Managerial economics is the branch of management studies that uses economic ideas to make business decisions and solve business problems. It draws on both microeconomics and macroeconomics, and its central concern is using scarce resources well.
Think of it as the meeting point of business and economics. It gives managers the information they need for demand projections, capital management, pricing, profit planning, cost analysis and production planning.
A manager using it looks at the factors inside the firm and the forces outside it, then applies micro and macro tools to the problem at hand. So it is a practical subject: economic reasoning is put to work on real business questions, and not only to fix today's problems but also to help the firm grow and last.
Writers usually describe three approaches to managerialism:
- Liberal: consumer demand drives the market; customers are free to make their own buying choices, and the firm must follow them.
- Normative: management takes practical decisions on cost, demand analysis, production and advertising, based on experience and method.
- Radical: management takes a fresh, reforming view and puts customer needs and satisfaction ahead of profit alone.
The economist N. Gregory Mankiw organises the study of economics around three questions, and each of them matters to a manager too:
- How do people make decisions?
- How do people interact?
- How does the economy work as a whole?
A firm that understands the answers is far better placed to succeed.
Key terms
- Strategic choice
- A decision that sets the future direction and strategy of a firm.
Common questions
What are the characteristics of managerial economics?
It is usually described as:
- Microeconomic in nature
- Multidisciplinary
- Goal-oriented
- Practical
- Dynamic
- Normative
- Conceptual
- Metrical, that is, it measures and quantifies