Before you start incorporating managerial economics into your business operations, it is important to understand its scope and principles of the same. Only when you know it closely will you be in a position to reap the benefits of managerial economics.
This set of notes walks you through the scope as well as the principles of managerial economics.
Scroll down to know more!
Scope of Managerial Economics
The purpose of managerial economics is to manage, allocate and leverage resources in a manner that helps in bringing down expenses. But it is not similar to Micro or Macroeconomics. Rather it comes with a much narrower scope. In simpler words, it aims at offering practical solutions to managerial issues with the help of microeconomics.
If there is any scarcity of resources, managerial economics makes sure that managers take conscious and smart decisions regarding rival companies, customers, suppliers, the entire organisation and so on.
There are three fundamental questions related to the scarcity of necessary resources:
What, how and for whom to produce?’
Only by using managerial economics can you come up with apt answers to these questions.
Let’s take up each question one by one!
- For the first question, the manager relies on demand theory. This theory helps the manager in studying the behaviour of the consumers. Also, they would try to understand a pattern in the way they purchase at present or even in future. Also, a proper note is taken about the factors which influence the consumers to buy a specific type of product or hire any particular service. Demand forecasting helps managers to decide the exact number of services and goods that should be produced.
- The next question involves the Hows of goods and services production. Depending on what to produce, a firm is then required to decide about the process of production. This indeed will be a crucial decision for the firm that involves ordering the raw materials, taking care of required tools and human resources etc. It is advisable that the manager leverages suitable managerial tools such as project appraisal methods, cost analysis etc., to take those significant decisions carefully.
- Coming to the last question! A business enterprise must be able to define its niche or target audience very clearly. Segmenting the market before you start selling out your services is highly significant. By analysing the market thoroughly, one can understand the structure of the market closely. And based on the details, one should decide about the segment or TG whom you will be approaching with your services or products.
Managerial economics makes the decision-making process easier for any business enterprise. You can actually take the help of rational or logical thought procedures and then study simple models. This will enable you to handle practical or complicated situations.
Managerial economics basically looks at the bigger picture. It helps with the goals and targets of the enterprise and enables the enterprise to grow further and make huge profits. It deals with important issues such as the exit from or entry into the market, market situation and so on.
Principles of Managerial Economics
Before you start applying managerial economics in your business, it is necessary that you understand all its principles closely. When you apply principles while applying managerial economics, these principles allow the manager to stay rational and think logically. Below-mentioned is the principles of managerial economics you must know about.
1. Equi-marginal principle: When you derive utility by consuming an extra unit, it is called marginal utility. As per the equi-marginal utility, a consumer can easily accomplish the ideal stage of equilibrium by consuming different commodities that have equal marginal utility. This law is also known as the law of proportional marginal utility as per contemporary economists.
As a result, consumers will tend to spend their money on products and commodities in a manner that makes the price of each product proportional to the marginal utility of every product. Depending on this principle, the manager can decide to hire or delegate resources so that equilibrium gets created between marginal costs of resources and ratio of marginal returns.
2. Marginal and incremental principle: If a specific decision helps a firm to earn more profits, then it is considered to be a rational one. This can happen in two situations- either the total revenue declines lesser than the total cost, or the total revenue increases much more than the overall cost. Marginal analysis helps in evaluating even a single unit of alteration. On the other hand, incremental analysis helps you evaluate the overall picture of the entire firm and involves changes on a large scale.
3. Time perspective principle: This principle urges a manager to give equal significance to both long-term as well as short-term decisions.
4. Discounting principle: Suppose you are taking a decision on behalf of the firm. And this decision will impact the expenses as well as revenues of the firm in the long run. In that case, you should compare those revenues and expenditures with the firm’s present-day scenario. And this should be done before you proceed to go for another decision by ignoring the ongoing one.
5. Opportunity cost principle: Also known as the sacrifice of alternatives, this principle allows an organisation to hire a specific factor for production purposes only if that factor is in a position to get rewarded with something which is higher than the opportunity cost.
Now that you know the scope and principles of managerial economics, it will get convenient for you to apply managerial economics for the betterment of your firm.