Managerial Economics
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Introduction:
Managerial economics as defined by Edwin Mansfield is “concerned with application of the economic concepts and economic analysis to the problems of formulating rational managerial decision”. It deals with body of economics and principles known as “Theory of firm”. It is micro in nature, it deals with the economic behaviour of the individual units such as consumers, resource owners, business(firms) etc. It is sometimes referred as the business economics.
Characteristics:
It is micro in nature most of the times.
It is Pragmatic in nature that is many assumptions are made to bring a harmony between the traditional economic theories to actual business behaviour and these assumptions can be unrealistic.
Largely depends on statistics and algebra.
Applications:
In Business: Prime function of management is decision making. Decision making is the process of selecting one from two or three alternatives. Constraints are land, Capital (etc).Once decision is made raw material procurement,pricing etc. is made. If the knowledge of future was perfect plans could be formulated without error and uncertainity. In this uncertainity economic theories can be pressed during the decision making. Estimating economic relations such as Elasticity of income ,demand, price for forecasting. Predicting economic terms like Profit, Demand, Production, Pricing etc. Understanding significant external factors constituting the business environment.
To Government: Managerial Economics helps to Government to decide what should be the Tax base on a particular product. These decisions are made by determining the price elasticity of the product and its substitutes etc.
To Individual: If an individual has a knowledge about managerial economics he/she can use the same to make a purchasing decision among alternatives.
Drawbacks:
The assumptions made in Managerial economics are completely unrealistic.
Assigning values like Utility etc. that are used in these theories are quite difficult.
Every value should be converted in terms of rupees to make any analysis which is difficult job.
Many complications are ignored.