics that underpins the Managerial Economics. Managerial Economics
applies the theories of Micro Economics to resolve the issues of the organization and for decision
making.

All Managers want to carry out their function of decision making with maximum efficiency. Their
business planning can be effectively planned and performed with comprehensive knowledge and
understanding of micro economic concept and its applications. Optimum decision making to achieve the
objective of the organisation i.e. for profit maximizing or for cost minimizing, is possible with proper
compliance of micro economic know how, regardless of the technological constraints and given market
conditions. Micro Economic Analysis is important as it is applied to day to day dilemma and concerns.

The reliance of Managerial Economics on Micro Economics is made clearer in the points below:

If a manager wants to increase the price of the product due to increase in cost of production, he will
analyze the price elasticity of demand for that product so that price rise is not followed by substantial fall
in the demand of the product. It is the application of demand analysis to the real world situation.

For fixing the price of the products managers applies the pricing theories, cost and revenue theories of
micro economics.

Decisions regarding production and supply of the product in the market, knowledge of availability of
fixed and variable factors of production, state of technology to be used and availability of raw-material
are essential. This can be determined with the knowledge of theory of production.

Determination of price and output is possible with the acquaintance of market structures and
approaches pertinent for determination of price and output in the given market setup.

Managerial economics utilizes statistical methods such as game theory, linear programming etc for
application of Economic Theory in Decision making.

One of the responsibilities of Manager is to workout budgets for different departments of the
organization which is learned from Capital Budgeting and Capital Rationing.

Cost and benefit analysis helps the manager in decision making.

Study of welfare economics helps Manager in taking care of social responsibilities of the organization.

Microeconomics is the study that deals with partial equilibrium analysis which is useful for the manager
in deciding equilibrium for his organization.

Managerial Economics also uses tools of Mathematical Economics and econometrics such as regression
analysis, correlation analysis etc.

Theory of firm, an important element of microeconomics, is one of the most significant element of
Managerial Economics