“Managerial economics is concerned with the application of economic principles and methodologies to the decision-making process within the firm or organization. It seeks to establish rules and principles to facilitate the attainment of the desired economic goals of management”-Douglas.
The subject matter of economics comprises a number of concepts and theories. The application of these concepts and theories in the process of business decision making is known as managerial economics. In other words, managerial economics undertakes the study of different economic tools that are used in business decision making.
Some of the popular definitions of managerial economics are given as follows:
According to Mansfield, “Managerial economics is concerned with the application of economic concepts and economics to the problems of formulating rational decision making.”
In the words of Spencer, “Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management”
According to Douglas, “Managerial economics is concerned with the application of economic principles and methodologies to the decision-making process within the firm or organization. It seeks to establish rules and principles to facilitate the attainment of the desired economic goals of management”.
As per Haynes, Mote, and Paul, “Managerial Economics refers to those aspects of economics and its tools of analysis most relevant to the firm’s business decisions-making process. By definition, therefore, its scope does not extend to macroeconomic theory and the economics of public policy an understanding of which is also essential for the manager.”
From the aforementioned definitions, it can be concluded that managerial economics serves as a link between the two disciplines, namely management and economics. The management discipline is concerned with a number of principles that help in business decision making and improving the effectiveness of business organizations
On the other hand, economics is related to an optimum allocation of limited resources for attaining the set objectives of a business organization. Therefore, it can be said that managerial economics is a special discipline of economics that can be applied in business decision making of organizations.
The decision-making process of an organization involves selecting the best course of action from the available alternatives. Therefore, an organization should have a clear understanding of business environment so that it can take appropriate business decisions.
Figure-1 shows the application of economics in business decision-making:
Thus, managerial economics deals with the analysis of economic theories and laws to take decisions based on rational thinking.
Importance of Managerial Economics:
The main objective of any business organization is to earn maximum profit. For achieving this objective, an organization needs to ensure the effectiveness of its decision making process. Decision-making is defined as a process of selecting the best course of action among the available alternatives, so that the set business objectives can be achieved.
A comprehensive decision requires a perfect knowledge of various economic theories, concepts, and tools that are directly included in the business decision making. Managerial economics enables manager’s in effective business decision making as it analyzes a business problem rationally and with different perspectives.
It helps an organization in the following ways:
a. Helps in taking decisions related to type of product, investment, pricing, and level of production
b. Enables managers to select production techniques and best course of action
c. Comprises various economic concepts, such as demand theory, production theory, and capital theory, which helps in studying and analyzing different business problems
d. Helps organization in making future decisions with respect to economic variables, such as price, demand, supply, and cost
e. Applies different economic theories and tools to the real world business environment
f. Enables organizations to determine and analyze factors that affect business decisions
g. Helps in formulating business policies
h. Helps in assessing relationship between different economic variables, such as demand, supply, income, employment, and profit