Scope of Managerial Economics

Scope of Managerial Economics

The scope of managerial economics is narrower than economic theory because economics is related to both micro and macro economics whereas the scope of managerial economics is limited to micro analysis. However, it is closely related to operation research like mathematics and decision making theory. There are various functional areas of management like production, marketing, finance and accounting which are considered by managerial economists. It is a newly developing subject so no uniform pattern is followed. The following aspects determine the subject and scope of managerial economics-

1. Demand analysis and forecasting

2. Production and cost analysis

3. Price and product decision

4. Profit management

5. Capital management and investment budgeting

6. Product policy, sales promotion and marketing strategy

1. Demand analysis and forecasting- Demand analysis is a useful source of information for many important business decisions. The success of a business ultimately depends on the ability to satisfy consumer demand.  If a firm fails to attract consumers, it exits the market.

Managerial economics is concerned with the analysis of the fundamental factors that determine consumer needs or demand. It provides a background to determine pricing, forecast sales and formulate strategies accordingly.

2. Production and cost analysis- In the first two-thirds of the twentieth century, production was considered to play a secondary role in the economy and this was generally true. The focus was on expansion. Many economists were not interested in production, believing that production was self-determined. Now this view has changed. Due to limited available resources, it is necessary for firms to decide how much to produce and how much labour and capital to invest in it so that goods are produced efficiently.

Managerial economics helps in designing the production function. Techniques are studied which determine the cost-minimizing production. Production and cost analysis is necessary for planning the project. It is only through this analysis that the goal of minimum cost and maximum production (output) can be achieved.

3. Price and product decision-Pricing is a very important area of ​​managerial economics. In fact, it is the base price of the firm or its income. To a large extent, the success of the firm depends on correct pricing. The price fixed today can have a significant impact on future profits.  Many firms produce a number of goods which are sold in different markets. Sometimes the price fixed for one good affects the demand for other goods as well.

Managerial economics provides a good approach to pricing. The important points or aspects discussed in this field are pricing in different markets, methods of pricing, different prices and forecasting of prices.

4. Profit Management-The organisation is structured to earn profit and the primary measure of its success is profit. Profit also indicates the degree or level of efficiency of management. Profit planning and management helps in increasing the efficiency of the firm. Profit management is an important part of managerial economics.

Profit planning always has an element of uncertainty. In the world of competition and uncertainty, all expectations are not always met, so profit planning is a very difficult area of ​​managerial economics. Various techniques of profit planning such as break-even analysis are used for this.

5. Capital Management and Investment Budgeting-A manager has to take various long-term decisions also. Whether new items should be added to the production line or removed? Whether old tools and machines should be replaced or not? Whether a new plant should be built or not? etc.

Such decisions are complex and affect the long-term profitability of the firm.  Managerial economics includes techniques which are effective in making long term investment decisions and capital budgeting. Various techniques of cost reduction, production increase are studied for taking complex decisions.

6. Product Policy, Sales Promotion and Marketing Strategy-Every successful business should have a product policy and it should always plan the product range on the basis of changing demand. It should also adopt the policy of product promotion. Therefore, product policy, sales promotion and marketing strategy are important aspects, and the manager should plan these aspects with the help of managerial economics. All the above mentioned aspects have a big impact on the business like demand and production, cost uncertainty, profit uncertainty.