Managerial economics

Managerial economics as defined by Edwin Mansfield is "concerned with application of economic concepts and economic analysis to the problems of formulating rational managerial decision."[1] It is sometimes referred to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice.[2] It draws heavily from quantitative techniques such as regression analysis and correlation, calculus.[3] If there is a unifying theme that runs through most of managerial economics, it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of operations research, mathematical programming, game theory for strategic decisions,[4] and othercomputational methods.[5] Managerial decision areas include:

assessment of investible funds selecting business area choice of product determining optimum output determining price of product determining input-combination and technology sales promotion.

Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:

Risk analysis - various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk.[6]

Production analysis - microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm's cost function.

Pricing analysis - microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.

Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions.[7]

At universities, the subject is taught primarily to advanced undergraduates and graduate business schools. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses. In many countries it is possible to read for a degree in Business Economics which often covers managerial economics, financial economics, game theory, business forecasting and industrial economics.

[edit]Scope

of Managerial economics

Managerial economics to a certain degree is prescriptive in nature as it suggests course of action to a managerial problem. Problems can be related to various departments in a firm like production, accounts, sales, etc. 1. Demand decision 2. Production decision 3. Theory of exchange or Price Theory 4. Theory of Profit 5. Theory of Capital and Investment 6. Environmental issues

[edit]Demand

decision

Demand refers to the willingness to buy a commodity. Demand, here, defines the market size for a commodity i.e. who will buy the commodity. Analysis of the demand is important for a firm as its revenue, profits, income of the employees depend on it.[8]

[edit]Production

decision

A firm needs to answer four basic questions - what to produce, how to produce and how much to produce and for whom to produce. What to produce? A firm will produce according to its perception of the customer demand. It can either produce consumer goods like food, clothing etc. (which are for consumption purpose) or it can produce capital goods like machinery etc. (which are for investment purposes). How to produce? Goods can be produced by certain techniques. Firms have the option of producing goods by labour intensive technique and capital intensive technique. Labour intensive technique is the one in which manual labour is used to produce goods. Capital intensive technique is the one in which machinery like forklift, assembly belts etc. are used to produce goods. How much to produce? A firm has to decide its production capacity and also how much of their good a consumer needs and produce accordingly.

For whom to produce? A firm has to decide its target population (i.e. to whom they will serve products and/or services). Example, it will not be viable to produce luxurious goods for middle income or low income group if they can't afford it and produce basic necessity goods for rich class if they don't need it. Therefore, a firm needs to match its produce according to the target population it is serving.

: What is the role of managerial economists? A managerial economist helps the management by using his analytical skills and highly developed techniques in solving complex issues of successful decision-making and future advanced planning. The role of managerial economist can be summarized as follows: 1. He studies the economic patterns at macro-level and analysis its significance to the specific firm he is working in. 2. He has to consistently examine the probabilities of transforming an ever-changing economic environment into profitable business avenues. 3. He assists the business planning process of a firm. 4. He also carries cost-benefit analysis. 5. He assists the management in the decisions pertaining to internal functioning of a firm such as changes in price, investment plans, type of goods /services to be produced, inputs to be used, techniques of production to be employed, expansion/ contraction of firm, allocation of capital, location of new plants, quantity of output to be produced, replacement of plant equipment, sales forecasting, inventory forecasting, etc. 6. In addition, a managerial economist has to analyze changes in macro- economic indicators such as national income, population, business cycles, and their possible effect on the firms functioning. 7. He is also involved in advising the management on public relations, foreign exchange, and trade. He guides the firm on the likely impact of changes in monetary and fiscal policy on the firms functioning. 8. He also makes an economic analysis of the firms in competition. He has to collect economic data and examine all crucial information about the environment in which the firm operates. 9. The most significant function of a managerial economist is to conduct a detailed research on industrial market. 10. In order to perform all these roles, a managerial economist has to conduct an elaborate statistical analysis. 11. He must be vigilant and must have ability to cope up with the pressures. 12. He also provides management with economic information such as tax rates, competitors price and product, etc. They give their valuable advice to government authorities as well. 13. At times, a managerial economist has to prepare speeches for top management.

Read more: http://mbadiscussions.com/what-role-managerial-economists-4113.html#ixzz2DXk2jZTR