Managerial economics is that branch of economics that deals with managerial decision making. Managerial Economics and Business economics are the two terms, which, at times have been used interchangeably. But somehow the term Managerial Economics has become more popular and seems to displace progressively the term Business Economics.
The major role and responsibility of a management executive in a business organization is decision making and planning. Decision Making means the process of selecting one course of action from two or more alternative courses of action whereas on the other hand planning means laying down plans and policies for the future. The opportunity of making the choice arises because resources which are required for production of goods and services such as capital, land, labour and management are limited in nature and can be employed in alternative uses.
The decision making function thus becomes one of making choices or decisions that will provide the most efficient means of attaining a desired end, say, profit maximization. Once decision is made about the particular goal to be achieved, plans as to production, pricing, capital, raw materials, labour, etc., are prepared. Forward planning thus goes hand in hand with decision making.
A major condition of the business under which it operates, work and take decisions, is uncertainty. And this fact of uncertainty not only makes the function of decision making and forward planning complicated but adds a different dimension to it. If we had full knowledge of the future then, plans can be formulated without committing any error and hence without any need for subsequent revision.
In the real world, however, the business manager do not possess complete information and the estimates about future are predicted to the best of their knowledge. As plans are implemented over time, many real situations, problems and facts comes to our knowledge and with respect to these changes, plans may have to be revised, and a different course of action adopted. Managers are thus engaged in a continuous process of decision making through an uncertain future and the overall problem confronting them is one of adjusting to uncertainty.
In achieving the function of decision making in an uncertain environment, economic theories can be put into the best service with considerable advantage. Economic theories talks about number of concepts and principles which relate to business directly, for example, to profit, demand, cost, pricing, production, competition, business cycles, national income, etc., which takes help by many other disciplines like Accounting, Finance, Statistics and Mathematics can be used to solve or at least throw some light upon the problems of business management. The manner in which the analysis of economics theories can be used as a tool to solve business problems, is known as Managerial Economics.
In approximately all management courses Managerial economics is studied as a subject so that potential business manager’s can come to know about economic theories and they can take better decisions.
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