Managerial economics is a science that deals with the application of various economics theories, principles, concepts and techniques to business management in order to solve business and management problems It deals with the practical application of economic theory and methodology to decision-making problems faced by private, public and non profit making organizations..
In the words of Spencer and Seigelman “Managerial Economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by the management.
Scope of Managerial Economics The term “scope” indicates the area of study, boundaries, subject matter and width of a subject. Business economics is comparatively a new and upcoming subject. The following topics are covered in this subject :-
1) Objectives of a firm :- Profit maximization has been considered as the main objective of a business unit in olden days, but in the context of present day business environment ,many new objectives have come to the fore. Today, there are multiple objectives and they are multi dimensional in nature.
Some of them are competitive while others are supplementary in nature. There are economic, social, organizational, human and national goals. There are managerial and behavioral theories.
2) Demand Analysis and Forecasting :-A firm is basically a producing unit. It produce different kinds of goods and services. It has to meet the requirement of consumers in the market. The basic problems of what to produce where to produce, for whom to produce, how to produce and how to distribute them in the market are to be answered by a firm.
3) Production and Cost Analysis :-Production implies transformation of inputs into outputs. It may be either in physical or monetary terms. Maximization of outputs is one of the basic goals of a firm. Production analysis deals with production function, laws of return, returns to scale, economies of scale etc. Maximization of output with minimum cost is the basic slogan of any firm.
4) Pricing Decisions, Policies and Practices :- Pricing Decision is related to fixing the prices of goods and services. This depends on the pricing policy and practices adopted by a firm. Price setting is one of the most important policies of a firm. The amount of revenue, the level of income and above all the volume of profit earned by a firm directly depend on its pricing decisions.
5) Profit Management :-A firm is basically a commercial or business unit. Consequently, the success or failure of it is measured in terms of the amount of profit it is able to earn in a competitive market. Under profit management, one has to study various theories of profit, emergence of profit, functions of profit and its measurement, etc.
6) Capital Management :-It is another crucial area of business. Success of any business depends on adequate capital investment and its proper management. Under capital management, one has to study capital requirement, methods of capital mobilization, capital budgeting, optimal allocation of capital, selection of highly profitable project cost, cost of capital, return on capital, planning and control of capital expenditure etc.
7) Linear Programming and Theory of Games :-The term linear means that the relationships handled are the same as those represented but straight lines and programming implies systematic planning or decision-making. It offers actual numerical solution to the problems of making optimum choices. It involves either maximization of profits or minimization of costs.
8) Market Structure and Conditions :-The knowledge of market structure and conditions existing in various kinds of markets are of great importance in any business. The number of sellers and buyers, the nature, extent and degree of competition etc. determines the nature of policies to be adopted by a firm in the market.
9) Strategic Planning :-It provides a framework on which long term decisions can be mad which have an impact on the behavior of the firm. The firm sets certain long term goals and objectives and selects the strategy to achieve the same. It is now a new addition to the scope of business economics with the emergence of MNC’s.
10) Others Areas :-Macro economic management of the country relating to economic system, Impact of Liberalization, globalization, etc.