THE FUNDAMENTALS OF MANAGERIAL ECONOMICS

Managerial Economics is both conceptual and metrical. Before the substantive

decision problems which fall within the purview of managerial economics are
discussed, it is useful to identify and understand some of the basic concepts
underlying the subject.
Managerial Economics can be defined as amalgamation of economic theory with
business practices so as to ease decision-making and future planning by
management. Managerial Economics assists the managers of a firm in a rational
solution of obstacles faced in the firm’s activities. It makes use of economic theory
and concepts. It helps in formulating logical managerial decisions. The key of
Managerial Economics is the micro-economic theory of the firm. It lessens the gap
between economics in theory and economics in practice. Managerial Economics is
a science dealing with effective use of scarce resources. It guides the managers in
taking decisions relating to the firm’s customers, competitors, suppliers as well as
relating to the internal functioning of a firm. It makes use of statistical and
analytical tools to assess economic theories in solving practical business problems.

Study of Managerial Economics helps in enhancement of analytical skills, assists in

rational configuration as well as solution of problems. While microeconomics is the
study of decisions made regarding the allocation of resources and prices of goods
and services, macroeconomics is the field of economics that studies the behavior
of the economy as a whole (i.e. entire industries and economies). Managerial
Economics applies micro-economic tools to make business decisions. It deals with
a firm.
The use of Managerial Economics is not limited to profit-making firms and
organizations. But it can also be used to help in decision-making process of non-
profit organizations (hospitals, educational institutions, etc). It enables optimum
utilization of scarce resources in such organizations as well as helps in achieving
the goals in most efficient manner. Managerial Economics is of great help in price
analysis, production analysis, capital budgeting, risk analysis and determination of
demand.
Managerial economics uses both Economic theory as well as Econometrics for
rational managerial decision making. Econometrics is defined as use of statistical
tools for assessing economic theories by empirically measuring relationship
between economic variables. It uses factual data for solution of economic
problems. Managerial Economics is associated with the economic theory which
constitutes “Theory of Firm”. Theory of firm states that the primary aim of the firm
is to maximize wealth. Decision making in managerial economics generally involves
establishment of firm’s 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.

The following figure tells the primary ways in which Managerial Economics
correlates to managerial decision-making.