Economics helps us to study how to manage our resources. Managing resources is important because of scarcity. Scarcity means that the resources in the world are limited and not all our wants can be fulfilled.
But what is managerial economics? Let’s explore this concept and the importance of managerial economics along with the objectives of managerial economics.
Managerial Economics (ME) is the use of economic modes of thought to analyze business situations. It applies economic theories into businesses. These applications help in examining the ways by which an organization can achieve its goals and objectives. The principles and methodologies are applied in conditions where there is uncertainty.
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#1. Evaluating Choice Alternatives
It involves identifying ways to efficiently achieve goals, specifying pricing and production strategies, and spelling out production and marketing rules to maximize profits.
#2. Making The Best Decision
Managerial economics helps meet management objectives efficiently. It also shows the logic of consumer, and government decisions.
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#1. Theory Of Demand
The primary objective of any firm is to identify and fulfill the demand of the firm’s products. It answers the question “How much to produce?” ME helps in making an accurate estimation of the demand for the Company’s products and also the demand determinants which are the factors affecting the demand. With the help of these, the firm can manipulate demand.
#2. Cost Analysis And Planning
It involves determining the cost and factors affecting these costs so that they can be controlled and profits can be maximized. The concepts used are cost concepts, cost output relationships, economies of scale, production functions and cost control.
#3. Pricing And Competitive Strategy
ME is used for determining price and output under different types of market conditions, methods and strategies for determining pricing, competitor’s response to pricing.
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#4. Profit Analysis
Profit maximization is the basic objective of every firm. Profits are the basic means of measuring the success of a firm. Profits depend upon Revenues and Costs, both of which may vary. There is an element of risk involved in profits, ME uses tools and techniques such as profit planning, break even analysis, etc. to minimize risks.
#5. Production Decisions
It tells the firm what to produce and how much to produce. ME helps in determining which products to produce, the quantity to be produced in the short run and long run, scale of production, capacity utilization, an optimum combination of inputs to maximize output, an optimum level of inventory, EOQ, etc. Concepts such as production functions, laws of production, etc. are part of ME.
#6. Investment Decisions
ME helps in taking decisions related to investments, such as how much to invest, return on investment, choice of investment projects, evaluating the efficiency of capital with the help of capital budgeting techniques.
#7. Environmental or External Issues
It refers to the study of the general business environment in which the firm operates. They pertain to Macro Economics. It includes the type of economic system which operates in the country, i.e., Capitalist, Socialist, Communist, and Mixed. Trends in production, income, employment, Working of Financial Institutions, i.e., Banks, Government Policies like Liberalisation, privatization, globalization, Trends in Foreign Trade, i.e., Export /Import all can be studied through the use of managerial economics.
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