Managerial Economics - Meaning, Nature, Importance and Scope

May 15, 2024
Managerial Economics

Quick Summary

  • Managerial economics deals with optimum resource utilization.
  • It guides rational decision-making by integrating economic theories.
  • Managerial economics is both an art and science.

Table of Contents

Businesses need to make crucial decisions on a day-to-day basis. These decisions can be about an investment opportunity, a new product, a new competitor, or a company’s direction. For such important decisions, businesses need to rely on experts. These experts come from the background of Managerial Economics. They are the experts who provide monetary value to the different opportunities and then urge the company to proceed. 

What is Managerial Economics?

Managerial economics is a stream of management studies that emphasizes primarily on solving business problems and decision-making by applying the theories and principles of microeconomics and macroeconomics.

It is a specialized stream dealing with an organization’s internal issues using various economic tools. Economics is an indispensable part of any business. This single concept derives all the business assumptions, forecasting, and investments.

Nature of Managerial Economics

You need to know about the various characteristics of managerial economics to get more knowledge about it. Let’s read about the nature of managerial economics.

Nature of Managerial Economics

1. Art and Science

Management theory requires a lot of critical and logical thinking and analytical skills to make decisions or solve problems. Many economists also find it a source of research, saying it includes applying different economic concepts, techniques, and methods to solve business problems.

2. Microeconomics

Managers typically deal with the problems relevant to a single entity rather than the economy as a whole. It is, therefore, considered an integral part of microeconomics.

3. Uses of Macro Economics

A corporation works in an external world, i.e., serving the consumer, an important part of the economy. For this purpose, managers must evaluate the various macroeconomic factors, such as market dynamics, economic changes, government policies, etc., and their effect on the company.

4. Multidisciplinary

Managerial economics uses many tools and principles that belong to different disciplines, such as accounting, finance, statistics, mathematics, production, operational research, human resources, marketing, etc.

5. Prescriptive or Normative Discipline

By introducing corrective steps managerial economics aims at achieving the objective and solves specific issues or problems.

6. Management Oriented

This serves as an instrument in managers’ hands to deal effectively with business-related problems and uncertainties. This also allows for setting priorities, formulating policies, and making successful decisions.

7. Pragmatic

The solution to day-to-day business challenges is realistic and rational.

Different individuals take different views of the principles of managerial economics. Others may concentrate more on customer service and prioritize efficient production.

Recommended Read: Nature and Scope of Macroeconomics

The Concepts of Managerial Economics

The branch of managerial economics comprises various concepts:

Concepts of Managerial Economics

1. Liberal Managerialism

A market is a democratic space where people make their choices and decisions. The organization and its managers must function according to the customers’ demand and market trends otherwise; this can lead to business failures.

2. Normative Managerialism

Managerial economics’ normative view states that administrative decisions are based on experiences and practices of real life. They systematically study demand, forecasting, cost control, product design and promotion, recruitment, etc.

3. Radical Managership

Managers have to have a creative approach to business concerns, i.e., make decisions to improve the current situation or circumstance. We concentrate more on the need and satisfaction of the consumer rather than just the maximization of income.

4. Managerial Economic Values

The excellent macroeconomist N. Gregory Mankiw has given ten principles to explain the significance of managerial economics in business operations.

Principles of Managerial Economics

Managerial economics follows several principles. These principles help in assessing its application in diverse areas. Both conceptual and metrical aspects are dealt with in this field. Problems often arise due to a disequilibrium in the economic theory and managerial theory of business organizations. Various analytical tools enable the firms to identify the nature and measure of problems.

The principles of managerial economics are as follows:

1. Principles of How People Decide

Let us go through the following principles to understand how decision-making takes place in real life:

  • Humans face trade-offs: To make decisions, people have to determine whether to choose from the different options available or not.
  • Price of Opportunity: Each decision involves a cost of opportunity, which is the cost of those options we let go of while choosing the most appropriate one
  • Feel fair about the margin: People typically think about the margin or income they receive before investing in a specific project with their money or resources.
  • People respond to stimulus: Decisions to be made highly depend on incentives related to a product, service, or activity. Negative incentives discourage people, while positive incentives encourage them.

2. Principles of How People Interact

Communication and market impact business transactions. Let us take a look at the following related principles to justify the statement:

  • Trade could better anyone: The theory states that trade is a way to share. Everyone gets an opportunity to offer the good products or services they make and buy the products or services that other people are good at manufacturing.
  • Markets usually represent a good organized economic activity: Markets serve as a means of customer and product interaction. Consumers express their desires and expectations (demands) while producers determine whether or not to manufacture necessary products or services.
  • Governments may often boost the performance of the market: During the time of adverse market conditions, or for the benefit of society, the government intervenes in business operations. An example of such a circumstance is when the government agrees on minimum wages for the benefit of workers.

3. Principles on How Economy Works

The following theory outlines the economic role of an organization’s functioning:

• The standard of living of a country depends on its capacity to generate goods and services: The companies must be productive enough to produce products and services to develop a country’s economy. Ultimately it meets the customer’s demand and enhances GDP to increase the standard of living in the country.
• Prices increase when the government’s printing lots of money: Suppose surplus money is available to citizens, and their capacity to spend increases. Eventually, it would lead to a rise in demand. Inflation takes place when the manufacturers are unable to satisfy market demand.
• Society faces a short-term correlation between unemployment and inflation: The government introduces numerous economic policies to reduce unemployment. In the short term, such policies target to improve the economy and what kind of practice contributes to inflation.

Scope of Managerial Economics

The definition of managerial economics is commonly used to deal with various business problems within organizations. Both microeconomics and macroeconomics have an equal effect on the organization and its work. The following points illustrate its significance:

Micro-economics Applied to Operational Matters

The various theories or principles of microeconomics used to solve the internal problems of the organization arising in the course of business operations are as follows:

  1. Demand Theory: Demand Theory emphasizes the consumer’s behavior toward a product or service. This considers the customers’ desires, expectations, preferences, and conditions to enhance the manufacturing process.
  2. Decisions on Production and Production Theory: This theory is primarily concerned with the volume of production, process, capital and labour, costs involved, etc. It aims to optimize the production analysis to meet customer demand.
  3. Market Structure Pricing Theory and Analysis: It focuses on assessing a product’s price considering the competition, market dynamics, production costs, optimizing sales volume, etc.
  4. Exam and management of profit: the companies are operating for assets; hence, they aim to maximize profit. It also depends on demand from the market, input costs, level of competition, etc.
  5. Decisions on capital and investment theory: Capital is the most important business element. This philosophy takes priority over the proper distribution of the resources of the company and investments in productive programs or initiatives to boost operational performance.

Macro-Economics Applied to Business Environment

Any organization is greatly affected by the environment in which it operates. The business climate can be defined as:

  1. Economic environment: A country’s economic conditions, GDP, government policies, etc., have an indirect effect on the company and its operations.
  2. Social environment: The society in which the organization works, like employment conditions, trade unions, consumer cooperatives, etc also affect it.
  3. Political environment: A country’s political system, whether authoritarian or democratic, political stability, and attitude towards the private sector, impact the growth and development of the organization.

Career Options in Managerial Economics

Management economics is an important method for assessing the company’s priorities and objectives, the organization’s current role, and what the management can do to fill the void between the two.
Deriving from the definition of managerial economics, we have listed down the best options you can pursue in this field.

1. Banking Sector

Banking sector job profiles are financial analysts, consultants, financial advisers, investment bankers, environmental policymakers, development officers, or part of Research and Development.

2. Business Economist

They deal with various sectors and companies, and their main role is to serve as an intermediary between the corporate and the outside world.

3. Higher Studies

There are several programs and courses to procure a degree in managerial economics. You can acquire in-depth knowledge in this field by doing higher studies in this subject. Many renowned institutions offer such programs along with good placements. Having high-level knowledge can fetch your impeccable opportunities.

4. Credit and Risk Manager

They analyze the company’s financial details and calculate the associated default risk to help the lender and the buyer.

5. Financial Controller / Economist

A Financial Controller or Economist is concerned with analyzing the day-to-day financial operations of an organization. He/she supervises the finance and accounting department and prepares financial reports.

6. Market Analyst

A market analyst analyses the market so that their employers can make a better decision concerning product launching or rendering services.

7. Operations Manager

From output to the review of statistics to educating new staff, an operations manager manages all day-to-day activities in the company and needs to ensure that the organization runs optimally.

8. Teaching

If you want to be a lecturer or become a senior economics teacher in private schools, apply for the NET / CTET exam in the field of education. After completing an M.A in Economics with a mark of at least 55 percent an applicant can either seek a Ph.D. at any college or appear for UGC-NET. The exam is administered by the NTA.

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9. Equity Analyst

An equity analyst extracts equity information for investment purposes and explores stock market insights to identify where to invest or whether to proceed or sell on the market.

10. Cost Accountant

A Cost Accountant plans, studies, and records the costing concepts of an organization. He/she analyzes the fixed and variable costs to obtain the company’s total cost. Cost Accountant is one of the exciting career options under the scope of managerial economics.

11. Economic Services of India

You can join the Economic Services of India. For joining this service, you have to appear for the Indian Economic Service Exam. You should have completed M.Sc or MA. in economics with at least 55 percent marks. The age range is from 21-30 years. UPSC administers the test.

12. Public Sector Banking Services

The Reserve Bank of India also recruits banking-sector economists through various recruitment exams. The age limit is 21-28 years.

13. Private and Foreign Banks

An Economics degree holder can try for both private and foreign banks. The Banking job categories are branch managers, clerks, economic analysts, planning and development officers, etc.

14. Agricultural Economist

Agricultural Economics is an advanced branch of Economics. An agricultural economist optimizes the production, distribution, and consumption of food and fiber products.

15. Agencies Worldwide

Experienced and professional economists in well-known international organizations such as the World Bank and the International Labor Organisation (ILO) can get great employment opportunities.

16. Work as an Advisor

Graduates in Economics can work as economic consultants independently. In the case of various scientific research and consulting in the private sector, companies can ensure optimal job opportunities. The position includes Economic Researcher, Business Economist, Investment Analyst, etc.

17. Entrepreneurship

Economists possessing a profound understanding of the market can create their own start-ups. They can evaluate the industry dynamics and competitive business sectors, and thereon design their business processes. Ultimately, they can achieve exponential growth by starting their own business. Besides, it will also aid the unemployment problems in the country by generating work opportunities.

18. Mass Media and Journalism

You can also join the news media by becoming an economic or editorial journalist. You can complete your graduation or post-graduation in mass communication and head towards joining mass media. Even if your educational discipline is different you can take up this option. By having the required knowledge and skills relating to this field, you can grow in your career exceptionally.

19. Actuary

An Actuary plays a vital role in an organization. With the help of various financial theories and statistics, they analyze the economic cost of financial risks. They assist business organizations to minimize costs by designing effective policies.

Suggested Read: Career Options in Economics

Significance of Managerial Economics

Managerial economics holds great significance in various management processes. The main importance of managerial economics in an organization are Demand analysis & forecasting, Profit management, and Capital management. It assists an organization in its decision-making process by integrating the tools and techniques of economic theories with multiple business activities.

Managerial economics deals with the optimum utilization of scarce resources. It ensures the proper functioning of the firm by using the resources effectively. It guides the management in rational decision-making, implementing both economic theories and econometrics. With the help of factual data solutions, several economic problems are curated.

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Managerial Economics at a Glance

  • Managerial Economics amalgamates economic theories with managerial practices. It is a tool used by organizations to formulate various managerial decisions. It aids the organization in numerous decision-making processes.
  • Business organizations curate strategies for management planning by using the various tools and techniques of economics.
  • Managerial economics can be defined as the branch of economics which combines economic theories with business and management practices. It helps business organizations in taking various managerial decisions.
  • The characteristics of managerial economics are Art as well as Science, Microeconomics, Macro Economic Usage, Multidisciplinary, Prescriptive Discipline, Management Oriented, and Pragmatic.
  • The concepts of managerial economics include Liberal Managerialism, Normative Managerialism, Radical Managership, and Managerial Economic Values.
  • Principles of how to decide, how to interact, and how an economy works.
  • The scope of managerial economics includes business analysts, jobs in the banking sector, cost accountants, economic analysts, financial controllers, risk managers, professors, government services, and many more.
  • Profit management, capital management, and demand analysis & forecasting are the main importance of managerial economics.

Frequently Asked Questions (FAQs)

What are managerial economics concepts?

The following are some of the core concepts in managerial economics: Liberal Managerialism, Normative managerialism, Radical Managership.

What are the types of managerial economics?

The types of managerial economics are:

1. Liberal Managerialism: People make decisions and choices in a market, which is a democratic setting. Organization action and the managers must function according to the customers’ demand and market trends; otherwise, this can lead to business failures.

2. Normative managerialism: According to the normative approach of managerial economics, administrative choices are founded on actual experiences and practices. They employ a methodical approach to research demand, forecasting, cost management, product creation and promotion, hiring, etc.

3. Radical Managership: Managers have to have a creative approach to business concerns, i.e., they have to make decisions to improve the current situation or circumstance. We concentrate more on the need and satisfaction of the consumer rather than just the maximization of income.

What are managerial economics and its importance?

Every day, decisions affecting the future of the company are made. These choices may relate to an investment opportunity, a new product, a new rival, or the course of a business. Businesses must turn to specialists in managerial economics for such critical decisions.

Is managerial economics a science?

Managerial economics is both a cumulation of art and science. To make decisions or find solutions, one must have a strong sense of logic, critical thinking, and analytical abilities. Many economists use it as a study resource since it entails using many economic theories, strategies, and approaches to address business issues.

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