With respect to the last goal, viz. If the future were known with certainty, it would be very easy to take financial decisions. In managerial economics, measures of central tendency like the mean, median, mode, and measures of dispersion, correlation, regression, least square, estimators are widely used. Managerial economics is basically concerned with how individual economic units behave, make decisions, and respond to changes in the external macro environment of business. In regard to this, various hypotheses can be developed which will become alternative courses for the solution of the problem. Microeconomic data has shown that in some cases a vigorous ad campaign is often a successful way to beat the competition. Relation of Managerial Economics to Other Areas of Management : It is possible to establish link of managerial economics to other areas of management.
However, the pursuit of each of these objectives in isolation would not lead to the fulfilment of the overall objective of the company, i. By this way, he can assist the management in adopting appropriate adjustment in policies and programmes. The economic model of a firm is called the theory of the firm. Investment refers to expenditure on capital goods. The tools of managerial economics are really useful in evaluating these issues. Economics contributes a lot to the managerial economics. Role of Managerial Economics in Business Development 10.
However, a business firm may have some other objectives such as maximisation of sales or growth of the firm. Although that seems logical, it might not be the best choice. Promotional strategy and activities determination of optimum advertising budget 5. We can programme a complex system of relationship with the help of this method. For more, see: In the case of Firm A, which makes shirts, or for any firm no matter what it makes, if manufacturing and selling a single unit of a product costs less than the revenue it brings in, then the smart decision is to produce and sell the product. Motivations, the relation of rewards and aspiration levels, and patterns of influence and authority all these are key factors in the theory of decision making.
Such decisions require an act of investment or capital expenditure which will yield a return in future periods. These estimates are useful for management decisions. In business decision making however the real situation tends to be quite different from theoretical assumptions. The theoretical structure permits us to concentrate on a few important forces and ignore others. It also helps to find out,what to produce, how much to produce and for whom to produce.
In managerial economics, one attempts to extract from economic theory particularly micro-economics those concepts and techniques that enable the decision-maker to efficiently allocate the resources of the organization. Business draws upon data to make a variety of critical choices — any one of which could mean the success or failure of their enterprise. It is a study of particular firms, particular households, individual prices, wages, incomes, individual industries and particular commodities. Statistical techniques are used incollecting processing and analyzing business data, testing and validity of economics laws withthereal economic phenomenon before they are applied to business analysis. In other words, traditional economic theory enables business decision makers to know what information is necessary to make the decision, and how to process and use that information. He may face problems relating to best combination of the factors to gain maximum profit or how to use different machine hours for maximum production advantage, etc. Managerial Economics is often called as Business Economics or Economic for Firms.
It is often asked what the method of science is, whether induction or deduction? But there may be number of obstacles and weaknesses of economic analysis in actual decision making situation. Business economics is however not a branch of economic theory but separate discipline by itself having its own principles and methods. The managerial problem of planning and control of capital is examined from an economic stand point. He should be able to find out the relations between events and events and between events and environment. These tools are used to make stock market investing decisions and decisions on capital investments for a business. Managerial economics may be viewed as economics applied to problem solving at the level of the firm. Management accounting provides the accounting data for taking business decisions.
It also makes frequent use of well- known models in price theory such as those for monopoly price, the kinked-demand theory and price discrimination. As regards the pricing of products being produced by a business entity, it is one of the most critical decisions for a manager to fix the price of particular products as it is by means of pricing decisions taken by a manager, the inflow of revenue is determined. This is the main argument for the adoption of historical method in the present day managerial economics. The basic concepts are derived mainly from microeconomic theory, which studies the behaviour of individual consumers, firms, and industries, but new tools of analysis have been added. But they have a common interest: they have the need for some reliable though not totally perfect or accurate estimates of the demand for the product being sold by the firm. The firm can make only timely adjustments to their external factors.
An economist uses additional factors as costs, including — the tradeoff concept described in the previous chapter. Hence, cost structure, reduction of cost and cost control has come to occupy important places in business decisions. He helps to co-ordinate practices relating to production, investment, price, sales and inventory schedules of the firm. Microeconomics which deals with demand theory and with the theory of cost and production is extremely helpful for making such decisions. Business decisions about the future require the businessmen to choose among alternatives, and to do this, it is necessary to know the costs involved. It facilitates the transition from economic theories to economics in pratice. In simple terms, managerial economics means the application of economic theory to the problem of management.
The process by which businesses make decisions is as complex as the processes which characterize consumer decision-making. Because the cost of manufacturing each shirt over a certain number increases as more shirts are made, a theoretical point is reached where making more shirts eats into profits and eventually causes a loss. As you all know that pricing system as a conceptwas developed by economics and it is widely used in managerial economics. Economics has two main branches—micro-economics and macro-economics. . Decision making in managerial economics generally involves establishment of firms 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. It teaches the art of rational decision making.