Current Theories in Managerial Economics
Managerial Economics is associated with the economic theory which constitutes the “Theory of Firm”.
Managerial Economics is the science of managing the effective use of scarce resources. The key to Managerial Economics is the micro-financial theory of the company. It lessens the space between economics in principle and economics in exercise.
It publications the managers in making choices relating to the company’s customers, competition, and suppliers in addition to relating to the inner functioning of a company.
It uses statistical and analytical tools to assess monetary theories in solving realistic enterprise troubles.
The study of Managerial Economics allows for the enhancement of analytical capabilities, assists in rational configuration, and answers to troubles.
While microeconomics is the study of decisions made regarding the allocation of assets and expenses of products and offerings, macroeconomics is the sphere of economics that studies the conduct of the economic system as a whole (i.e. Entire industries and economies).
Managerial Economics applies micro-economic tools to make business decisions. It deals with a firm.
The use of Managerial Economics is not limited to profit-making firms and organizations.
But it can also be used to help in the decision-making process of non-profit organizations (hospitals, educational institutions, etc). It enables optimum utilization of scarce resources in such organizations as well as helps in achieving the goals most efficiently.
Managerial Economics is of great help in price analysis, production analysis, capital budgeting, risk analysis, and determination of demand.
Managerial economics uses both Economic theory as well as Econometrics for rational managerial decision-making.
Econometrics is defined as the use of statistical tools for assessing economic theories by empirically measuring the relationship between economic variables. It uses factual data for the solution of economic problems.
Managerial Economics is associated with the economic theory which constitutes the “Theory of Firm”. The theory of firm states that the primary aim of the firm is to maximize wealth.
Decision-making in managerial economics generally involves the establishment of a firm’s objectives, identification of problems involved in the achievement of those objectives, development of various alternative solutions, selection of best alternatives, and finally implementation of the decision.
The following figure tells the primary ways in which Managerial Economics correlates to managerial decision-making.
The Theory of the Firm
The theory of the firm refers to the microeconomic approach devised in neoclassical economics that every firm operates to make profits. Companies ascertain the price and demand of the product in the market and make optimum allocation of resources for increasing their net profits.
Neoclassical economics dominates mainstream economics today, so the theory of the firm (and different theories related to neoclassicism) affects choice-making in a ramification of areas, consisting of resource allocation, production techniques, pricing changes, and the extent of manufacturing.
While early economic evaluation targeted vast industries, as the nineteenth century progressed, greater economists commenced inviting fundamental questions about why companies produce what they produce and what motivates their choices when allocating capital and hard work.
However, the theory has been debated and improved to bear in mind whether or not an organization intends to maximize income in the short term or long term.
Modern take on the idea of the firm now and then distinguishing between long-run motivations, consisting of sustainability, and short-run motivations, which include profit maximization.
If an employer intends to maximize short-term profits, it might locate methods to enhance sales and decrease prices.
However, agencies that make use of fixed assets, like gadgets, would ultimately want to make capital investments to ensure the company is profitable in the long term.
The use of cash to invest in belongings could undoubtedly hurt short-term period earnings but could help with the long-term viability of the organization.
Competition (now not simply earnings) also can affect the decision-making of company executives.
If competition is powerful, the organization will need to not only maximize income but also live one step ahead of its competition by reinventing itself and adapting its offerings.
Therefore, long-time period profits should best be maximized if quick-time period earnings are stable and making an investment within the destiny.
