Managerial Economics

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Summary

Managerial economics (also called business economics), is a branch of economics that applies microeconomic analysis to specific business decisions. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression and correlation, Lagrangian calculus, linear If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity.

Almost any business decision can be analysed with managerial economics techniques, but it is most commonly applied to:

• Risk analysis - various uncertainty models, decision rules, and risk quantification techniques are used to assess the riskiness of a decision.
• Production analysis - microeconomic techniques are used to analyse production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm's cost function.
• Pricing analysis - microeconomic techniques are used to analyse various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.
• Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions.

Definition of Managerial Economics:

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.

Management decision problem arise in any organisations when they seek to achieve some objectives subject to some constraints. For e.g. A Telecommunication Company may seek 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.

Relationship to Economic Theory and Decision Science.

The organisation can solve these types of problems by the application of economic theory and the tools of decision science. Economic theory refers to Microeconomics and Macroeconomics. Whereas decision science utilise the tools of Mathematical Economics and Econometrics to construct and estimate decision models aimed at determining the optimal behaviour of the firm. In particular, Mathematical Economics is used to formalise the economic models proposed by Economic theory and Econometrics applies statistical tools to estimate the models and for forecasting.

Topics within Managerial Economics

Managerial Economics deals with:

• The Theory of the Firm
• Theories of Profit
• Optimisation Techniques:

  *Substitution Method
  *Lagrangian Multiplier Method
  *Linear Programming

• Demand Forecasting:

  *Qualitative forecasts
  *Time Series Analysis
  *Smoothing Techniques
  *Barometric Methods
  *Econometric Methods

• Production Theory and Estimation
• Cost Theory and Estimation
• Market Structure:

  *Perfect Competition
  *Monopoly
  *Monopolistic Competition
  *Oligopoly

• Pricing Practices:

  *Pricing of Multiple products
  *Price Discrimination
  *Transfer Pricing
  *Other Pricing Practices

• Risk Analysis
• Asymmetric information

At universities, the subject is taught primarily to advanced undergrads. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses.