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Managerial Economics

The Scope of Managerial Economics

The scope of managerial economics in two parts: microeconomic theories for the firm's internal decisions, and a PESTEL view of the environment outside it.

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The scope of man­age­r­ial eco­nom­ics falls into two broad parts: micro­eco­nom­ics for the prob­lems inside the firm, and macro­eco­nom­ics for the con­di­tions out­side it.

Micro­eco­nom­ics for solv­ing oper­a­tional prob­lems

Man­agers use micro­eco­nomic prin­ci­ples to han­dle inter­nal mat­ters such as pro­duc­tion, sales, dis­tri­b­u­tion, cap­i­tal, pric­ing, profit and the work­force. The main the­o­ries they draw on are these.

  • Pro­duc­tion the­ory: to get high out­put from lim­ited resources, the firm stud­ies its pro­duc­tion deci­sions: how much cap­i­tal and labour it needs, its capac­ity, its processes and tech­niques, and its cost and qual­ity.
  • Invest­ment the­ory: the firm plans its cap­i­tal spend­ing care­fully so that resources are used well and earn good returns.
  • Demand the­ory: to keep cus­tomers sat­is­fied, man­agers study what con­sumers need and how they respond to the fir­m's prod­ucts and ser­vices.
  • Mar­ket struc­ture and pric­ing the­ory: the firm decides its prices com­pet­i­tively, tak­ing into account pro­duc­tion cost, mar­ket demand and mar­ket­ing cost.
  • Profit man­age­ment: since profit is a cen­tral aim, the firm keeps a close watch on both cost and rev­enue.

Macro­eco­nom­ics for han­dling the exter­nal envi­ron­ment

A busi­ness also faces chal­lenges it can­not con­trol. Macro­eco­nomic think­ing, often organ­ised through a PES­TEL analy­sis, helps the man­ager read that envi­ron­ment.

  • Polit­i­cal (P): the gov­ern­ment plays a large part in a fir­m's progress, so man­agers study how the style of gov­er­nance, polit­i­cal unrest and for­eign col­lab­o­ra­tion affect pri­vate com­pa­nies.
  • Eco­nomic (E): prof­itabil­ity depends heav­ily on gov­ern­ment pol­icy, tax changes, GDP growth and the coun­try's eco­nomic sta­bil­ity.
  • Social (S): soci­ety's val­ues, beliefs and atti­tudes, con­sumer aware­ness, employ­ment con­di­tions, lit­er­acy and trade unions all shape a busi­ness.
  • Tech­no­log­i­cal (T): tech­nol­ogy improves how goods and ser­vices are pro­duced and dis­trib­uted.
  • Envi­ron­men­tal (E): as con­cern for the envi­ron­ment grows, firms are pressed to adopt sus­tain­able prac­tices: cut­ting pol­lu­tion, man­ag­ing waste and con­serv­ing water and other nat­ural resources.
  • Legal (L): busi­nesses must work within the law, includ­ing con­sumer rights, labour laws, health and safety rules, labelling rules and adver­tis­ing guide­lines.
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