Busi­ness plan­ning

Man­age­r­ial eco­nom­ics helps a busi­ness draw up sound plans and take bet­ter deci­sions. It analy­ses demand and fore­casts future busi­ness activ­ity, which is where plan­ning begins.

Cost con­trol

Keep­ing costs in check mat­ters to every busi­ness. Man­age­r­ial eco­nom­ics exam­ines pro­duc­tion activ­i­ties and the costs attached to them, and makes sure resources are used effi­ciently, which brings down over­all cost.

Price deter­mi­na­tion

Set­ting the right price is one of the key deci­sions any busi­ness takes. Man­age­r­ial eco­nom­ics gives man­agers the rel­e­vant infor­ma­tion for decid­ing the price of each prod­uct.

Busi­ness pre­dic­tion

By apply­ing eco­nomic tools and the­o­ries, man­agers can antic­i­pate future uncer­tain­ties. Spot­ting them early allows the firm to take steps to avoid or reduce them.

Profit plan­ning and con­trol

It helps plan and man­age the fir­m's profit by esti­mat­ing all costs and rev­enues accu­rately, so that the tar­get profit can be earned.

Inven­tory man­age­ment

Good inven­tory man­age­ment keeps busi­ness activ­ity run­ning with­out inter­rup­tion. By study­ing demand and pro­duc­tion, man­agers can make sure the right quan­tity of stock is avail­able.

Man­ag­ing cap­i­tal

Man­age­r­ial eco­nom­ics guides deci­sions about the fir­m's cap­i­tal. Invest­ment options are exam­ined before money is com­mit­ted, so that each invest­ment is likely to be prof­itable. For many firms this is its most impor­tant use.

Beyond these, man­age­r­ial eco­nom­ics also helps man­agers to:

Improve per­for­mance

It helps them find and remove waste in the organ­i­sa­tion.

Com­pete effec­tively

It helps them under­stand their com­peti­tors and work out ways to do bet­ter than them.

Make bet­ter strate­gic choices

It helps them see the long-term effects of their deci­sions.

In short, man­age­r­ial eco­nom­ics is a vital tool for man­agers who want to make informed choices and improve their organ­i­sa­tion's per­for­mance. It is applied in sev­eral spe­cific areas:

  • Pric­ing: set­ting prices that max­imise profit.
  • Pro­duc­tion: decid­ing how to pro­duce goods or ser­vices in the most effi­cient way.
  • Mar­ket­ing: design­ing adver­tis­ing that reaches the tar­get cus­tomers and raises sales.
  • Finance: decid­ing how to raise cap­i­tal, where to invest it and how to man­age the bud­get.
  • Risk con­trol: iden­ti­fy­ing and assess­ing risks and work­ing out ways to reduce them.

It is use­ful to man­agers in every indus­try. If you are inter­ested in a career in man­age­ment, a course in man­age­r­ial eco­nom­ics is well worth tak­ing.

Key terms

PES­TEL (Polit­i­cal, Eco­nomic, Social, Tech­no­log­i­cal, Envi­ron­men­tal and Legal)
A method of analysing these six exter­nal fac­tors in a busi­ness's sit­u­a­tion, to iden­tify the oppor­tu­ni­ties and threats they cre­ate.
Cost con­trol
The prac­tice of iden­ti­fy­ing and reduc­ing busi­ness expenses to increase profit. It starts with the bud­get­ing process and is cen­tral to main­tain­ing and grow­ing prof­itabil­ity.

Com­mon ques­tions

What are the types of man­age­r­ial eco­nom­ics?

1. Lib­eral man­age­ri­al­ism: peo­ple make their choices freely in a mar­ket, which is a demo­c­ra­tic set­ting. The firm and its man­agers must fol­low cus­tomer demand and mar­ket trends, or the busi­ness may fail.

2. Nor­ma­tive man­age­ri­al­ism: man­age­r­ial deci­sions are based on real expe­ri­ence and prac­tice. Man­agers use a method­i­cal approach to demand analy­sis, fore­cast­ing, cost man­age­ment, prod­uct design and pro­mo­tion, hir­ing and so on.

3. Rad­i­cal man­age­ri­al­ism: man­agers take a cre­ative, reform­ing approach to busi­ness prob­lems, aim­ing to improve the present sit­u­a­tion. The focus is on the needs and sat­is­fac­tion of the con­sumer rather than only on max­imis­ing income.

Is man­age­r­ial eco­nom­ics a sci­ence?

It is both an art and a sci­ence. Find­ing solu­tions needs logic, crit­i­cal think­ing and ana­lyt­i­cal abil­ity, and it rests on eco­nomic the­o­ries, meth­ods and tech­niques applied to busi­ness prob­lems.

What is the role of man­age­r­ial eco­nom­ics?

It plays a key role in busi­ness man­age­ment: it sup­ports deci­sion-mak­ing, plan­ning, demand pro­jec­tion, coor­di­na­tion, cost analy­sis, cost con­trol, pro­duc­tion analy­sis, profit man­age­ment and cap­i­tal man­age­ment.

How does man­age­r­ial eco­nom­ics dif­fer from eco­nom­ics?

Man­age­r­ial eco­nom­ics applies eco­nomic prin­ci­ples sys­tem­at­i­cally to a fir­m's deci­sions; it solves busi­ness prob­lems and focuses on using scarce resources well. Tra­di­tional eco­nom­ics stud­ies the pro­duc­tion, dis­tri­b­u­tion and con­sump­tion of goods across the econ­omy and how lim­ited resources are allo­cated.