Managerial economics

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Managerial economics is a branch of economics involving the application of economic methods in the organizational decision-making process.[1] Economics is the study of the production, distribution, and consumption of goods and services. Managerial economics involves the use of economic theories and principles to make decisions regarding the allocation of scarce resources.[2] It guides managers in making decisions relating to the company's customers, competitors, suppliers, and internal operations.[3]

A Prisoner's Dilemma in Game Theory.

Managers use economic frameworks in order to optimize profits, resource allocation and the overall output of the firm, whilst improving efficiency and minimising unproductive activities.[4] These frameworks assist organisations to make rational, progressive decisions, by analysing practical problems at both micro and macroeconomic levels.[5] Managerial decisions involve forecasting (making decisions about the future), which involve levels of risk and uncertainty. However, the assistance of managerial economic techniques aid in informing managers in these decisions.[6]

Managerial economists define managerial economics in several ways: 1. It is the application of economic theory and methodology in business management practice.

2. Focus on business efficiency.

3. Defined as "combining economic theory with business practice to facilitate management's decision-making and forward-looking planning."

4. Includes the use of an economic mindset to analyze business situations.

5. Described as "a fundamental discipline aimed at understanding and analyzing business decision problems".

6. Is the study of the allocation of available resources by enterprises of other management units in the activities of that unit.

7. Deal almost exclusively with those business situations that can be quantified and handled, or at least quantitatively approximated, in a model. [3]

The two main purposes of managerial economics are:

  1. To optimize decision making when the firm is faced with problems or obstacles, with the consideration and application of macro and microeconomic theories and principles.[7]
  2. To analyze the possible effects and implications of both short and long-term planning decisions on the revenue and profitability of the business.

The core principles that managerial economist use to achieve the above purposes are:

  • monitoring operations management and performance,
  • target or goal setting
  • talent management and development.

In order to optimize economic decisions, the use of operations research, mathematical programming, strategic decision making, game theory[8] and other computational methods[9] are often involved. The methods listed above are typically used for making quantitate decisions by data analysis techniques.

The theory of Managerial Economics includes a focus on; incentives, business organization, biases, advertising, innovation, uncertainty, pricing, analytics, and competition.[10] In other words, managerial economics is a combination of economics and managerial theory. It helps the manager in decision-making and acts as a link between practice and theory.[11] Furthermore, managerial economics provides the tools and techniques that allow managers to make the optimal decisions for any scenario.

Some examples of the types of problems that the tools provided by managerial economics can answer are:

  • The price and quantity of a good or service that a business should produce.
  • Whether to invest in training current staff or to look into the market.
  • When to purchase or retire fleet equipment.
  • Decisions regarding understanding the competition between two firms based on the motive of profit maximization.[12]
  • The impacts of consumer and competitor incentives on business decisions[13]

Managerial economics is sometimes referred to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units to assist managers to make a wide array of multifaceted decisions. The calculation and quantitative analysis draws heavily from techniques such as regression analysis, correlation and calculus.[14]

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