Managerial Economics

Managerial economics is a stream of management studies that focus on decision-making and problem-solving. Both microeconomics and macroeconomics theories are applied. It focuses on the efficient utilization of scarce resources.

It is a discipline that brings together the concepts of business and economics. It enables leaders and managers with relevant data—demand projections, capital management, pricing decisions, profit management, cost analysis, and production analysis.

• Managerial economics is the application of various economic measures, policies, principles, tools, methods, and theories to enable decision-making and problem-solving.
• It highlights techniques for efficient utilization of financial, human, and material resources—so that profits can be maximized.
• It is a pragmatic and normative approach—it solves a business's internal (microeconomic) problems—by analyzing macroeconomic threats and challenges.

Managerial economics analyzes the internal and external factors impacting an organization. It aims to resolve problems using micro and macroeconomic tools. Thus, it is a practical approach where economic measures are undertaken to solve business problems. In addition to solving problems, this approach extends to the growth and sustainability of a firm.

It is further classified into three subtypes:

• Liberal: Consumer demand dictates markets; customers are free to make their buying decisions and choices.
• Normative: The administration takes pragmatic decisions pertaining to cost management, demand analysis, production, and advertising.
• Radical: The management adopts a game-changing attitude to prioritize customer needs, requirements, and satisfaction—over business profits.

N. Gregory Mankiw stated managerial economics is about answering three crucial questions:

1. How do people make decisions?
2. How do people interact?
3. How does the economy work as a whole?

Finding answers to these questions can drive a business towards success.

The concept is implemented in the following ways:

Microeconomics for Solving Operational Problems

Managers apply microeconomic principles and theories to handle internal issues—production, sales, distribution, capital, pricing, profit, workforce, etc.

Given below are the various microeconomic theories:

1. Production Theory: In order to ensure high productivity with limited resources, microeconomics studies the impact of production-related decisions: capital requirement, labor requirement, production capacity, process, methods, techniques, cost, and quality, 
2. Investment Theory: Companies diligently plan their capital investment to ensure resource utilization—generating higher returns.
3. Demand Theory: To ensure consumer satisfaction, managers analyze consumer needs and requirements—they understand consumer attitudes and responses toward company products or services.
4. Market Structure Pricing Theory: It involves price determination and management—the business prices its products and services very competitively. To determine the price, the firms consider production cost, market demand, and marketing cost.
5. Profit Management: Profit maximization is the ultimate aim—this approach focuses on cost and revenue.

Macroeconomics for Handling External Environment Issues

Businesses operate in external environments—face unforeseen challenges. Macroeconomics deals with external challenges with the help of tools like PESTEL analysis.

Let us go through the components in detail:

1. Political (P): The government plays a critical role in a firm's progress. Thus, managerial economics studies how governance style, political unrest, and foreign collaboration affect private sector companies.
2. Economic (E): Business profitability greatly depends on government policies, tax reforms, GDP, and the nation's economic stability.
3. Social (S): The social environment molds businesses. This includes factors like societal values, beliefs, attitudes, consumer awareness, employment conditions, literacy rate, and trade unions.
4. Technological (T): Technology enhances the production and distribution of goods or services.
5. Environmental (E): When awareness of environmental concerns increases—firms face pressure to adopt sustainable and eco-friendly practices. This includes the curtailing of pollution, waste management, preservation of water, and preservation of natural resources.
6. Legal (L): Businesses must operate within legal boundaries—national laws pertaining to consumer rights, labor laws, health and safety laws, product labeling regulations, and advertising guidelines.

Managerial economics has often been confused with traditional economics but it has a whole new meaning and purpose. Let us understand the distinction by venturing deeper into its characteristics:

• Microeconomics: It solves microeconomic problems faced by a particular firm—does not focus on the entire economy.
• Pragmatic: Managerial economics is a practical approach—it applies economic principles in decision-making and problem-solving.
• Multidisciplinary: This approach aggregates multiple streams—business, management, accounting, statistics, finance, and mathematics.
• Application of Macro Economics: Every firm operates in an external environment—influenced by legal, political, global, social, economic, technological, competitive, and demographic factors. Macroeconomics deals with all these threats.
• Management Oriented: It educates leaders and managers on how to make crucial decisions in critical situations.

Following are areas where managerial economics plays a key role:

• The companies use managerial economics for forecasting demand. Based on demand projections, long-term business policies are formulated.
• The external environment poses various challenges and uncertainties. This discipline creates an estimate of those threats; as a result, firms can prepare themselves for damage limitation strategies.
• Inventory management is crucial for business. By employing demand analysis, firms can plan inventory beforehand.
• It facilitates the determination of the future cost of the business. Scarce resources can be utilized efficiently; this way total cost of production and sales can be mitigated.
• This study aids top-level management in making critical capital management decisions—investing in the right venture.

This has been a guide to what is Managerial Economics and its definition. We discuss the scope, meaning, nature, role & importance of managerial economics. You can learn more about it from the following articles – 

• Business Economics
• Managerial Economics Books
• Economic Efficiency