What Is Managerial Economics? - Importance, Nature & Types

Managerial Economics is a concept that involves the application of economic theories and managerial skills in navigating the business to achieve the target more efficiently. It plays a crucial part in every organization to make optimal decisions for real-world business. 

The superiors or leaders must understand the concept, nature, and types of managerial economics to navigate the complex economic landscape in which their organizations operate. It becomes even more important as it is related to the effective management and sustainable growth of an organization. In this blog, you will learn about the meaning of managerial economics, its nature, and its type thoroughly.

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Nature of Managerial Economics 

Managers have to face several challenges in an organization or in business, for example, allocating the resources wisely, making decisions, determining pricing strategies, forecasting demand, market trends and technology analysis, accessing the risks, and so on. 

Here managerial economics plays a significant role, where the economic theories are combined with management knowledge to deal with real-world business problems. The nature of managerial economics can be understood by the following key concepts: 

• Integration of Economic Theory and Management Principles:Managerial economics is concerned with the integration of economic theory and management principles to achieve the objectives of the organization, such as demand and supply, market and cost analysis, and pricing strategies, with practical business scenarios. Every leader or manager must implement this theory in the decision-making process to achieve the target.  
• Provides You With A Decision-Making Framework:It helps to provide you with a decision-making framework. With this help, managers can easily evaluate the situations and can find solutions or alternatives to deal with the obstacles in the way of achieving the objectives. This involves assessing the impact of different economic factors on business decisions, including risk and uncertainty. 
• Helps In The Microeconomics Analysis: Managerial economics primarily focuses on the analysis of microeconomic factors, such as studying the firm, industry, or market. It will help managers learn about different economic factors that influence the business decisions.  
• Resources Optimization: Resource optimization is one of the key elements for an organization’s success. Through managerial economics, managers can easily allocate resources accordingly and ensure the proper utilization of each resource at its optimum level. This method also helps to boost the organization’s overall performance by reducing costs. 

Types of Managerial Economics

Managers have to implement different types of managerial economics strategies that help them smooth the decision-making process within the organization. These are a few listed managerial economics that are used by the managers within an organization to run the organization and uplift the business growth.  

• Descriptive Managerial Economics: Descriptive managerial economics is a type of managerial economics that means to systematically analyze past data and trends. It is the most important type as it provides a strong base for the managers to make necessary decisions, such as analyzing past performance, market trend classifications, and setting benchmarks for their projects. For instance, a team leader will analyze the team’s overall performance and, after the analysis, set some common goals or strategies to achieve next month’s target.  
• Normative Managerial Economics: Normative managerial economics is another type of managerial economics that focuses on the “what should be done” theory. Providing you with a framework for strategic planning for long-term goals achieved and ethical considerations for an organization or business. It plays an important role in the organizational policy-making process and ensures that decisions are made according to ethical standards. For example, it helps the manager to take initiative and work according to the social responsibility guidelines.  
• Prescriptive Managerial Economics: The prescriptive managerial economics is concerned with the execution of the plans in an effective and efficient manner. This type of managerial economics provides the managers with guidance in creating strategies, allocating resources, and setting up the monitoring process. It also ensures that the decisions made by the managers are actionable and can lead to the success of the tasks and target achievement. 
• Positive Managerial Economics: Positive managerial economics is totally different from the normative and prescriptive economics. It focuses on understanding and explaining the impact of economic variables on managerial decisions and results. It primarily focuses on the aspects of “what is happening” and “what will happen in the future” from the perspective of marketing. This managerial perspective helps the manager understand the external changes and shifts in the market on the basis of statistical data. Along with that, it helps in understanding changes in economic variables such as market performance and risks and hence offers them more informative and data-driven choices.  Hence, it can be said that each type of managerial economics has its own approach to studying the market, data analysis, and reviewing the market performance, and helping the managers or the leaders in decision making policies and achieving the targeted goals and objectives of the organization. 

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Importance of Managerial Economics 

The managerial economics has a crucial role in the successful building of any organization, as it is something that is an integration of economic theory and business and management knowledge that helps the managers or leaders in the data analytics process, decision making and policy making process so that the desired outcomes can be accomplished. Here are the factors that make it important from various perspectives, emphasizing its role in decision-making, resource allocation, market analysis, cost management, and strategic planning. 

• Helps In Business Planning:Managerial economics helps in the business planning process systematically. It helps the manager to plan the business strategies based on data and facts rather than depending on guesswork or any intuition.  It contributes to the organization in formulating plans and better decisions, analyzing demand, and forecasting future business activities. It helps to provide you with a framework to face business problems and challenges.  
• Helps In Cost Control: Cost control is another factor that plays a major role in managerial economics. So! First, let’s understand the term cost. The cost is the amount that is being used to make the product or provide the service.  It is very crucial to keep an eye on the cost control for running a business, as the cost and profit are inversely proportional to each other. The lower the cost, the higher the profit, and vice versa. Here, managerial economics helps in the proper analysis of cost, thus helping in the production act and profit maximization of the organization. It also ensures that all the resources are utilized at their optimum level while controlling the general cost.  
• Helps In Price Determination: Price determination is the another factor that plays an essential role in business. So, earlier, you studied that cost is the amount that is used in the making of products and services. Similarly, price is the total amount of a product or service after adding the profit to the cost of the product.  
• Price = Cost + Profit :And for any business, it is important to determine the price of the product or service that they are offering in order to evaluate the final profit in the end. Here, managerial economics works in an efficient way by providing relevant data to the managers so that they can determine the price of the product and organization effectively.   
• Helps In Business Prediction: Business is based on the risk taking factor. Hence, managerial economics plays an important role in this area as well. Managerial economics applies random tools, techniques, and theories to predict the future uncertainties related to the business. Hence, it helps in the timely deduction of the uncertainty or sudden risks and provides you with all the possible solutions or steps to avoiding them. Overall, it helps the business by providing them predictions about the future and also an active planning and risk management.  
• Helps In Profit Planning & Control 

The managerial economics also helps the business to plan out the profit or control the extra production cost.

It helps in providing you with valuable information about the company, like :

• ]What are the methods that can be used by an organization in controlling the cost structure? 
• How to determine the potential revenue of the business? 
• What are the different types of market dynamics that are affecting the overall performance of the market? 

It helps the business to set the desirable and realistic objectives. Providing them with the relevant revenue-generating opportunities for business growth. Also help the organization to offer the relevant measures and solutions of cost control and profit upliftment.  

In short, the managerial economics allows for planning and managing the profit of the business. Also, it makes an accurate estimate of the costs and revenue, which helps in earning specified profits.  

• Helps In Capital Management :As per the economics, “capital"—is the physical or financial resources used to produce value in the economy through goods and services.” That means capital plays a major role in the execution of the business or organization.  The managerial economics helps in taking all decisions concerning the firm's capital. It properly analyzes investment revenue before investing any amount into them to make sure that the profitability of an investment. It is a major important point of managerial economics in organizations.In short, capital acts as a building block for any organization or for any business. Hence, it becomes even more important to manage the capital while analyzing all the internal and external factors of the business. 

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Scope of Managerial Economics 

The scope of managerial economics refers to the areas where it can be implemented. As you know, managerial economics is the combination of economics and management. How one can apply the economic theories to business management to take important decisions to boost the overall performance of an organization while earning profit.  

• Theory of Demand: Demand refers to the total requirement or order within the organization by the consumers. And with the help of the managerial economics, an organization can keep an idea about the upcoming demand for a particular product or service. It provides the business with relevant data or information through which it can prepare themselves for the sudden market changes. 
• Theory of Production :Demand and supply are related to each other. The production of any good or service depends on the demand for it. For example, with the help of managerial economics, a company can know about the overall production or supply of the product or service needed. It helps the organization in the production management of the products or services they offer so that it can meet the demand for the product or service and results in targeted goal achievement as well as desired profit earning. Along with that, managerial economics helps in the overall cost analysis as it provides the organization with different alternatives to make the production better and to earn maximum profit. Hence, managerial economics allows the organization to keep an eye on the optimum production of the products or services with the help of accurate data and insights.  

Theory of Exchange or Price Theory:The theory of exchange or price theory is about the calculation of the products based on various market conditions. Here, managerial economics helps you to determine the firm’s price policies as well as helps to set the price of the products, like: 

• In which product does the organization earn the maximum profit?  
• In which areas that particular product will sell out or not? 
• At which time does that particular product have the maximum or minimum selling?  

By determining these above-mentioned conditions, an organization can estimate their overall profit over the product they are selling. 

Theory of Profit

Profit plays a significant role in the survival and growth of the business. And there are numerous factors that ensure the profitability of the business, such as:

• Demand for the Product
• Price Determination of the Product 
• Competitive Analysis 
• Market Trends Analysis 

And here managerial economics helps the organization to determine such a price that it can provide the firm with the maximum profit by offering relevant data and valuable insights.  

Theory of Capital & Investment

The profitability of an organization also depends on the capital and the investment factors. Most companies may face several issues related to the capital and investment, such as:

• In which project company should invest the money or not? 
• How much does one firm invest in a particular product or service? 
• At which time that investment should be made? 
• By what time will the organization get the returns? 

These are all a few queries that can be bombarded in a manager’s mind. And here, managerial economics helps the organization in providing the relevant solutions to deal with these queries. 

• Environmental Issues :Managerial economics is basically part of microeconomics. However, sometimes it talks about macroeconomics too. For example, it is concerned with the political and environmental conditions in which an organization operates.

It also covers many other conditions, such as 

• How is the economic system of the country? 
• How do the business cycles run in the country? 
• What are the taxation policies of the country? 

So! These are the scopes of the managerial economics, where it can be applied and can contribute to the organization’s success. 

Conclusion 

Thus, managerial economics plays an important role in the success of an organization. It is not just a study that integrates the economic theory with management knowledge. It also provides you with a framework for strategic business planning, decison making, cost control, competitive product analysis, etc.