Uses Of Managerial Economics

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Managerial economics achieves several objectives. The principal objectives are as follows:

  • It presents those aspects of traditional economics, which are relevant for business decision-making in real life. For this purpose, it picks from economic theory those concepts, principles and techniques of analysis, which are concerned with the decision-making process. These are adapted or modified in such a way that it enables the manager to take better decisions. Thus, managerial economics attains the objective of building a suitable tool kit from traditional economics.
  • Managerial economics also incorporates useful ideas from other disciplines such as psychology, sociology, etc. If they are found relevant for decision-making. In fact, managerial economics takes the aid of other academic disciplines that are concerned with the business decisions of a manager in view of the various explicit and implicit constraints subject to which resource allocation is to be optimised.
  • It helps in reaching a variety of business decisions even in a complicated environment. Certain examples of such decisions are those decisions concerned with:
    • The products and services to be produced
    • The inputs and production techniques to be used
    • The quantity of output to be produced and the selling prices to be subscribed
    • The best sizes and locations of new plants
    • Time of replacing the equipment
    • Allocation of the available capital
  • Managerial economics helps a manager to become a more competent model builder. Thus, he can pick out the essential relationships, which characterise a situation and leave out the other unwanted details and minor relationships.
  • At the level of the firm, functional specialists or functional departments exist, e.g., finance, marketing, personnel, production etc. For these various functional areas, managerial economics serves as an integrating agent by co-ordinating the different areas. It then applies the decisions of each department or specialist, those implications, which are pertaining to other functional areas. Thus managerial economics enables business decision-making to operate not with an inflexible and rigid but with an integrated perspective. This integration is important because the functional departments or specialists often enjoy considerable autonomy and achieve conflicting goals.Managerial economics keeps in mind the interaction between the firm and society and accomplishes the key role  of business as an agent in attaining social economic welfare. There is a growing awareness that besides its obligations to shareholders, business enterprise has certain social obligations as well. Managerial economics focuses on these social obligations while taking business decisions. By doing so, it serves as an instrument of furthering the economic welfare of the society through socially oriented business decisions.

Thus, it is evident that the applicability and usefulness of managerial economics is obtained by performing the following activates:

  • Borrowing and adopting the tool-kit from economic theory.
  • Incorporating relevant ideas from other disciplines to achieve better business decisions.
  • Serving as a catalytic agent in the course of decision-making by different functional departments/specialists at the firm’s level.
  • Accomplishing a social purpose by adjusting business decisions to social obligations.
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