Economics is the study of how man uses limited resources to satisfy unlimited human wants through production, distribution and consumption of goods. Study of economics is of relevance to any organization that seeks to make rational decision in the dynamic business environment. The management of an organization employs varying economic tools together with other parameters in the decision making process.
We can thus define managerial economics as the application of economic theories, principles and concepts in the decision making process in an organization. Economic theories are basic explanation of macroeconomic and micro-economic issues in a country. While economic principles and concepts on the other hand are well formulated statistical and mathematical tools that explains how logic and rational decisions are arrived at. Managerial economics is applicable to both public and private corporations since they must access and devise means of adapting to the surrounding economic environment in order to remain relevant.
Scope of managerial economics
The main branches in the study of economics are microeconomics and macroeconomics. Microeconomics is concerned with the study of individual and small business units in the economy for instance study of a given industry. While macroeconomics refers to the study of the economy as a whole and related factors such as business cycles, foreign policies and taxation. Both microeconomics and macroeconomics are applied in the managerial decision making process as discussed below.
Application of microeconomics in the operational issues
It refers to the application of economic theories in addressing internal organizational issues that arise in the course of business. Instances where the management applies microeconomics in operational issues include determination of production levels, inventory management, pricing of commodities and how to improve sales among others. The following are common economic theories that managers apply in solving operational issues.
Theory of demand and supply
Theory of demand and supply explain how producers and consumers behave at given supply and consumption levels in order to arrive at an equilibrium price. The theory of demand and supply is used when pricing products, segmenting of consumers and understanding consumers’ tastes and preferences.
Theory of production
Provides and explanation about variables that affect input and output costs and processes in the production process. Theory of production provides a basis for obtaining optimum production level at a minimal cost.
Used to describe how price are arrived at in the market by considering key factors in the market. Market analysis thus allows a business to price its products under different market conditions for instance under price wars.
Theory of capital
It is concerned with allocation of capital in available investment opportunities. It is concerned with assessing of investment opportunities and efficient allocation of capital.
This is an in depth analysis of the profitability of a business and various factors influencing it. Examples are; level of demand, competition and price behaviors in the market under different conditions.
Application of macroeconomics to the business environment
Macroeconomic analysis refers to an overall view of socio, political and economic activities. These are the activities in a country and their likely impacts on the business. Different factors in the external macroeconomic environment impact business activities either positively or negatively. Management of a business can apply macroeconomic view using the following two alternatives.
Trend in local or international business environment
This includes the current emerging issues that affect business globally for instance increase in petroleum prices. It also involves analyzing the impact of fluctuating foreign currency rates and trade agreement between two or more countries.
Social and policy framework
Explains the social expectation of surrounding community on the business through activities like social corporate responsibility. It also looks at the impact of introduction of new regulation by the government in the market.