Managerial Economics refers to the application of economic theory and the tools of decision science to examine how an organisation can achieve its aims or objectives most efficiently.
Managerial decision-making problems arise in an organisation when they seek to achieve some objective subject to constraints. For example, a telecommunication company may try to provide its service to as many customers as possible at the lowest possible cost. A hotel may seek to rent its room to the maximum tourists with limitations on its physical resources and budget. A university may aim to provide education to as many students as possible subject to the physical and financial constraints it faces.
Managerial Economics is a link between two disciplines, which are management and economics. The management discipline focuses on a number of principles that aid the decision-making process of organizations. On the other hand, economics is related to the optimum allocation of limited resources for attaining the set objectives of organizations.
The development of managerial economics is attributed to the close relationship that exists between management and economics (Brickley, Smith, & Zimmerman, 2015). For example, management requires a great deal of economic analysis in the carrying out of evaluations aimed at establishing the demand, cost, competition, and profit associated with certain goods and services (Brickley et al., 2015). On the other hand, management plays a significant role in guaranteeing that all challenges that may arise, particularly in the handling of employees are adequately addressed (Brickley et al., 2015). Thus, the combination of these two aspects of business results in managerial economics, which comprises of managerial theories and economic theories aimed at guaranteeing the development of a sustainable business environment (Brickley et al., 2015). The concept behind managerial economics is best elaborated by Spencer and Siegelman, who defined it as “the integration of economic theory with business practice for the purpose of facilitating decision making and planning by management” (Brickley et al., 2015).
Managerial economics meets its objectives by integrating diverse economic aspects such as microeconomics and macroeconomics. The study of microeconomics is aimed at understanding what influences specific business patterns at the regional level and is designed around studying the actions of firms and individual consumers (Brickley et al., 2015). Macroeconomics is centred on analysing the structure, performance, and the behaviour of the economy as a whole (Brickley et al., 2015). Managerial economics incorporates microeconomic principles to implement specific theories and techniques aimed at improving management decisions. Compared to macroeconomics, microeconomics has limited applications in managerial economics due to its limited scope (Brickley et al., 2015). This is because macroeconomics analyses aggregate indicators such as the unemployment rate and the GDP to provide a vast understanding of the factors that are influencing the general economy (Brickley et al., 2015).
The incorporation of microeconomics in managerial economics is influenced by the fact that they both advocate the need to utilise quantitative methods in evaluating economic data. By utilising quantitative analysing methods, it becomes possible to warrant that the human and financial resources required to manage a particular business effectively are allocated efficiently (Froeb, McCann, & Ward, 2015). On the other hand, the use of macroeconomics in managerial economics is based on its ability to provide a broader scope on the economy's overall condition. The information acquired using macroeconomics is what governments utilise in the establishment of policies aimed at enhancing an economy (Froeb et al., 2015).
Even though managerial economics is comprised of numerous functions, it's primary function is effective decision-making. This is attained by taking courses of actions that warrant that every challenge is addressed using the most suitable option derived from two or more alternatives (Froeb et al., 2015). The need to take the best course of action is influenced by the fact that in spite of the numerous roles an organisation plays, its responsibility to its shareholders is that the available resources are utilised in the best way post to warrant profitability (Froeb et al., 2015). Microeconomics and macroeconomics have played a significant role in the study of managerial economics. However, economists are far from fully understanding managerial economics with studies of managerial economics continuing today (Froeb et al., 2015). In addition to micro and macroeconomics, capital management, profit management, and demand analysis and forecasting are also considered to be covered under the scope of managerial economics (Froeb et al., 2015). Based on the evaluation provided, it is inevitable to note the significant role managerial economics has in warranting managerial challenges are handled in the manner possible using diverse economic concepts and decision science techniques.
Application of economic analysis to business decision-making & organisation: basic economic tools, business objectives, demand analysis; pricing policies & competitive strategies, cost & production analysis, market structure, decision-making under uncertainty, capital budgeting & investment analysis.
After completing this course, you should be able to:
- Apply decision and game theoretic models to management decisions.
- Understand and incorporate knowledge from empirical economic studies.
- Research and synthesise information to create new knowledge.
- Critically evaluate economic advice.
- Write professional company reports.
- Work collaboratively with others in large unorganised groups towards a common objective.
- Brickley, J., Smith, C., & Zimmerman, J. (2015). Managerial economics and organizational architecture. New York: McGraw-Hill Education.
- Froeb, L. M., McCann, B. T., & Ward, M. R. (2015). Managerial economics. Boston, Massachusetts: Cengage learning.
- https://course-profiles.uq.edu.au/student_section_loader/summary/98697 University of Queensland: ECON3430 - Managerial Economics