MODULE 1: MANAGERIAL ECONOMICS (ECO301B)

MANAGERIAL ECONOMICS

What is Managerial Economics?

- Managerial economics is defined as the branch of economics which deals with the
application of various concepts, theories, methodologies of economics to solve
practical problems in business management. It is also reckoned as the amalgamation
of economic theories and business practices to ease the process of decision making.
Managerial economics is also said to cover the gap between the problems of logic
and problems of policy.

- Managerial economics is used to find a rational solution to problems faced by firms.

These problems include issues around demand, cost, production, marketing, and it is
used also for future planning. The best thing about managerial economics is that it
has a logical solution to almost every problem that may arise during business
management and that too by sticking to the microeconomic policies of the firm.

- When we talk of managerial economics as a subject, it is a branch of management

studies that emphasizes solving business problems using theories of micro and
macroeconomics. Spencer and Siegelman have defined the subject as “the
integration of economic theory with business practice to facilitate decision making
and planning by management.” The study of managerial economics helps the
students to enhance their analytical skills, developing a mindset that enables them to
find rational solutions.

Nature of Managerial Economics:

We know about managerial economics like what it is and how different people define it.
Managerial Economics is an essential scholastic field. It can be termed as a science in
the sense that it fulfills the criteria of being a science.
• We all know science as a systematic body of knowledge and it is based on
methodological observations. Similarly, Managerial Economics is also a science of
making decisions and finding alternatives, keeping the scarce of resources in mind.
• In science, we arrive at any conclusion after continuous experimentation. Similarly, in
managerial economics policies are formed after constant testing and trailing.
• In science, principles are universally acceptable and in managerial economics,
policies are universally applicable at least partially if not fully.
Characteristics of Managerial Economics in brief:

1. Art and Science

Managerial Economics requires a lot of creativity and logical thinking to come up with a
solution. A managerial economist should possess the art of utilizing his capabilities,
knowledge, and skills to achieve the organizational objective. Managerial Economics is
also considered as a stream of science as it involves the application of different
economic principles, techniques, and methods, to solve business problems.

2. Microeconomics
In managerial economics, problems of a particular organization are looked upon rather
than focusing on the whole economy. Therefore, it is termed as a part of
microeconomics.

Julius Estes Paris G. Manabat, RCrim.

Instructor I
 MODULE 1: MANAGERIAL ECONOMICS (ECO301B)

3. Uses Macroeconomics
Any organization operates in a market that is a part of the whole economy, so external
environments affect the decisions within the organization. Managerial Economics uses
the concepts of macroeconomics to solve problems. Managers analyze the
macroeconomic factors like market conditions, economic reforms, government policies
to understand their impact on the organization.

4. Multi-disciplinary
Managerial Economics uses different tools and principles from different disciplines like
accounting, finance, statistics, mathematics, production, operation research, human
resource, marketing, etc. This helps in coming up with a perfect solution.

5. Management oriented and pragmatic

Managerial economics is a tool in the hands of managers that aids them in finding
appropriate solutions to business-related problems and uncertainties. As mentioned
above, managerial economics also helps in goal establishment, policy formation, and
effective decision making. It is a practical approach to find solutions.

Types of Managerial Economics:

- Everyone has their perceiving ability, so the same goes with managerial economics.
All managers perceive the concept of managerial economics differently. For some,
customers’ satisfaction can be the priority while some may focus on efficient
production. This leads us to different types of managerial economics. So, let us explore
the different approaches to managerial economics.

1. Liberal Managerialism

Market is a free and democratic place in terms of decision making. Customers get a lot
many options to choose from. So, companies must modify their policies according to
consumers’ demands and market trends. If not done so, it may result in business failures.
This is what we call liberal managerialism.

2. Normative Managerialism

The normative view of managerial economics means that the decisions taken by the
administration would be normal, based on real-life experiences and practices. The
decisions reflect a practical approach regarding product design, forecasting, marketing,
supply and demand analysis, recruitments, and everything else that is concerned with
the growth of a business.

3. Radical Managerialism

Radical managerialism means to come up with revolutionary solutions. Sometimes, when

the conventional approach to a problem doesn’t work, radical managerialism may have
the solution. However, it requires the manager to possess some extraordinary skills and
thinking to look beyond. In radical managerialism, consumer needs and satisfaction are
prioritized over profit maximization.

Julius Estes Paris G. Manabat, RCrim.

Instructor I
 MODULE 1: MANAGERIAL ECONOMICS (ECO301B)

Principles of How People Make Decisions

Based on the real-life decision-making processes, four principles are recalled in

Managerial Economics.

1. People Face Tradeoffs

There are enormous options in the market. So, people have to make choices among the
various options available.

2. Opportunity Cost

Every decision involves an opportunity cost that is the cost of those options which we let
go of while selecting the most appropriate one.

3. Rational People Think at the Margin

When we make choices from the various options available and before investing the
capital or resources, we look at the profit margin we would make in the investment.

4. People Respond to Incentives

It is human nature to look for something extra while purchasing something. Decision-
making is affected by the incentives attached to a particular product or service. Positive
incentive motivates people to opt for the product while negative incentive discourages.

Principles of How People Interact

Communication with the audience plays a vital role in good performance. Over the
years, organizations have realized the need to communicate well with their audience.
Based on this, three principles are given in Managerial Economics.

1. Trade can Make Everyone Better Off

This principle states that trade is a medium to exchange services and products. Everyone
gets a fair chance to offer products and services which they are good at making and
also to purchase those products and services.

2. Markets Are Usually A Good Way to Organize Economic Activity

Market is a place where buyers and sellers interact with each other. Consumers put in
their demands and requirements and the producers decide on the production and
supply of those products and services.

3. Government can better the market outcomes

Government intervenes in business operations whenever there are unfavorable market

conditions like the current pandemic situation or also for the welfare of society. One
example of the latter is deciding the minimum wage for laborers.

Julius Estes Paris G. Manabat, RCrim.

Instructor I
 MODULE 1: MANAGERIAL ECONOMICS (ECO301B)

Principle of How Economy Works as a Whole

Three principles are given to explain the role of the economy in the functioning of an
organization.

1. A Country’s Standard of Living Depends on the Goods and Services produced

The role of organizations in the economic growth of a country is one of the major, so, the
organizations must be capable enough to produce goods and services for the
population. This ultimately raises the standard of living and also contributes to GDP
growth.

2. Price Rises When Government Prints Too Much Money

If there is surplus money available with people, their spending capacity increases,
ultimately leading to a rise in demand. When the producers are unable to meet the
consumer’s demand, inflation takes place.

3. Society Faces a Short-Run Tradeoff between Inflation and Unemployment

Government bring-in policies to tackle the problem of unemployment and boost the
economy in the short run as well. This further leads to inflation.

Scope of Managerial Economics

Managerial Economics has a narrower scope. It solves a firm’s problem using

microeconomics. In the situation of scarce resources, managerial economics ensures
that managers make effective and efficient decisions that are equally beneficial to
customers, suppliers, and the organization. The fact of scarcity of resources gives rise to
three fundamental questions:

1. What to produce?

2. How to produce?

3. For whom to produce?

Reference:

Pathak, R. (2020). What is Managerial Economics? Definition, Types, Nature, Principles,

and Scope

Julius Estes Paris G. Manabat, RCrim.

Instructor I