Managerial Economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by manager. Explain.
Managerial Economics has developed due to the close interrelationship between management and economics. Usually the managerial decisions are economic in nature as the firms management is faced with the problems of choice in simple words various alternatives. The management has to look out for the best possible alternative available with them based on the economic theory and analysis of the activities involved. And as the resources are scarce in nature thereby it becomes the management’s responsibility to see that the resources are allocated appropriately.
Since the economic environment in which the firms operate is volatile and changes rapidly, this makes it important for the firms to facilitate appropriate and rational decision-making and forward planning skills in its managers. As the firms are responsible for providing goods and services to the individuals, the economic environment they function in also affects them. Therefore, managerial economic provides for the study of allocation of resources available with firm vis-a-vis its activities, keeping in mind the best possible alternative available to the firm.
The manager is therefore responsible for taking rational decisions and future planning with regards to the economic concepts and problem analysis. As it needs to ensure that scarce resources are utilized to the utmost efficiency and that best results are achieved.
The resource allocation decision may include taking decisions pertaining to production and transportation process. Whereby the manager is responsible for deciding the amount of factors of production to be allocated to a particular activity and the transportation process and cost involved in transferring these factors of production to the activity.
Apart from resource allocation the mangers are also faced with inventory issues, which involve taking decisions pertaining to holding the appropriate levels of stock of raw materials and finished goods for a period of time. For which it is important to understand the demand and supply conditions in the market, as it would have a bearing on the prices of its products.
The decision-nicking process also involves an important decision relating to fixing the prices of the products. For which various methods may be adopted keeping in mind that the price is neither too high nor too low. As, if the price is high, it will be out of reach for various individuals and if the price is too low then people may tend to have second thoughts about its quality. As the firms operate for profits thus accurate price decisions play a vital role in the growth of the organization as a whole.
And also that decision-making by the management involves making a choice from various available alternatives, which makes it all the more economic in nature. As the best decision can only be reached by making the appropriate choice keeping in mind the objectives as well as the obstacles on the path. In other words, the optimal decision-making process is achieved with a combination of traditional economic concepts along with tools and techniques of analysis in order to reach the best solution to the business problem.
The managers are also faced with taking decisions regarding future i.e. forward planning. It relates to taking various investment decisions. As appropriate decisions have to be taken while planning to install new machinery or hiring extra labor, as the cost factor and the further repercussions have to be kept in mind while planning and taking decisions thereon.
Therefore, it is a true fact that economics and management goes hand in hand with the help from various concepts, tools and methodologies. It also enhances the role and function of a manager as it helps the manager to take rational decisions and to appropriately plan for the future based on the analysis of the information available with him.