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Nature and Scope and Significance
of Managerial Economics
Concept of Economics
• Economics is the science of choice in the face
of unlimited ends and scarce resources which
have alternative uses. Since resources are
scarce and the uses to which they can be put
to are unlimited, one is required to choose the
best amongst the available alternatives. The
crux of the problem which economics tries to
address is the choice of the best uses of
resources among the alternative uses.
• Generally, economics can be divided into two
broad categories: microeconomics and
• Macroeconomics is the study of the economic
system as a whole. It includes techniques for
analyzing changes in total output, total
employment, the consumer price index, the
unemployment rate, and exports and imports.
Only aggregate levels of these variables are
• But concealed in the aggregate data are
countless changes in the output levels of
individual firms, the consumption decisions of
individual consumers, and the prices of
particular goods and services. These all fall
under the domain of microeconomics.
• Microeconomics focuses on the behavior of
the individual actors on the economic stage,
that is, firms and individuals and their
interaction in markets.
Origin of Managerial Economics
• Like every other individual a manger of a
business firm has to take decisions in the face
of scarcity and alternative uses of resources.
In fact success of a business firm largely
depends upon the efficiency in utilization of
limited resources remaining in the disposal of
the business firm.
• Thus managerial economics is evolved as an
important tool kits which is useful in the decision
making for the manager.
• The development of managerial economics as a
separate discipline has a recent origin. Joel
Dean’s book Managerial Economics published in
1951 is taken as the pioneer in this discipline.
• Due to wide recognition of the uses of economic
theories in the decision making of the business
this subject is rich in literature in these days.
Concept of Managerial Economics
• Managerial economics is the discipline that deals with
the application of economic concepts, theories and
methodologies to the practical problems of
businesses/firms in order to formulate rational
managerial decisions for solving those problems.
• It uses the tools and techniques of Economic analysis
to solve managerial problems or to achieve the firm’s
desired objective. It is that branch of economics, which
serves as a link between abstract theories and
managerial practices. It is based on economic analysis
for identifying problems, organizing information and
• Managerial economics borrows theories from
traditional economics i.e. microeconomics
where as it borrows tools from decision
science i.e. mathematics and statistics and it
tries to find out optimum solution of business
• Thus Spencer and Seligman defined
Managerial economics as “The integration of
economic theory and business practice for the
purpose of facilitating decision-making and
forward planning by management.”
• Following diagram shows how does the managerial economics
provide the link between traditional economics and decision
Economic Theory Decision Sciences
Study of Functional Areas:
Accounting, Finance, and
Distinction between Managerial
Economics and Traditional Economics
• There are some differences between
managerial economics and traditional
economic theory because managerial
economics seeks the help of other disciplines
such as statistics, mathematics, accounting,
management to get optimal solution to the
managerial decision-making problems.
• Differences between managerial economics
and traditional economics which are outlined
1.Managerial economics concerns with the
application of economic principles to the
problems of the firm but the traditional
economics deals with the body of principles
2. Managerial economics is highly
microeconomics in character. It studies the
problems of a firm but does not study the
macroeconomic phenomenon. But traditional
economics consist of both micro and macro
Features of Managerial Economics
Even if there are some differences among scholars
on the subject of features of managerial
economics, here some of the commonly agreed
characteristics of managerial economics are
introduced. They are:
• Microeconomics character: - Managerial
economics is microeconomics in character
because its unit of study is firm. However, it
always takes the help of macroeconomics to
understand and adjust to the environment in
which the firm operates.
• Choice and Allocation: - Managerial
economics is concerned with decision-making
of economic nature. This implies that
managerial economics deals with
identification of economic choices and
allocation of scarce resources on the best
• Goal Oriented: - Managerial economics is
goal-oriented and prescriptive. It deals with
how decisions should be formulated by
managers to achieve the organizational goals.
Significance - How Is Managerial
• Evaluating Choice Alternatives
– Identify ways to efficiently achieve goals.
– Specify pricing and production strategies.
– Provide production and marketing rules to help
maximize net profits.
• Making the Best Decision
– Managerial economics can be used to efficiently
meet management objectives.
– Managerial economics can be used to understand
logic of company, consumer, and government