Demystifying Managerial Economics – its scope and applications.
Imagine you are fresh out of college and planning to pursue higher studies. You look at the various options available to you and choose the one best suited to your aptitude and budget and of course the scope the course offers in the future. You finish your higher studies and now enter the job market. You apply in various companies. (Hopefully!) you get a number of job offers.What do you do? You take a look at the company profile, go in for interviews, consider the job responsibilities, work timings, remuneration offered, other perks and decide to opt for a particular job (by sacrificing other offers). What are you doing here? You are forgoing certain alternatives in favour of (at the cost of) one.
Similarly a firm also has to decide what to produce (among a variety of alternatives it has at its disposal), how to produce (among the number of options it has got). The firm chooses one product (or a product line) by sacrificing other alternatives and also opts for a particular kind of technology which suits its factor usage and budget.
I as a faculty at Athena School of Management often pose this question to my students and get interesting answers.
What do you think, the consumer (you) and the producer are doing? We are simply relying on the idea of Opportunity Cost! Economics is logic of choice. It teaches the art of rational decision making.
Managerial Economics is essentially an applied economics in the field of management. It is the economics of business or managerial decisions. It pertains to all about the economic aspects of managerial decision making and forward planning.
According to Prof. Watson, “Price theory in the service of business executives is known as managerial economics”. As such, managerial economics is of significant use in modern business, as decision making is the core of business and success in decision making in the course of alternative actions, in view of the constraint set by given resources, which are relatively scarce.
Managerial Economics in particular is the study of allocation of resources available to a firm or other unit of management among the activities of that unit. It is fundamentally concerned with the art of economizing i.e., making rational choices to yield maximum return out of minimum resources and efforts, by making the best selection among alternative courses of action.
Area of study:
Broadly speaking, managerial economics deals with the following topics:
1. Demand analysis and forecasting
2. Cost and production analysis
3. Pricing decisions, policies and practices
4. Profit management
5. Capital management
6. Linear programming and theory of games.
We all know how important (and stressful!) the job of a manager is. Decisions made by managers are crucial to the success or failure of a business. Roles played by business managers are becoming increasingly more challenging as complexity in the business world grows. Business decisions are increasingly dependent on constraints imposed from outside the economy in which a particular business is based—both in terms of production of goods as well as the markets for the goods produced. The impact of rapid technological change on innovation in products and processes, as well as in marketing and sales techniques, figures prominently among the factors contributing to the increasing complexity of the business environment. Moreover, because of increased globalization of the marketplace, there is more volatility in both input and product prices. The continuous changes in the economic and business environment make it ever more difficult to accurately evaluate the outcome of a business decision. In such a changing environment, sound economic analysis becomes all the more important as a basis of decision making. Managerial economics is a discipline that is designed to provide a solid foundation of economic understanding in order for business managers to make well-informed and well-analyzed managerial decisions.
A typical managerial decision making may involve one or more of the following issues:
• Making decisions regarding further business investment and the mode of financing the investment
• Making employment and training decisions
• Deciding the price of a product and the quantity of the commodity to be produced
• Deciding whether to manufacture a product or to buy from another manufacturer
• Deciding on the level of inventory a firm will maintain of a product or raw material
• Deciding on the advertising media and the intensity of the advertising campaign
• Choosing the production technique to be employed in the production of a given product
When I meet new students at Athena, I often ask them why study Managerial Economics? Their answers range from Economics is interesting to ‘ma’am, we have no option but study the subject.’
But they often overlook the fact that Economics plays a key role in all aspects of life and is an important subject worth knowing more about. The knowledge of managerial Economics equip students with the idea of how the economic way of thinking to individual decisions and business decisions are applied, measuring the responsiveness of consumers' demand to changes in the price of a good or service, the price of other goods and services, and income, understanding economies of scale, diseconomies of scale, economies of scope, and cost complementarities, and how each affects the cost of production, understand why there is a role for the government to play in market economies and so on.
Thus, from this we know that a base in the subject of managerial economics gives its learners not just a head-start into the corporate world but the much needed edge over others. So to all those ‘would be’ entrepreneurs, managers, CEOs…give the subject a try (you must!) and am sure it will be embracing you with open arms!
- Prof. Anwesha Ghosh (Athena School of Management - Powai)