Gaps between Theory of the Firm and managerial Economics

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The theory of the firm is a body of theory, which contains certain assumptions, theorems and conclusions. These theorems deal with the way in which businessmen make decisions about pricing, and production under prescribed market conditions. It is concerned with the study of the optimisation process.

For optimality to exist profit must be maximised and this can occur only when marginal cost equals marginal revenue. Thus, the optimum position of the firm is that which maximises net revenue. Managerial economics, on the other hand, aims at developing a managerial theory of the firm and for the purpose it takes the help of economic theory of the firm. However, there are certain difficulties in using economic theory as an aid to the study of decision-making at the level of the firm. This is because for the purposes of business decision-making it fails to provide sufficient analytical tools that are useful to managers.

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