Nature and Scope of Managerial Economics
The Nature of Managerial Economics:
- It analyses towards solving business problems, constitutes the subject-matter of Managerial Economics.
- It helps in decision making and forward planning.
- The problem of choice arises because resources are limited and the firm has to make the most profitable use of these resources.
- As future is unpredictable, a business manager’s task is to prepare the best possible plans for the future depending on past experience and future outlook .
- It assists the managers of a firm in a rational solution of obstacles faced in the firm’s activities.
- It helps in formulating logical managerial decisions.
- It lessens the gap between economics in theory and economics in practice.
- 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.
- It helps in enhancement of analytical skills, assists in rational configuration as well as solution of problems.
Scope of Managerial Economics
1. Demand Analysis and Forecasting:
The foremost aspect regarding its scope is in demand analysis and forecasting. A business firm is an economic unit which transforms productive resources into saleable goods. Since all output is meant to be sold, accurate estimates of demand help a firm in minimizing its costs of production and storage.
A firm must decide its total output before preparing its production schedule and deciding on the resources to be employed. Demand forecasts serves as a guide to the management for maintaining its market share in competition with its rivals, thereby securing its profit. Thus, demand analysis facilitates the identification of the various factors affecting the demand for a firm’s product. This, in turn helps the firm in manipulating the demand for its output.
In fact, demand forecasts are the starting point for a firm’s planning and decision-making. This deals with the basic tools of demand analysis i.e.; Demand Determinants, Demand Distinctions and Demand Forecasting etc.
2. Cost and Production Analysis:
A firm’s profitability depends much on its costs of production. A wise manager would prepare cost estimates of a range of output, identify the factors causing variations in costs and choose the cost-minimising output level, taking also into consideration the degree of uncertainty in production and cost calculations. Production processes are under the charge of engineers but the business manager works to carry out the production function analysis in order to avoid wastages of materials and time. Sound pricing policies depend much on cost control.
The main topics discussed under cost and production analysis are:
Cost concepts, cost-output relationships, Economies and Diseconomies of scale and cost control.
3. Pricing Decisions, Policies and Practices:
Another task before a business manager is the pricing of a product. Since a firm’s income and profit depend mainly on the price decision, the pricing policies and all such decisions are to be taken after careful analysis of the nature of the market in which the firm operates. The important topics covered in this field of study are: Market Structure Analysis, Pricing Practices and Price Forecasting.
4. Profit Management:
Each and every business firms are tended for earning profit; it is profit which provides the chief measure of success of a firm in the long period. Economists tell us that profits are the reward for uncertainty bearing and risk taking. A successful business manager is one who can form more or less correct estimates of costs and revenues at different levels of output. The more successful a manager is in reducing uncertainty, the higher are the profits earned by him. It is therefore, profit-planning and profit measurement that constitutes the most challenging area of business economics.
5. Capital Management:
Still another most challenging problem for a modern business manager is of planning capital investment. Investments are made in the plant and machinery and buildings which are very high. Therefore, capital management requires top-level decisions. It means capital management i.e., planning and control of capital expenditure. It deals with Cost of capital, Rate of Return and Selection of projects.