Managerial Economics is basically a blend of Economics and Management. Two branches of economics i.e. micro economics and macro economics are the major contributors to managerial economics.
Micro Economics is the study of the behaviour of individual consumers and firms whereas microeconomics is the study of economy as a whole.
Managerial Economics and Micro Economics
All the firms operating in the market have to take under consideration the constituent of the economic environment for its proper functioning. This economic environment is nothing but the Micro economics elements.
Micro Economics is a broader concept as compare to Managerial Economics. Micro Economics forms the foundation of managerial economics. Almost all the concepts of Managerial Economics are the perceptions of Micro Economics concepts.
Managerial economics can be perceived as an applied Micro Economics. Demand Analysis and Forecasting, Theory of Price, Theory of Revenue and Cost, Theory of Supply and Production are major bare bones of Micro Economics that underpins the Managerial Economics. Managerial Economics applies the theories of Micro Economics to resolve the issues of the organization and for decision making.
All Managers want to carry out their function of decision making with maximum efficiency. Their business planning can be effectively planned and performed with comprehensive knowledge and understanding of micro economic concept and its applications. Optimum decision making to achieve the objective of the organisation i.e. for profit maximizing or for cost minimizing, is possible with proper compliance of micro economic know how, regardless of the technological constraints and given market conditions. Micro Economic Analysis is important as it is applied to day to day dilemma and concerns.
The reliance of Managerial Economics on Micro Economics is made clearer in the points below:
If a manager wants to increase the price of the product due to increase in cost of production, he will analyze the price elasticity of demand for that product so that price rise is not followed by substantial fall in the demand of the product. It is the application of demand analysis to the real world situation.
For fixing the price of the products managers applies the pricing theories, cost and revenue theories of micro economics.
Decisions regarding production and supply of the product in the market, knowledge of availability of fixed and variable factors of production, state of technology to be used and availability of raw-material are essential. This can be determined with the knowledge of theory of production.
Determination of price and output is possible with the acquaintance of market structures and approaches pertinent for determination of price and output in the given market setup.
Managerial economics utilizes statistical methods such as game theory, linear programming etc for application of Economic Theory in Decision making.
One of the responsibilities of Manager is to workout budgets for different departments of the organization which is learned from Capital Budgeting and Capital Rationing.
Cost and benefit analysis helps the manager in decision making.
Study of welfare economics helps Manager in taking care of social responsibilities of the organization.
Microeconomics is the study that deals with partial equilibrium analysis which is useful for the manager in deciding equilibrium for his organization.
Managerial Economics also uses tools of Mathematical Economics and econometrics such as regression analysis, correlation analysis etc.
Theory of firm, an important element of microeconomics, is one of the most significant element of Managerial Economics.