Managerial Economics and Economics


Managerial Economics and Economics

Managerial economics is defined as a subdivision of economics that deals with decision-making. It may be viewed as a special branch of economics bridging the gulf between pure economic theory and managerial practice. Economics has two main divisions-microeconomics and Macroeconomics. Microeconomics has been defined as that branch where the unit of study is an individual or a firm. It is also called “price theory” (or Marshallian economics) and is the main source of concepts and analytical tools for managerial economics. To illustrate, various micro-economic concepts such as elasticity of demand, marginal cost, the short and the long runs, various market forms, etc., are all of great significance to managerial economics.

Macroeconomics, on the other hand, is aggregative in character and has the entire economy as a unit of study. The chief contribution of macroeconomics to managerial economics is in the area of forecasting. The modern theory of income and employment has direct implications for forecasting general business conditions. As the prospects of an individual firm often depend greatly on general business conditions, individual firm forecasts rely on general business forecasts.

A survey in the U.K. has shown that business economists have found the following economic concepts quite useful and of frequent application:

  • Price elasticity of demand
  • Income elasticity of demand
  • Opportunity cost
  • Multiplier
  • Propensity to consume
  • Marginal revenue product
  • Speculative motive
  • Production function
  • Liquidity preference
  • Business economists have also found the following main areas of economics as useful in their work. Demand theory
  • Theory of firms – price, output and investment decisions
  • Business financing
  • Public finance and fiscal policy
  • Money and banking
  • National income and social accounting
  • Theory of international trade
  • Economies of developing countries.

Thus, it is obvious that Managerial Economics is very closely related to Economics.

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