What is managerial economics scope and importance to a corporate firm?

Answer 1

Managerial economics is a science that deals with the application of various

economics theories, principles, concepts and techniques to business management in order

to solve business and management problems It deals with the practical application of

economic theory and methodology to decision-making problems faced by private, public

and non profit making organizations..

In the words of Spencer and Seigelman "Managerial Economics is the integration of

economic theory with business practice for the purpose of facilitating decision making

and forward planning by the management."

Scope of Managerial Economics

The term "scope" indicates the area of study, boundaries, subject matter and width of a

subject. Business economics is comparatively a new and upcoming subject.

The following topics are covered in this subject :-

1) Objectives of a firm :- Profit maximization has been considered as the main

objective of a business unit in olden days, but in the context of present day

business environment ,many new objectives have come to the fore. Today, there

are multiple objectives and they are multi dimensional in nature. Some of them

are competitive while others are supplementary in nature. There are economic,

social, organizational, human and national goals. There are managerial and

behavioral theories.

2) Demand Analysis and Forecasting :-A firm is basically a producing unit. It

produce different kinds of goods and services. It has to meet the requirement of

consumers in the market. The basic problems of what to produce where to

produce, for whom to produce, how to produce and how to distribute them in the

market are to be answered by a firm.

3) Production and Cost Analysis :-Production implies transformation of inputs into

outputs. It may be either in physical or monetary terms. Maximization of outputs

is one of the basic goals of a firm. Production analysis deals with production

function, laws of return, returns to scale, economies of scale etc. Maximization of

output with minimum cost is the basic slogan of any firm.

4) Pricing Decisions, Policies and Practices :- Pricing Decision is related to fixing

the prices of goods and services. This depends on the pricing policy and practices

adopted by a firm. Price setting is one of the most important policies of a firm.

The amount of revenue, the level of income and above all the volume of profit

earned by a firm directly depend on its pricing decisions.

5) Profit Management :-A firm is basically a commercial or business unit.

Consequently, the success or failure of it is measured in terms of the amount of

profit it is able to earn in a competitive market. Under profit management, one has

to study various theories of profit, emergence of profit, functions of profit and its

measurement, etc.

6) Capital Management :-It is another crucial area of business. Success of any

business depends on adequate capital investment and its proper management.

Under capital management, one has to study capital requirement, methods of

capital mobilization, capital budgeting, optimal allocation of capital, selection of

highly profitable project cost, cost of capital, return on capital, planning and

control of capital expenditure etc.

7) Linear Programming and Theory of Games :-The term linear means that the

relationships handled are the same as those represented but straight lines and

programming implies systematic planning or decision-making. It offers actual

numerical solution to the problems of making optimum choices. It involves either

maximization of profits or minimization of costs.

8) Market Structure and Conditions :-The knowledge of market structure and

conditions existing in various kinds of markets are of great importance in any

business. The number of sellers and buyers, the nature, extent and degree of

competition etc. determines the nature of policies to be adopted by a firm in the

market.

9) Strategic Planning :-It provides a framework on which long term decisions can

be mad which have an impact on the behavior of the firm. The firm sets certain

long term goals and objectives and selects the strategy to achieve the same. It is

now a new addition to the scope of business economics with the emergence of

MNC's.

10) Others Areas :-Macro economic management of the country relating to economic

system, Impact of Liberalization, globalization, etc.