Managerial economics

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Managerial economics deals with the application of the economic concepts, theories, tools, and methodologies to solve practical problems in a business. In other words, managerial economics is the combination of economics theory and managerial theory. It helps the manager in decision-making and acts as a link between practice and theory. [1] It is sometimes referred to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units.

Business economics is a field in applied economics which uses economic theory and quantitative methods to analyze business enterprises and the factors contributing to the diversity of organizational structures and the relationships of firms with labour, capital and product markets. A professional focus of the journal Business Economics has been expressed as providing "practical information for people who apply economics in their jobs."

Economics is the social science that studies the production, distribution, and consumption of goods and services.

Contents

As such, it bridges economic theory and economics in practice. [2] It draws heavily from quantitative techniques such as regression analysis, correlation and calculus. [3] If there is a unifying theme that runs through most of managerial economics, it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of operations research, mathematical programming, game theory for strategic decisions, [4] and other computational methods. [5]

Regression analysis set of statistical processes for estimating the relationships among variables

In statistical modeling, regression analysis is a set of statistical processes for estimating the relationships between a dependent variable and one or more independent variables. The most common form of regression analysis is linear regression, in which a researcher finds the line that most closely fits the data according to a specific mathematical criterion. For example, the method of ordinary least squares computes the unique line that minimizes the sum of squared distances between the true data and that line. For specific mathematical reasons, this allows the researcher to estimate the conditional expectation of the dependent variable when the independent variables take on a given set of values. Less common forms of regression use slightly different procedures to estimate alternative location parameters or estimate the conditional expectation across a broader collection of non-linear models.

Calculus Branch of mathematics

Calculus, originally called infinitesimal calculus or "the calculus of infinitesimals", is the mathematical study of continuous change, in the same way that geometry is the study of shape and algebra is the study of generalizations of arithmetic operations.

Operations research (OR) is a discipline that deals with the application of advanced analytical methods to help make better decisions. Further, the term operational analysis is used in the British military as an intrinsic part of capability development, management and assurance. In particular, operational analysis forms part of the Combined Operational Effectiveness and Investment Appraisals, which support British defense capability acquisition decision-making.

Overview towards Microeconomics

Managerial decision areas include:

Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:

Risk is the potential for uncontrolled loss of something of value. Values can be gained or lost when taking risk resulting from a given action or inaction, foreseen or unforeseen. Risk can also be defined as the intentional interaction with uncertainty. Uncertainty is a potential, unpredictable, and uncontrollable outcome; risk is an aspect of action taken in spite of uncertainty.

Information economics or the economics of information is a branch of microeconomic theory that studies how information and information systems affect an economy and economic decisions. Information has special characteristics: It is easy to create but hard to trust. It is easy to spread but hard to control. It influences many decisions. These special characteristics complicate many standard economic theories.

Decision theory is the study of an agent's choices. Decision theory can be broken into two branches: normative decision theory, which analyzes the outcomes of decisions or determines the optimal decisions given constraints and assumptions, and descriptive decision theory, which analyzes how agents actually make the decisions they do.

At universities, the subject is taught primarily to advanced undergraduates and graduate business students. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses. In many countries it is possible to read for a degree in Business Economics which often covers managerial economics, financial economics, game theory, business forecasting and industrial economics.

Financial economics is the branch of economics characterized by a "concentration on monetary activities", in which "money of one type or another is likely to appear on both sides of a trade". Its concern is thus the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. It has two main areas of focus: asset pricing and corporate finance; the first being the perspective of providers of capital, i.e. investors, and the second of users of capital.

Game theory is the study of mathematical models of strategic interaction among rational decision-makers. It has applications in all fields of social science, as well as in logic, systems science, and computer science. Originally, it addressed zero-sum games, in which each participant's gains or losses are exactly balanced by those of the other participants. Today, game theory applies to a wide range of behavioral relations, and is now an umbrella term for the science of logical decision making in humans, animals, and computers.

Forecasting is the process of making predictions of the future based on past and present data and most commonly by analysis of trends. A commonplace example might be estimation of some variable of interest at some specified future date. Prediction is a similar, but more general term. Both might refer to formal statistical methods employing time series, cross-sectional or longitudinal data, or alternatively to less formal judgmental methods. Usage can differ between areas of application: for example, in hydrology the terms "forecast" and "forecasting" are sometimes reserved for estimates of values at certain specific future times, while the term "prediction" is used for more general estimates, such as the number of times floods will occur over a long period.

Scope

Managerial economics to a certain degree is prescriptive in nature as it suggests course of action to a managerial problem. Problems can be related to various departments in a firm like production, accounts, sales, etc.and it can also help in decision making.

(a) Operational issues

  1. Demand decision
  2. Production decision
  3. Theory of exchange or price theory
  4. All human economic activity

(b) Environmental issues

  1. Nature and trend of domestic business/ international environment
  2. Nature and impact of social costs and government policy

Demand decision

Demand is the willingness of potential customers to buy a commodity. It defines the market size for a commodity, and at a disaggregated level the composition of the customer base. Analysis of demand is important for a firm as its revenue, profits, and income of its employees depend on it. [8]

In economics, demand is the quantity of a good that consumers are willing and able to purchase at various prices during a given period of time. The relationship between price and quantity demanded is also known as the demand curve. Preferences which underlie demand, are influenced by cost, benefit, odds and other variables.

See also

Personnel economics has been defined as "the application of economic and mathematical approaches and econometric and statistical methods to traditional questions in human resources management". It is an area of applied micro labor economics, but there are a few key distinctions. One distinction, not always clearcut, is that studies in personnel economics deal with the personnel management within firms, and thus internal labor markets, while those in labor economics deal with labor markets as such, whether external or internal. In addition, personnel economics deals with issues related to both managerial-supervisory and non-supervisory workers.

Management science (MS) is the broad interdisciplinary study of problem solving and decision making in human organizations, with strong links to management, economics, business, engineering, management consulting, and other fields. It uses various scientific research-based principles, strategies, and analytical methods including mathematical modeling, statistics and numerical algorithms to improve an organization's ability to enact rational and accurate management decisions by arriving at optimal or near optimal solutions to complex decision problems. Management science helps businesses to achieve goals using various scientific methods.

Journals

Notes

  1. W. B. Allen, Managerial Economics Theory, Applications, and Cases, 7th Edition. Norton. Contents.
  2. William J. Baumol (1961). "What Can Economic Theory Contribute to Managerial Economics?," American Economic Review, 51(2), pp. 142-46. Abstract.
       • Ivan Png and Dale Lehman (2007, 3rd ed.). Managerial Economics. Wiley. Description and chapter-preview links.
       • M. L. Trivedi (2002). Managerial Economics: Theory & Applications, 2nd ed., Tata McGraw-Hill. Chapter-preview links.
  3. NA (2009). "managerial economics," Encyclopædia Britannica. Cached online entry.
  4. Carl Shapiro (1989). "The Theory of Business Strategy," RAND Journal of Economics, 20(1), pp. 125-137.
       • Thomas J. Webster (2003). Managerial Economics: Theory and Practice, ch. 13 & 14, Academic Press. Description.
  5. For a journal on the last subject, see Computational Economics, including an Aims & Scope link.
  6. • James O. Berger (2008)."statistical decision theory," The New Palgrave Dictionary of Economics , 2nd Edition. Abstract.
       • Keisuke Hirano (2008). "decision theory in econometrics," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
       • Vassilis A. Hajivassiliou (2008). "computational methods in econometrics," The New Palgrave Dictionary of Economics, 2nd Edition. Abstract.
  7. • Trefor Jones (2004). Business Economics and Managerial Decision Making, Wiley. Description and chapter-preview links.
       • Nick Wilkinson (2005). Managerial Economics: A Problem-Solving Approach, Cambridge University Press. Description and preview.
       • Maria Moschandreas (2000). Business Economics, 2nd Edition, Thompson Learning. Description and chapter-preview links.
  8. Prof. M.S. BHAT, and mk RAU.Managerial economic and financial analysis.Hyderabad. ISBN   978-81-7800-153-1

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