Managerial economics has a close interaction with Economics, Mathematics and Statistics but also Management theory and Accounting concepts. Managerial economic integrates concepts and methods from these disciplines and brings them together to solve managerial problems.
Economics applied to decision making is a special branch of economics, joining pure economic theory and managerial practices. Economics has been divided in two main branches: Micro-economics and macro-economics.
Micro-economics studies the behavior of the individual units and small groups of units. In particular firms, households, prices, wages, incomes, individual industries and commodities. Thus micro-economics gives a cellular view of the economy.
The background of managerial economics originates from micro-economic theory. Theory of price, elasticity of demand, marginal cost marginal revenue, the short and long runs and theories of market structure. It makes use of well-known models in price theory such as monopoly price, the elasticity of demand and the many pricing models for market competition.
Macro-economics on the other hand, deals with the behavior of the large aggregates in the economy. The large aggregates are total saving, total consumption, total income, total employment, general price level, wage level, cost structure, etc. As such, macro-economics is aggregate economics and examines the interrelations among the various elements, and causes of fluctuations in them.
Macro-economies are also extended managerial economics. The setting, in which a business operates, variables in national income, deviations in fiscal and monetary measures and variations in the level of business activity that have relevance to business decisions. The understanding of the complete process of the economic system is very useful to a managerial economist in the formulation of policy such as business forecasting. The most widely used model in modern forecasting is the gross national product model and its component parts.
A relatively new subject in economics is the theory of decision making and has gained significant importance for managerial economics. In the process of management such as planning, organizing, leading and controlling, decision making is always essential. Managers face a number of problems connected to production, inventory, cost, marketing, pricing, investment and human resources training.
Economist are interested in the efficient use of scarce resources and as a result their interest in business decision problems as applied to economics in the process of managing a business thus, managerial economics is economics applied to decision making.
Mathematicians, statisticians, engineers and others have joined together and developed models and analytical tools which have grown into a specialized subject known as operations research. The basic purpose of the research and development is to designed scientific model for the micro and macro systems which can then be utilized for policy making.
The development of techniques and concepts such as Linear Programming, Dynamic Programming, Input-output Analysis, Inventory Theory, Information Theory, Probability Theory, Queuing Theory, Game Theory, Decision Theory and Symbolic Logic and more recently neural training networks have each had a defining contribution towards the understanding of socio-economic systems.
Statistics provides the basis for the empirical testing of theory. It provides the individual firm with measures of appropriate functional relationship involved in decision making because a business runs on estimates and probabilities. Technique like multiple regression is used; measures of central tendency normal distribution, correlation, regression, least square, estimators are widely used in conjunction with computer software programs.
Managerial economics is also related to accounting as it records financial operation of a business. A business is started with the main aim of earning a profit. Capital is invested and engaged in purchasing properties such as building, furniture and daily running cost of the firm.
Goods produced are bought and sold for cash as well as credit, expenses are met and incomes derived. This goes on the daily routine work of the business transactions that must be transparently accounted for and evaluated for performance, specially, when the firm goes public and sells stock in the market.
Mathematics and numerical analysis have helped in the development of economic theories and now mathematical-economics has become a very important branch of economics. The most important branches of mathematics generally used by a managerial economist are geometry, algebra, calculus and computer software developed with powerful algorithms that solve complex problems and dynamic analysis.
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