ROLE OF MANAGERIAL ECONOMICS IN

MODERN SCENARIO
Economics
It is a social science; its basic function is to study how people-
individuals, households, firms & nations maximize their gains from
limited resources & opportunities. In economic terminology this is
called maximizing or optimizing behavior, which basically means
selecting the best out of available options with the objective of
maximizing gains from the given resources.
E.g. - In households- How households allocate their limited resources
(income) between various goods & services so that they are able to
maximize their total satisfaction

Managerial Economics
The study of economic theories, logic & tools of economic analysis that
are used in the process of business decision- making is called
managerial economics.
It is also known as business economics or applied economics as
economic theories & techniques of economic analysis are applied to
analyze business problems, evaluate business options & opportunities
with a view to arriving at an appropriate/best business decision. The
term "best" in the decision-making context primarily refers to achieving
the goals in the most efficient manner, with the minimum use of
available resources—implying there be no waste of resources.

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How Managerial Economics aids in Decision Making?
Modern Business conditions are changing so fast & becoming so
competitive & complex that personal business sense, intuition &
experience alone may not prove sufficient to make appropriate
business decisions. Personal Intelligence, experience, intuition &
business acumen of the decision makers need to be supplemented with
quantitative analysis of business data in market conditions & business
environment. It is in this area of decision-making that economic
theories & tools of economic analysis contribute a great deal.
Business decisions related to products or services normally involve
thorough market research and analysis of data. The ground reports
from market research has huge amount of data which analysts should
deal with. The analysts apply the principles and theories of managerial
economics to come up with meaningful findings from the available data
that can help business heads make informed decisions. The statistical
records of the past, the current market scenario and various factors
within the market, the forecast of demand, the competition and other
factors are considered during the course to arrive at results.

Application of Managerial Economics

 Decisions such as adding a simple feature to a product, changing

the product-line to make it more efficient, going for a new
business strategy, increasing production require thorough study
to ensure that the intended goals are achieved.
 The goal may not be limited to maximizing profit. It may be to
capture certain market share, to increase sales, to lead the market

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 or to simply add more value to the product at the same cost or
optimal cost of production.
 Since the decisions can greatly affect the company, business
heads may have managerial economists in their team or may
themselves have the knowledge of principles of the subject.
Managerial economists study the business environment. They
consider a wide number of macroeconomic factors such as
population growth and economic growth to study the market.
This information will be helpful to them in recommending long-
term goals for the business.
 Businesses sell products and services to consumers. When a
business decides to produce and sell a product or service it has to
find a way to make optimum use of limited resources such as
land, labor and investment.
 In production related issues, managers will be required to collect
& analyze data on:
1. Available techniques of production
2. Cost of production related with each production technique
3. Supply position of inputs required to produce the planned
commodity
4. Price structure of inputs & cost structure of competitive
products
5. Availability of foreign exchange if inputs are to be imported
 In order to assess the sales prospects, managers will be required
to collect & analyze data on:
1. Market size, general market trends & demand prospects for
the product
2. Major existing & potential competitors & their respective
market shares

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 3. Pricing strategy of the competitors
4. Supply position of complementary goods
It should be noted that the application of managerial economics is not
limited to profit-seeking business organizations. Tools of managerial
economics can be applied equally well to decision problems of
nonprofit organizations.
E.g.: Nonprofit hospital, while a nonprofit hospital is not like a typical
firm seeking to maximize its profits, a hospital does strive to provide its
patients the best medical care possible given its limited staff (doctors,
nurses, and support staff), equipment, space, and other resources. The
hospital administrator can use the concepts and tools of managerial
economics to determine the optimal allocation of the limited resources
available to the hospital.
While managerial economics is helpful in making optimal decisions, one
should be aware that it only describes the predictable economic
consequences of a managerial decision.