Managerial economics is a series of activities aimed at making the best decisions in order to fulfill company objectives effectively and efficiently. This system represents the combination of economics and decision-making processes.
As it pertains to the overall growth of the company, this step acts as an important guideline for everyone in the company. However, what is the scope of managerial economics and its purpose?
What is Managerial Economics?
Managerial economics is a decision-making technique that is based on analysis. This is due to the fact that management economics and decision-making processes are combined. This technique can help a company to have more effective and efficient steps to reach its objectives.
Within the business context, this managerial concept is used to assist companies in managing their resources including risk analysis, cost analysis, pricing standards, government regulations to investment strategies.
In other words, management economics is a concept used to improve quality and effectiveness in making decisions.
Managerial Economics Definition by Experts
Following are some definitions of management economics according to experts:
- Hirschey (2003) defines management economics as the use of economics to make management decisions.
- Dominic Salvatore (1996) defines it as knowledge related to economic theory and decision making analysis used to see whether or not a company can reach its goals effectively and efficiently.
- According to Evan J Douglas (1995), management is a part of science that is still related to economic principles in the process of making decisions.
Purposes of Managerial Economics
Some purposes of managerial economics are explained below.
To help company to solve any issues
Management economics allows the leader to gain fresh insights from the analysis done to fix any issues.
To evaluate the company’s performance
Management economics can be used as an evaluation towards the company’s new system. It can provide the weaknesses and strengths of the new system.
To analyze the business environment
Management economics can help a company to identify its business environment. A healthy business environment will result in an effective and efficient decision-making.
To manage the budgeting
It helps the company to analyze whether or not the operational components need to be improved, so any failures in the component management, which can affect the company profit, can be prevented.
The Scope of Managerial Economics
The scope of managerial economics involves these four points.
Economic theory is a fundamental knowledge that must be taken into account while making choices. Economics is separated into two types: macro and microeconomics.
Macroeconomics focuses on certain issues such as investment, employment, and income. Microeconomics, on the other hand, deals with resources, activities, commerce, and so on.
Techniques for Decision Making in Managerial Economics
There are also strategies for making decisions. This strategy evaluates and controls funds, materials, techniques, and people in order to make effective decisions.
Science of Decision-Making
Decision science is different from decision-making methods. Mathematics and statistics are used to help decision-making here. In other words, this scope ties economics to other scientific disciplines.
Administration of Business
Organizational management, such as finance, HR, and administration, becomes more efficient when a company knows the concepts of managerial science.
Estimates of Managerial Economics Demand
Management economics can estimate the demand of the company’s products through these several approaches.
A customer survey (direct interviews or questionnaires) is a way to observe customers’ opinions and behavior. However, there are several weaknesses to this approach, such as the expensive cost, unrealistic outcomes, and incorrect findings.
This technique examines a customer’s perspective and behavior through observations, which are often conducted by salesmen. The subjective picture of the observer is the method’s weakness.
A market experiment, in which the business estimates demand and performs trials in specific market sectors, is another method of estimation. The purpose of the study is to give unique treatment to customers, which will impact the sales.
Examples of Managerial Economic Cases
Case studies of management economics in companies that have not been applied properly may be found in the Apple Company. Steve Jobs, the CEO of Apple Corporation, decreased the price of an iPhone two months after it was released on September 5, 2007. Steve Jobs reduced the price for about $200 from $599. The initial goal of this decrease is to boost product sales, raise profits, and market the iPhone device.
Various parties, however, expressed disappointment. The other chairs of Apple were upset that the price drop was not announced in advance and came as a shock. Customers, on the other hand, feel disadvantaged because they paid a greater price for the product. Steve Jobs subsequently responded by offering a $100 credit to people who had purchased the iPhone at the original pricing.
All in all, management economics is a broad term for a strategic decision-making process used to achieve objectives and profit. It’s no surprise that the economic management role is critical to a company’s performance. Visit the Clockster blog for more interesting articles.