Economics is the study of this allocation of resources, the choices that are made by economic agents, while Managerial economics is the study of how scarce resources are directed most efficiently to achieve managerial goals. It is a valuable tool for analyzing business situations to take better decisions. (“Managerial Economics”, n.d.).
According to Baye, Managerial economics, is “the study of how to direct scarce resources in the way that most efficiently achieves a managerial goal. It is a very broad discipline in that it describes methods useful for directing everything from the resources of a household to maximize household welfare to the resources of a firm to maximize profits” (2010)
Managerial economics is grounded in economic theory with business knowledge and applications, the understanding and use of quantitative methods, problem-solving strategies, critical thinking. Going by McNair and Meriam, “Managerial economics is the use of economic modes of thought to analyse business situations” (1941).
Managerial economics involves concepts and principles like 'Theory of the firm' or 'Economics of the firm', also seeks to apply Profit Theory.
It is pragmatic, micro-economic and normative in nature, the limited nature of resources like land, capital, labour, assets, machinery has made managerial economics a growing necessity and field in today’s market.
Managerial economics involves many things, one of which is the strategic decision making over analyzed corporate financial information reflecting the organization’s health. Essentially using the results of processed accounting data and book keeping to make decisions, this requires the manager to have knowledge of components of accounting like income statement, statement of cashflows, statement of financial position, statement of owner’s equity, bad debt, GAAP, treatment of credit, treatment of loss, general ledger, tax etcetera. Accounting is in two forms Managerial Accounting (operations, day to day, planning etcetera) and Financial Accounting (overall organizational profitability), accounting for all intent and purposes is focused on the past hence the monicker “fossil accounting”, so managerial economics includes this to cover the “past aspect” of its reach.
Managerial economics also involves another thing, answering valid business questions like; in which assets or projects should the organization invest to increase shareholder and stakeholder wealth this is a capital budgeting decision. Comparison of expected and actual cost, to find eventual variations and finds ways to reduce cost further in the future. Understanding of budgeting and forecasting is quite important for these managers.
Managerial economics also involves another thing; finding innovative ways for the organization to fund these investments mentioned above (that is assets and projects) which is a financing decision. Using funding like equity, bonds, or loans. Weighing the cost/benefits analysis R.O.I. etcetera. It is worthy to note that in finance, a knowledge of economics is required.
In short managerial economics “incorporates useful ideas from other disciplines such a psychology, sociology, etc., if they are found relevant for decision making. In fact managerial economics takes the aid of other academic disciplines having a bearing upon the business decisions of a manager in view of the carious explicit and implicit constraints subject to which resource allocation is to be optimized.” (Akrani, 2009)
Reference
Akrani, G. (2009, July 29th). Introduction To Managerial Economics. Retrieved from http://kalyan-city.blogspot.com/2009/07/introduction-to-managerial-economics.html
Baye, (2010). Managerial Economics And Business Strategy. McGrawhill-Hill Companies, Inc. New York, N.Y. 7th ed. Pp 36
“Managerial Economics”, (n.d.) Retrieved fromhttp://www.sxccal.edu/TwinningProgramme/downloads/MBA-ManagerialEconomics-1stYear.pdf
McNair, M. & Meriam, R.S. (1941) Problems in Business Economics, McGraw- Hill Book Co., Inc. 1st ed.
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