Types and Applications of Managerial Economics

Decision-making is a very crucial aspect of any business, and the economics related to decision-making is known as managerial economics. Managerial economics contains a lot of theories along with the principles of microeconomics and macroeconomics that are used to solve business-related problems.

 

In this article, we are going to learn about the nature, types, and applications of managerial economics. 

 

Understanding Managerial Economics:

 

Managerial economics is the area of economics that focuses on using different economic concepts, theories, and approaches to address real-world issues in corporate management.

 

With time, economics has evolved into a crucial component of any business. All market predictions, investments, and expectations are supported by this one definition. Managerial economics helps businesses in multiple ways; it is goal-oriented and prescriptive by nature. 

 

“In managerial economics, the components of economic theory and analysis that are best suitable for managerial decision-making are rigorously treated.”, say professor Pappas and Brigham.

 

When we discuss managerial economics as a discipline, we mean a division of management studies that stresses using micro- and macroeconomic ideas to solve business challenges.

 

According to Spencer and Siegelman, the topic is "the integration of economic theory with business practice to aid managerial decision-making and planning”.

 

The study of management economics aids students in developing analytical abilities and a way of thinking that makes reasonable solutions possible.

 

The components of Managerial Economics:

 

We are familiar with managerial economics, including what it is and many definitions. An important academic area is managerial economics. Here are the components that determine the nature of managerial economics.

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Nature of Managerial Economics

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1. Art and Science:

 

To make judgments or find solutions, management theory calls for a great deal of critical, logical thinking, and analytical abilities. But it also requires a lot of creativity. According to many economists, it involves using various economic principles, tactics, and methodologies to address business challenges.

 

Managerial economics is also considered a field of science. 

 

2. Macroeconomics and microeconomics:

 

A company operates in the outside world, i.e., it serves the customer, who is a significant contributor to the economy. Managers must assess the numerous macroeconomic aspects and their impact on the business for this reason, including market dynamics, economic shifts, governmental policies, etc.

 

Similarly, microeconomics is also important for any organization. Managers often focus on issues unique to one entity rather than the economy as a whole while practicing management economics. As a result, it is viewed as an essential component of microeconomics.

 

3. Multi-disciplinary:

 

Managerial Economics draws on a variety of techniques and ideas from fields such as accounting, finance, statistics, mathematics, production, operation research, human resource management, and marketing, among others. This aids in developing the ideal solution.

 

4. Management Oriented:

 

Managers may use this as a tool to cope efficiently with issues and uncertainties in their businesses. Additionally, this enables the creation of policies, the definition of priorities, and effective decision-making.

 

5. Prescriptive nature:

 

Corrective action is taken to accomplish the goal and address particular problems or challenges.

 

Principles of Managerial Economics:

 

How people make decisions:

 

In Managerial Economics, four concepts are recalled that are based on actual decision-making processes.

 

1. People must make trade-offs.

 

The market offers a wide range of possibilities. People must thus choose from the different possibilities that are offered.

 

2. Cost of Opportunity.

 

Every choice has an opportunity cost, which is the price we pay for forgoing some possibilities in favor of the best option.

 

3. The Minds of the Rational Think at the Edge.

 

Before deciding amongst the many options available and allocating cash or resources, we consider the investment's profit margin.

 

4. Individuals React to Rewards.

 

It is in our inclination to search for extras while making purchases. The incentives associated with a specific good or service have an impact on decision-making. Positive incentives encourage consumers to choose a certain product, whereas negative incentives dissuade them.

 

 

How people interact:

 

Market conditions and communication impact corporate operations. Let's look at the following relevant concepts to support the claim:

 

1. Everyone can benefit from trade.

 

According to this notion, trade serves as a vehicle for interpersonal interaction. Everyone has the opportunity to market the goods or services they are skilled at producing. also, invest in those goods or services that others are skilled at producing.

 

2. Typically, markets are a good way to structure economic activity.

 

Markets serve primarily as a conduit for communication between customers and producers. In contrast to producers, who choose whether to create the goods or services demanded or not, consumers communicate their wants and requirements (demands).

 

3. Sometimes, governments may enhance market outcomes.

 

When there are unfavorable market circumstances or for the benefit of society, the government will intervene in corporate activities. When the government decides on minimum wages for labor welfare, this is one instance.

 

How the Economy works as a whole:

 

The function of economics in an organization is explained by the following principle:

 

1. A nation's capacity for producing goods and services determines its standard of living.

 

Organizations must be productive enough to create products and services for a nation's economy to expand. In the end, it satisfies consumer demand while boosting GDP to enhance living standards across the nation.

 

2. When the Government Prints Too Much Money, Prices Increase.

 

People may spend more when there is extra money available to them, which eventually boosts demand. Inflation occurs when manufacturers are unable to keep up with consumer demand.

 

3. Short-Run Tradeoff Between Inflation and Unemployment Faces Society

 

The government implements several economic strategies to lower unemployment. Short-term economic growth is the goal of these programs. Inflation results from these actions.

 

Also Read | What is Cryptoeconomics?

 

Types of Managerial Economics:

 

Here are the types of managerial economics:

 

1. Liberal Managerialism:

 

Less regulation exists in this sort of managerial economics in terms of decision-making. Liberal management is characterized by a free and democratic market. Additionally, a greater variety of solutions are more common, resulting in increased competition. Any business' ability to adapt its plans to the demands of its consumers is essential.

 

The market is a free and democratic space for making decisions. There are several alternatives available to customers. As a result, companies must modify their strategy to take into account changing client demands and market conditions. If this isn't done, there's a chance the business may fail.

 

Watch to learn more: The View from MARs: American Populism and the Liberal World Order

 

2. Normative Managerialism:

 

The administration's choices will be natural and based on actual experiences and practices, claims the normative perspective of managerial economics. The options offer a practical approach to recruiting, supply and demand analysis, marketing, product forecasting, and many other aspects of a company's growth.

 

3. Radical Managerialism:

 

Managers must approach company issues with a revolutionary mindset, which means they must decide how to alter the current circumstance. They place greater emphasis on meeting the needs of the consumer and ensuring their pleasure than just maximizing profits.

 

The appeal of radical managerialism is that it puts the demands and satisfaction of the customer first. Such a strategy aims to protect one of the most significant stakeholders in any company. The whole existence of the company is due to consumers.

 

They are essential to trade. Resource allocation choices must be made by leaders in both the public and private sectors. Managerial economics' major focus is on this, and while making decisions under risk or uncertainty, it applies the ideas and procedures of economic theory.

 

Watch now: Types of Demand I Managerial Economics

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Applications of Managerial Economics in real-life:

 

Organizations frequently employ managerial economics to address a range of business issues. The organization and its activities are equally impacted by macroeconomics and microeconomics.

 

Macroeconomics in the Context of Business Environment:

 

The environment in which an organization operates has a significant impact on that company. One definition of the corporate environment is:

 

• Economic environment: The GDP, government regulations, and other factors that affect a nation's economy all indirectly affect a company's operations.

 

• Social environment: The organization is impacted by the society in which it operates, including factors like the labor market, labor unions, consumer cooperatives, etc.

 

• Political environment: Political system, political stability, and a nation's stance toward the private sector are all factors that influence an organization's capacity to expand and thrive.

 

Theories of microeconomics:

 

The following are some of the several microeconomic theories or concepts that have been employed to address organizational internal issues that have arisen throughout corporate operations:

 

• Demand Theory: It highlights how consumers behave about a good or service. This improves the production process by taking the needs, wants, and preferences of the customers into account.

 

• Production Theory and Decisions: This theory focuses on the factors that affect production, such as the amount produced, the method used, the expenses associated with labor and capital, etc. It seeks to maximize output to satisfy consumer demand.

 

• Market Structure Pricing theory: It focuses on determining a product's pricing while taking the competition, market dynamics, manufacturing costs, maximizing sales volume, etc. into account.

 

• Profit analysis and management: Since businesses are run on assets, they seek to maximize profit. Input costs, input demand, amount of competition, etc. are other factors.

 

• Capital and investment theory decisions: The most crucial component of a firm is capital. This concept takes precedence over the efficient use of the company's resources and expenditures on worthwhile projects or programs to improve operational performance.

 

An essential tool for determining the organization's aims and objectives, its existing function, and what the management may do to bridge the gap between them is management economics. The following jobs require knowledge of managerial economics.

 

1. Business economists: They work with a variety of industries and businesses, and their major responsibility is to act as a liaison between corporations and the outside world.

2. Asset managers: They work with a variety of industries and companies, and their major responsibility is to serve as a liaison between the corporate world and the outside world.

3. Risk Manager: To assist the lender and the buyer, we assess the company's financial information and determine the corresponding default risk.

4. Market analyst: A industry analyst studies the market to help their employers launch products or provide services more effectively.

5. Teaching: Candidates who have earned an M.A. in Economics with at least a 55% grade point average may choose to pursue a Ph.D. at any college or sit for the UGC's current National Eligibility Exam, which is conducted by the NTA.

6. Equity Analyst: A stock market analyst investigates stock market data to determine where to invest, whether to go forward or sell on the market and extracts equity information for investing reasons.

7. Indian economic services: Before taking the Indian Economic Service Exam, you must successfully finish your M.Sc. and MA in economics with at least a 55 percent grade point average. The age range is between 21 and 30. Exams are given by UPSC.

8. Operate as an advisor: Economics graduates are eligible to work on their own as independent economic advisors. Companies can guarantee the best employment prospects in the case of diverse scientific research and consulting in the private sector.

9. Entrepreneurship: Market knowledge is a crucial skill for economists. They will have no trouble comprehending market competition and industrial dynamics. They will thereafter soon be able to experience exponential growth as a result of starting their own company. As a result, there will be a ton of job possibilities created. Additionally, it will aid in lowering the nation's unemployment issue.

10. Public sector Banking Services: Through a variety of recruiting tests, the Reserve Bank of India also hires economists for the banking industry. The age range is 21 to 28.

 

 

Conclusion:

 

In management economics, achieving the best results is a top focus, hence the phenomenon is goal-oriented. In management economics, a lot of prescriptive action is performed. This branch of economics translates abstract theory into operational management. Looking at things from a practical standpoint becomes a call for joy after joining a world where ideas are constantly thrust in your face. We often comprehend ideas better.

 

The topic of managerial economics is quite broad, and this essay has only just begun to touch on it. Using the principles of microeconomics, managerial economics enables managers to make decisions that are successful and efficient.