Scope & Nature Of Managerial Economics

Nature of business Economics:

1. Micro in nature: It is micro in nature. This is because economics is the study mainly at the level of the business firm. The appropriate title for micro economics is price theory. One the use of price theory is the application of its method of analysis to business problems. Its knowledge enables businessmen to take improved decisions in demand analysis,cost analysis and in fixation of prices. Linear programming, a new analytical tool in price theory, is applied to business problems.

2. Pragmatic in approach: It is pragmatic in its approach: It does not involve itself in theoretical controversies. It is the application of economic analysis to decision making. It puts in the background abstract assumption of economic theory.

3. Normative science: It is normative study. It prescribes standards or norms for policy making. It is prescriptive rather than descriptive in nature. In economic theory, we try to explain economic behaviour . In business Economics, we try to prescribe polices to the business manage

4. A scientific art: Business economics may also be called an art because it helps management in the efficient utilisation of scarce resources. It considers production costs, demand, price,profit,risk etc. Which help the management in selecting the best alternative.

5. Study of macro environment: Business firms operate under macro economic environment. The macro economic environment relating to national income,business cycles,economic policies of the government in relation to business are important to managers. Business firms operate on the basis of economic forecasts on national income,price level,inflation rates etc.


Scope of Managerial Economics:

1.Demand Analysis and Forecasting: A business firm is an economic organisation which is engaged in transforming productive resources into goods that are to be sold in the market. A major part of managerial decision making depends on accurate estimates of demand. A forecast of future sales serves as a guide to management for preparing production schedules and employing resources. It will help management to maintain or strengthen its market position and profit base. Demand analysis also identifies a number of other factors influencing the demand for a product. Demand analysis and forecasting occupies a strategic place in Managerial Economics.

2.Cost and production analysis: A firm’s profitability depends much on its cost of production. A wise manager would prepare cost estimates of a range of output, identify the factors causing are cause variations in cost estimates and choose the cost-minimising output level, taking also into consideration the degree of  uncertainty in production and cost calculations. Production processes are under the charge of engineers but the business manager is supposed to carry out the production function analysis in order to avoid wastages of materials and time. Sound pricing practices depend much on cost control. The main topics discussed under cost and production analysis are: Cost concepts, cost-output relationships, Economics and Diseconomies of scale and cost control.

3.Pricing decisions, policies and practices: Pricing is a very important area of Managerial Economics. In fact, price is the genesis of the revenue of a firm ad as such the success of a business firm largely depends on the correctness of the price decisions taken by it. The important aspects dealt with this area are: Price determination in various market forms, pricing methods, differential pricing, product-line pricing and price forecasting.

4.Profit management: Business firms are generally organized for earning profit and in the long period, it is profit which provides the chief measure of success of a firm. Economics tells us that profits are the reward for uncertainty bearing and risk taking. A successful business manager is one who can form more or less correct estimates of costs and revenues likely to accrue to the firm at different levels of output. The more successful a manager is in reducing uncertainty, the higher are the profits earned by him. In fact, profit-planning and profit measurement constitute the most challenging area of Managerial Economics.

 5.Capital management: The problems relating to firm’s capital investments are perhaps the most complex and troublesome. Capital management implies planning and control of capital expenditure because it involves a large sum and moreover the problems in disposing the capital assets off are so complex that they require considerable time and labour. The main topics dealt with under capital management are cost of capital, rate of return and selection of projects.