Economics for Global Managers (Managerial Economics)

As rightly stated by Prof. Robbins that Economic Problem is concerned with scare resources, which have alternative uses for satisfying human wants, which are unlimited. It is a problem of choice, a choice between ends and also a choice of using scare resources between alternative uses with the objective of maximizing satisfaction.

Thus, Managerial Economics may be viewed as economics applied to problem solving at the level of the firm. The problem is of allocating resources among competing ends. If an organization wants to maximize its profit, it must maximize its output and minimize the total cost involved in manufacturing the output. Managerial Economic Theory comprises of Micro Economics and Macro Economics. Micro-Economics deals with the theory of firms and individuals (for example – price / demand theory, market structure); whereas; Macro Economics deals with the study of the industry and economy (balance of payment, business cycle, economic policy, national income are macro-economic study).

Wikipedia explains the concept as, “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 analysis 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, for example through the use of operations research and programming”.

It also states that almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:

a) Risk analysis - various uncertainty models, decision rules, and risk quantification techniques are used to assess the risk of a decision.

b) Production analysis - microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm's cost function.

c) Pricing analysis - microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.

d) Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions.

The role of Managerial economist involves understanding the objective of the firm (their vision, mission, values, standards, attitude, and norms); analysing the external factors (competition, social, cultural, economic, global, demographic, natural, technological, political and legal environment); market structure (whether it is monopolistic market/ oligopolistic market / monopolistic competition / perfect competition). As mentioned earlier that Managerial Economics involves proper allocation and selecting of scare resources; which requires effective decision-making.

The process of decision-making is explained by W-Bruce Allen in 5 basic steps which are stated below: -

1. Establish Objectives.
2. Define the Problem.
3. Identify possible solutions.
4. Select the best possible solution.
5. Implement the decision.

Thomas Sowell once quoted, “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”