Role of managerial economics in decision making or importance of managerial economics
Role of managerial economics in decision making or importance of managerial economics
Today business and society are going through a phase of economic and industrial revolution. Its first component is globalization of markets. Globalization today does not mean exporting some goods and services to other countries. At present, globalization means considering the world as a holistic unit under managerial decisions, rather than considering a market related to a region or country.
The second component of the current revolution is the expansion of information technology and computer network. This leads to quick delivery of goods and services, reduction of wastage, proper balance of inventory and increase in productivity.
The third component of this revolution is – today the traditional managerial hierarchy structures have ended. Earlier, middle level managers were the medium of transmitting information between higher management and workers. At present, information can be easily sent from top management to workers and to each other through computers without middle level managers.
The fourth component of the current revolution is the rapid expansion of the information economy (economy), secondly, the determination of prices is based on knowledge and communication rather than natural resources and physical labour.
Due to this revolution, the role of managerial economics has increased in modern business management.
A basic function of management is decision making. A balance is made between available resources and requirements. Nobel Prize winning economist Herbert Simon has introduced the primary activities of decision making-
1. Finding an opportunity to take a decision.
2. Identifying possible decision-related processes.
3. Estimating costs and revenues.
4. Selecting a process that is best in achieving the objective of the firm (increasing the value of the firm).
The main role of managerial economics is to evaluate alternative processes and choose the best among them. The role and importance of managerial economics in decision making may be summarised as follows:
1. Providing understanding to solve business problems- Management economics provides many important ideas which are necessary for analysing business problems. Such as the nature or concept of elastic demand, fixed and variable costs, opportunity cost and net present value, all help in understanding and solving business problems.
2. Help in making the manager more efficient- Management economics helps a manager to become more efficient. With the help of various models, the manager can understand the relationship between these models, which shows the true situation.
3. Making decisions in a complex environment- Management economics is helpful in making decisions regarding various business complexities. Such as-
a. What products or services should be produced?
b. What production techniques should be applied?
c. What should be the best size and location of the new plant?
d. How should capital be distributed?
4. Focus on social problems- Management economics communicates between the firm and the society and plays an important role in business. It focuses on the social responsibilities that govern business decisions and serves as a tool to enhance the economic welfare of society.
5. Determining relationships- Management economics helps in accounting for relationships between various business parameters such as income, elasticity of demand, price elasticity, cost size analysis etc. These calculations are also useful in forecasting decisions and taking decisions.
6. Estimating the impact of external factors- Economic analysis also proves helpful in estimating the impact of external factors on business. Many factors affect the business environment such as business cycle, economic policies, national income, licensing policy and government price control policies. Decisions should be taken keeping in mind all these factors. In short, management economics is useful in taking tools from economic practice. It takes ideas from other branches or subjects so that better decisions can be taken. A good decision requires the analysis of the problem in a logical manner and management economics helps in this. General managerial economics will help managers to ensure that resources are allocated efficiently and the firm is making the necessary efforts to cope with the changes in the economic environment.
Decision making by management is essentially economic in nature
Decision making by a manager is essentially economic in nature because it involves selection among a set of alternatives. A manager always makes a choice in the name of decision making irrespective of the function, level or organisation. The finance manager selects the sources and uses of the function. The production manager selects the product-mix. The personnel manager selects the staffing pattern. The sales manager selects the market segments, the purchasing manager selects the variety of goods. These examples show that every manager selects one thing or the other from a set of alternatives.
