Scope of Managerial Economics

Scope of Managerial Economics

In general, the Scope of Managerial Economics comprehends all those economic concepts, theories and tools of analysis which can be used to analyse the business environment and to find solutions to practical business problems. In other words managerial economics is economics applied to the analysis of business problems and decision making. Broadly speaking it is applied economics.

The Scope of Managerial Economics includes following subjects:

  1. Theory of Demand
  2. Theory of Production
  3. Theory of Exchange or Price Theory
  4. Theory of Profit
  5. Theory of Capital and Investment
  6. Environmental Issues
  1. Theory of Demand

Demand theory explains the consumer’s behavior. It answers the questions:

  • Why do consumers buy a particular product?
  • How much they purchase a commodity?
  • How do consumers decide whether or not to buy a commodity?
  • How do consumers behave when there is change in price of commodity, their income, tastes, trends etc.?
  • Why and when do the consumers stop to consume a commodity?
  • What are other factors influencing the demand of a commodity?

The knowledge of demand theory can therefore be helpful in the choice of commodities for production.

  1. Theory of Production

Theory of production is also called Theory of Firm. It explains the relationship between inputs and output.  It helps in determining the size of firm and the level of production. The theory of Demand explains the following questions:

  • How average and marginal costs change with the change in production?
  • Under what conditions do the costs increase or decrease?
  • How total output increases when units of one factor (input) are increased keeping other factors constant or when all factors are simultaneously increased?
  • How can output be maximized from a given quantity of resources?
  • How can optimum size of output be determined?

Production theory, thus helps in determining the size of the firm, size of the total output and the amount of capital and labour to be employed.

  1. Theory of Exchange or Price Theory

Theory of Exchange is popularly known as Price Theory.  This theory explains how prices are determined under different market conditions. Pricing is an important area of managerial economics. The success of a business depends upon the accuracy and correctness of price decisions taken by it. Pricing Theory helps in determining the price policy of the firm. Price policy affects the demand of products. It includes the determination of prices under different market conditions, pricing methods, pricing policies, differential pricing, product line pricing and price forecasting.

  1. Theory of Profit

Profit making is most common objective of all business undertaking. But making a satisfactory profit is not always guaranteed because a firm has to carry out its activities under conditions of uncertainty with regard to :

  1. Demand for the product.
  2. Input prices in the factor market.
  3. Nature and degree of competition in the market.

Hence profit planning and profit management requires that the most efficient technique should be used for predicting future. Profit theory guides firms in the measurement and management of profit, in making allowances for the risk premium, in calculating the pure return on capital and pure profit and also for future profit planning.

  1. Theory of capital and investment decisions

Capital like all other inputs, is a scarce and expensive factor. capital is the foundation of business. Its efficient allocation and management is one of the most important tasks of the managers and a determinant of the success level of the firm. The major issues related to capital are:

  • Selection of most suitable investment project
  • Most efficient allocation of capital
  • Assessing the efficiency of capital
  • Minimizing the possibility of under capitalization or over- capitalization.

Knowledge of capital theory can contribute a great deal in investment decision making, choice of projects, maintaining capital intact, capital budgeting etc.

  1. Environmental issues

Certain issues of macro-economics also form a part of managerial economics. These relate to social and political environment in which a business and industrial firm has to operate. This is governed by the factors:

  • The type of economic system of the country.
  • Business cycles
  • Industrial policy of the country
  • Trade and fiscal policy of the country
  • Taxation policy of the country
  • Price and labour policy
  • General trends in economy with regards to the production, employment, income, prices, saving and investment etc.
  • General trends in the work of financial institutions in the country
  • General trends in foreign trade of the country
  • Social factors like value system of the society
  • General attitude and significance of social organisations like trade unions, producer’s unions and consumer’s cooperative societies etc.
  • Social structure and class character of various social groups
  • Political system of the country.
  • As the management of a firm cannot have any control over these factors, it should adjust the plans, policies and programmes of the firm according to these factors to offset their adverse effect on the firm.
Scope of Managerial Economics

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