Managerial economics is a social science discipline that combines the economics theory, concepts and known business practices in order to make the process of decision making easy. It is a very useful concept for every manager that is planning for the future. This is so because it assists the managers to make rational decisions on various obstacles facing the firm. Most of the complex management decision facing a firm can be broken down in a series of logical solutions. A key area of managerial economics is the theory of a firm that entails the best mix of the scarce resources to maximize profits within the firm. Marginal benefits and cost analysis is also another broad area in managerial economics. Managerial economics can be viewed by most modern economists as a practical application of economics theory in using effectively the firm’s scarce resources.
Managerial economics as a science is useful to managers in making decisions relating to a firm’s customer’s base, competitors and strategic future decisions. A lot of mathematical concepts especially statistics and analytical tools are required because of the probabilistic nature of future decisions that the firm wants to make. Most people might ask the questions why study managerial economics while one can make decisions based on past data. It is a genuine question but it is not possible to make a conclusion merely on the bases of prior data because of the dynamic nature of the current market. We have seen a lot of unexpected events that have happened in the past that we never expected. One is the crash of major banks in the US and the current crisis in Greece. Based on these examples it is now clear that we need an approach like managerial economics which will not only take into consideration the prior data but will allow us to include future risks in the posterior data.
Managerial economics helps the manager or the group/ groups of people making the decisions to increase their problem analytics skills as well as formulation solution to probabilistic problems. The main differences between managerial economics and the other branches of economics such as macro and micro economics is that. Micro economics involves the allocation of scarce resources on household level. Macro economics involve the study of economics as a whole. While managerial economics applies the tools learnt in these branches to come up with viable business ideas. Managerial economics is very broad and is not only used in decisions making for profit making organization but also useful to non-profit making organizations in the proper utilization of their scarce resources. The concept of management economics is also very useful in price determination, long term capital budgeting, and insights into the demands of a commodity.
Different schools of thought have suggested that managerial economics use the concepts of economics theory that differ from the fact that managerial economics is a combination of both economics theory and econometrics in making decisions. Econometrics is the use of statistical tools such as statistical packages and theories to experimentally measure the relationship that exist between economics variables. Its main advantage is that it uses factual data to model different scenarios.