What is managerial economics?
Managerial economics refers to the way the economic tools and concepts, theories and methodologies are applied to provide solutions to business in solving its practical problems. To put it simply, managerial economics means the amalgamation of the theories of economy and management. A manager with a good knowledge of managerial economics has a strong decision-making skill. Managerial economics is also called as business economics sometimes. It is that branch of economics, which makes use of microeconomic analysis to the methods of a decision in business and other units of management. Managerial economics takes a cue from the quantitative techniques that include calculus, correlation, and regression analysis. The only unifying aspect that goes through managerial economics is the effort to enhance decision-making in business especially if the business has some scarcity or constraints.
This effort is put through using mathematical programming, game theory, operations research and computational methods of other types. Managerial economics as a subject has materialized into a fully-fledged subject only in recent years. The rising unpredictability and variability in business have compelled the business managers to worry about uncovering the more practical ways of regulating an abusive environmental change. These problems caught the attention of the academicians across the globe who then came up with the idea of managerial economics. The subject became popular during the 1950s in the United States after Joel Dean published his immensely popular book titled Managerial Economics in the year 1951. Different economists have provided different definitions of managerial economics. As Brigham and Pappar define, managerial economics involves the function of the theories and methodology of economic into the practice of business administration.
What are the concepts of managerial economics?
Managerial economics has several concepts that make it a unique subject and an essential subject as well for business managers.
The concept of increment –
Although incremental reasoning is easy to explain, the concept is difficult to apply. In the views of T.J. Coyne, incremental concept of managerial economics includes approximating the influence of the alternatives to decisions on the total revenue and cost yielding from differences in price procedures, products, and investments. Incremental analysis has two fundamental concepts at its heart including incremental cost and revenue. While the incremental cost means the change in the cost due to a decision taken, incremental revenue refers to the change seen in the total revenue owing to the decision taken.
Time perspective concept –
In the field of economics, people often distinguish between the long-run and the short-run. Managerial economics states that this distinguishing factor is based on the rate at which the decisions are made or could be made and the variations in the production factors rather than on a fixed period. Short-run is referred to as the time during which, the managers are able to bring variations to certain factors barring others. In contrast to this, the long-run is the period during which all the factors could be varied. To provide an instance, with the help of increased raw materials and labor, the increased output could be achieved in the short-run.
Discounting principle concept –
The discounting principle states that managers discount the future profit because of the uncertainty associated with it. however, this concern is wrong because even when there is no uncertainty, it is essential to discount the future profit in order to turn them into equal as the present-day profit. A strong example of the discounting principle could be given as a person is offered 1000 dollars as a gift in the present day or a year after. It is obvious that the person would choose the first option although there is the absence of uncertainty that she or he will not receive the gift after a year. The reason for the individual choosing the first option is that in the present era where the interest rate is anything but zero, there is a possibility to invest 1000 dollars at the interest rate of the market and collect interest from the principle.
How is managerial economics useful to an engineer?
Apart from benefitting the business managers, managerial economics has advanced to benefit the engineers as well. it is evident that each engineer has to evolve and at some point in life, the chances of evolving cease. Economics is a beneficial subject for every decision-maker and engineers too have to make crucial decisions in their careers. Business economics or managerial economics should be easy for an engineer because it involves many subjects that are taught in engineering as well. In fact, concepts such as linear programming, operations research and statistics and probability are taught more elaborately in engineering. However, it is important to note that engineers at the testing, developing and designing levels do not have anything to do with managerial economics. For other engineers, having a good knowledge of managerial economics would greatly help in valuing the subject. Engineering yielding too much cost in building something is not good engineering. In order to be able to become a good engineer who has good knowledge about the ways to manage cost and prices while providing engineering solutions, one must have a stronghold in managerial economics.
What is differential cost in managerial economics?
In managerial economics, the differential cost is the incremental cost, which finds out the total relevant cost amongst two alternatives. In general, these alternatives include two distinct levels of activity, make or buy amongst others. Differential cost is the additional cost that seems to incur when one alternative is opted over the other. In simpler terms, managers compare two options to find out the total costs of the two and to know the difference between the total costs of the two options. The change that comes up after finding the difference between the total costs of the two options in the revenues is known as incremental or differential revenue. Differential cost analysis takes place in order to make crucial decisions related to making or buying, making changes in the activity level, adding any new product, making changes in the product mix exporting orders and so on. In the differential cost analysis, the users take into consideration only the relevant costs.
Costs, which have been acquired in the past already are considered not relevant. This is also known as a fixed cost. Future costs are considered relevant because these costs are variable. Joel Dean explains that managerial economists always look for future costs because important management decisions are made using forecasts of the future costs. Forecasting of cost is significant especially to control expenditure. It is further important to learn about the income statements in the future, decisions related to capital investment, pricing, dropping and developing old and new products respectively. It is also important to note that the differential cost analysis is taken into consideration only to make management decisions and bears no relevance to bookkeeping or accounting.
Role And Importance Of Managerial Economics (Step-by-Step )
Role of managerial economics –
The first important role of managerial economics is to enhance the decision-making efficiency in business in order to increase profit.
The second role of managerial economics is to study the economic patter at the macro-level to analyze the significance of the subject in an organization and the functioning of an organization.
Third, managerial economics examines the way the changing environment brings in profit for the organization in the perfect way.
Fourth, managerial economics helps in making good decisions when it comes to choosing an alternative that could reduce cost.
Fifth, managerial economics plays a crucial role of to help in making investment decisions for the individual investors as well as for the corporations.
Sixth, it helps the business companies in deciding the strategies of pricing as well as deciding the correct pricing levels to be given to their services and products.
Sixth, managerial economics helps in the decision-making related to internal working of a company like price changes, plans of investment, and types of services to be given, inputs utilized and so on.
Seventh, managerial economics plays the role of analyzing the changes that take place in indicators showing macroeconomics including population, business cycles, national income and their probable influence on the company’s working.
Importance of managerial economics –
Managerial economics is vital in analyzing the managerial policies. Organizations have certain policies especially operational policies that tend to produce no return and are of no use to the organization as well. These policies also play no role in altering the market conditions as well. Managerial economics helps in making crucial evaluations and that too in crucial time in order to solve upcoming obstacles before those harm the organization.
Managerial economics is important also because it helps the business recognize its strengths and weaknesses. it helps the business identify where it excels as well as where it lags behind. With the help of managerial economics, managers could ensure certain activities, which could influence the development of business.
What is the advantage and disadvantage of managerial economics?
Advantages of managerial economics –
Managerial economics helps in evaluating the past policies to decide whether these policies are suitable for the business or do this need to be improved. It happens sometimes that the policies introduced and executed by the business are outdated and hold no relevance in the market that keep on changing. Hence, policy evaluation becomes vital to find better solution to the problem.
As an advantage, managerial economics assists the managers to identify the economic strengths and weaknesses, which could impact the company.
One of the other advantages if managerial economics is that is helps in establishing a policy of decision, which aligns with the operational standards of the company. Every company comprises distinct operational standards along with different regulations and policies made to suit the type of company.
Managerial economics is advantageous because it helps to identify the costs to be as competent as it could be.
Disadvantages of managerial economics –
Managerial economics concentrates on analysis of the management based on the cost accounting and financial data. Hence, the dependability of this data bases on the information accuracy of financial accounting.
Analysis of the data depends on the past information and thus, if the company plans to bring in new schemes and the situations change, relying on past information would be disadvantageous.
Managerial economics encourages individual manager’s personal preferences that could affect the final decision largely.
Managerial economics has the disadvantage of being very expensive as a process for any business. A company would commonly need to employ more than just one manager to make sure the functioning is smooth.
One of the most visible disadvantages of managerial economics is its newness. Therefore, many experts believe that it might be ambiguous in some situations.
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