Economics combines elements of both science and art.

Economists try to develop analytical mathematical models which seek to explain economic behaviour in a way that can be theoretically proved. For example working out the elasticity of demand through using calculus. In macro economic models there are many models which seek to explain macro variables such as inflation, growth and unemployment. Yet, when applied to the real world these models have significant limitations which can make them of limited value. For example, much of economic theory rests on an assumption of rational behaviour by consumers. Especially in classical economics, economic theory is derived from a belief that consumers and firms will rationally pursue utility maximising decisions. Yet, in practice human nature is much more complex.Behavioural economics tries to understand these human factors much more but, this involves many normative / subjective opinions. In the past few decades the efficient market hypothesis took the assumption, asset prices would be correctly priced given available information. Yet, recent events suggest these neat theories have severe limitations in the real world. Consumers and firms do not always behave rationally, but are subject to irrational behaviour such as

Irrational exuberance the belief asset prices can keep rising Herd behaviour the belief the majority must be right e.g. if share prices, house prices are rising it must be based on economic fundamentals. Yet, the majority is often wrong, which is why we get booms and busts quite frequently. If economics is a science, the obvious question is why did so few economists not predict the current crisis? The answer is that many economists had great confidence in their theories of efficient market hypothesis and didnt feel the house price rises of 2000 -2006 was a boom, but based on underlying fundamentals. In October of 2008, one of the chief architects of the period of great moderation, Alan Greenspan admitted he was in a state of shocked disbelief, because the whole intellectual edifice had collapsed.

If economics was a science, the whole intellectual theory was no longer was satisfactory. This crisis is not the first time, economic theory has been left failing to give any meaningful explanation. The Great Depression left the economic profession fumbling in the dark for why markets werent clearing. Monetarists will claim the stagflation of the 1970s, showed the limitations of Keynesian fiscal expansion. There are many issues to this question and Ive only touched on a few. To summarise, in isolation, you can look at an economic issue and analyse them as a science. But, linking theory to the real world is always going to be a very subjective experience. It depends on which sets of data you use, it depends on which assumptions to make. Perhaps the problem in recent decades is that economists have spent too much time trying to fit everything into their neat theories. The problem is that economics is very complex, there are no easy overarching explanations like E=MC2 of F=MA. It is said Henry Trueman asked for a one armed economist an economist who would give a straight simple answer rather than it depends or on the other hand. This shows he was hoping economics could be reduced to a simple science but in reality it is more of an art.
Economics is considered to be a science as well as an art. Some of its features like...self corrective nature, systematic body of knowledge, own laws and theories, universal validity of its laws(law of demand,marginal utility,law of diminishing returns,etc) support economics to be a science, but its other features like lack of predictability and lack of accurate observation and experimentation prevents the same... Moreover economics has some features in common with art i.e. The applicability of theories and principles into practical use. For this reason Marshall took out a midway and regarded economics as a science,pure and applied,rather than a science and an art.

1) What to produce: This problem is what should the economy produce in order to satisfy consumer wants (as seen by demand curves) as best as possible using the limited resources available. If a country produces goods in a way that maximises consumer satisfaction then the economy is allocatively efficient. 2) How to produce: This problem is how to combine production inputs to produce the goods decided in problem 1 as most efficiently as possible. An economy achieves productive efficiency if it produces goods using the least

resources possible. A productively effiecient economy is represented by an economy that is able to produce a combination of goods on the actual curve of the PPF. 3) For whom to produce: Should the economy produce goods targetted towards those who have high incomes or those who have low incomes. What sort of demographic group should the goods in the economy that are produced be targetted towards? If the economy is addresses this problem then it has reached preto efficiency or pareto optimality. If all three problems are addressed at any one time then the economy has achieved static efficiency. If the economy achieves static efficiency over a period of time then it is dynamically efficient.

All these problems are focused around the problem of unlimited wants and limited resources. Where resources are the fators of production (such as labor, capital, technology, land..) which are used to produce the products that satisy the wants. Source(s): My first ever economics lesson many years ago.

Positive science implies that science which establishes relationship between cause and effect. In other words, it scientifically analyses a problem and examines the causes of a problem. For example, if prices have gone up, why have they gone up. In short, problems are examined on the basis of facts. On the other hand, normative science relates to normative aspects of a problemi.e., what ought to be. Under normative science, conclusions and results are not based on facts, rather they are based on different considerations like social, cultural, political, religious and son are basically is subjective in nature, an expression of opinions. In short, positive science is concerned with 'how and why' and normative science with 'what ought to be'. The distinction between the two can be explained with the help of an example of increase in the rate of interest. Under positive science it would be looked into as to why interest rate has gone up and how can it be reduced whereas under normative science it would be seen as to whether this increase is good or bad. Three statements about positive and normative science each are given below: Positive Science: (i) The main cause of price-rise in India is increase in money supply. (ii) Production of food grains in India has increased mainly because of increase in irrigation facilities and consumption of chemical fertilisers. (iii) The rate of population growth has been very high partly because of high birth rate and partly because of decline in death rate. Normative Science: (i) Inflation is better than deflation. (ii) More production of luxury goods is not good for a poor country like India.

(iii) Inequalities in the distribution of wealth and incomes should be reduced

Micro economics and macro economics

Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and government decisions. Macroeconomics and microeconomics, and their wide array of underlying concepts, have been the subject of a great deal of writings. The field of study is vast; here is a brief summary of what each covers: Microeconomics is the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services. This means also taking into account taxes and regulations created by governments. Microeconomics focuses on supply and demand and other forces that determine the price levels seen in the economy. For example, microeconomics would look at how a specific company could maximize it's production and capacity so it could lower prices and better compete in its industry. (Find out more about microeconomics in Understanding Microeconomics.) Macroeconomics, on the other hand, is the field of economics that studies the behavior of the economy as a whole and not just on specific companies, but entire industries and economies. This looks at economy-wide phenomena, such as Gross National Product (GDP) and how it is affected by changes in unemployment, national income, rate of growth, and price levels. For example, macroeconomics would look at how an increase/decrease in net exports would affect a nation's capital account or how GDP would be affected by unemployment rate. (To keep reading on this subject, see Macroeconomic Analysis.) Read more: http://www.investopedia.com/ask/answers/110.asp#ixzz21zpIY61M
] Micro economics plays a vital role in the study of modern economic theory. It is important in the following ways as described below:

To understand the working of the economy:

It helps us in understanding the working of a free enterprise economy. It gives us an idea about how major economic decisions are taken in a market economy.

Helpful in the efficient employment of resources:

It suggests economizing, that is how efficiently the scarce available resources can be utilized in production process in an economy.

 Helps in International Trade:

Micro economics is used to explain gains from internal trade, external trade, foreign exchange, balance of payment, disequilibrium and in the determination of exchange rate.

Basis of welfare economics:

The entire structure of micro economics has been built on the basis of price theory which is an important constituent of micro economics. It suggests the conditions of efficiency and explains how it can be achieved. It helps in improving the standard of living of population.

Helpful in understanding the consequences of taxation:

Imposition of tax leads to reallocation of resources from one place to another. Micro economics explains how imposition of different types of direct and indirect taxes lead to attainment of social welfare.

Tool for evaluating economic policies:

It helps the states and central government to frame economic policies like price policy, taxation policy etc. It also explains the condition of efficiency in production and consumption.

Construction and use of models:

Micro economics construct and uses simple models in order to understand the actual economic phenomenon. It uses abstract models to explain the economic phenomenon.

May no be true inaggregates:Micro economics studies small economic units explaining the relation and the equilibrium between them.But the use of the conclusions of the equilibrium of small units or the partial equilibrium in case of the economy as a whole provides wrong conclusion.Because what is true in cost of one unit may be true case of aggregates.For example,individual saving is good since it promotes individual economic property.But if all people save,the effective demand is reduced.This,in,turn reduces the employment opportunities. Assumption of full employees unrealistic:Micro-economic assumes 'ceteris paribus and full employment'.But this is an unrealistic assumption.According to J.M.Keynes,the socexample,it studies about individuals demand,individual price and so on.Micro-economics,does not give knowledge about the working of the whole economy.The knowledge of the economy.The knowledge of the economy as a whole is also equally important to the man

Macroeconomics is useful in several ways. Some of them are discussed under the following headings: a. To understand the working of economy:-Macroeconomics gives birds eye view of the economic world. It helps in understanding how the macroeconomic variables behave in the aggregate. Study of the national income, aggregate output, gross saving and output, national expenditure is very essential to understand the working of the economy. b. Helpful in formulation of economic policies:-Macroeconomic analysis provides a sound basis for the formulation of governments economic policy. The economic policies for the removal of poverty, employment and price stabilization must be based upon reliable statistics of the aggregate variables. c. Helpful in controlling economic fluctuations:-Economic fluctuations like trade cycle, inflation, deflation etc. need to be handled appropriately in appropriate period to correct them. This will give a finite direction to the economy. For this the knowledge of macroeconomics is essential. d. Helpful in international comparisons:-Only macroeconomic variables like national income, total output, aggregate demand, and consumption behaviour and investment patterns of different countries can be easily compared. Macroeconomics provides the necessary information for this. e. National Income:-National income is the barometer that scales the growth of a country. It analyses the overall performances of the economy within a given period of time and allow us to compare that performance with the post. National income, basically, is an aggregate concept. Thus, macroeconomics studies about the problems of unemployment, inflation, economic instability and economic growth. It also enriches our knowledge of functioning of the whole economy by studying the behaviour of national income, output, investment, saving, and consumption.

The significances of the study of micro-economics remarkably increased after it was developed and popularised by J.M Keynes.But macro-economics has following limitations. 1. Danger of excessive thinking in terms of aggregates :There is danger of executive thinking in terms of aggregates which are not homogeneous.For example,2apples +3apples=5 apples is the meaning full aggregate,similarly 2 apples +3 oranges is meaningful to some extent. 2. Aggregate tendency may not affect all sectors equally :For example,the general increase in price affects different sections of the community or the different sectors of the economy differently.The increase in general level of price benefits the producers,but hurts the consumers. 3. Indicates no change has occured:The study of aggregates make us believe that no change has occured even if there is a change.It indicates that there is no need of new policy.For example,a 5 percent fall in agricultural price an d5 percent rise in industrial prices does not affect the price level. 4. Difficulty in the measurement of aggregates:There are at times,difficulty in the measurement of aggregates.It is difficult to measure the big aggregates.This problem has now been more or less erased by the use of calculators and the things which are nothomogeneous. 5. The fallacy of composition:The aggregate economic behavior is the sum of individual behavior.This is called fallacies of composition.What is true in case of an

individual may not be true in the case of economy as whole.For example,individual saving is a virtue,wheres the public saving is vice.According to K.E.Boulding "These difficulties are aggregative paradoxes which is true when used to one person,but false when used to the economy as a whole.

Following are the steps helps to managers while taking decisions.. 1.Establish objectives. 2.Define the problem. 3.identify factors that affect the problem. 4.specify alternative solutions. 5.collect data and other informations. 6.Evaluate and screen alternatives. 7.Implement best alternative and monitor result. I think these are the main process in managerial economics.. By -Nsk Note: There are comments associated with this question. See the discussion page to

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A managerial economist helps the management by using his analytical skills and highly developed techniques in solving complex issues of successful decision-making and future advanced planning. The role of managerial economist can be summarized as follows: 1. 2. 3. 4. 5. He studies the economic patterns at macro-level and analysis its significance to the specific firm he is working in. He has to consistently examine the probabilities of transforming an ever-changing economic environment into profitable business avenues. He assists the business planning process of a firm. He also carries cost-benefit analysis. He assists the management in the decisions pertaining to internal functioning of a firm such as changes in price, investment plans, type of goods /services to be produced, inputs to be used, techniques of production to be employed, expansion/ contraction of firm, allocation of capital, location of new plants, quantity of output to be produced, replacement of plant equipment, sales forecasting, inventory forecasting, etc. In addition, a managerial economist has to analyze changes in macro- economic indicators such as national income, population, business cycles, and their possible effect on the firms functioning. He is also involved in advicing the management on public relations, foreign exchange, and trade. He guides the firm on the likely impact of changes in monetary and fiscal policy on t he firms functioning. He also makes an economic analysis of the firms in competition. He has to collect economic data and examine all crucial information about the environment in which the firm operates. The most significant function of a managerial economist is to conduct a detailed research on industrial market. In order to perform all these roles, a managerial economist has to conduct an elaborate statistical analysis. He must be vigilant and must have ability to cope up with the pressures. He also provides management with economic information such as tax rates, competitors price and product, etc. They give their valuable advice to government authorities as well. At times, a managerial economist has to prepare speeches for top management.

6. 7. 8. 9. 10. 11. 12. 13.

Pricing
Managerial economics assists businesses in determining pricing strategies and appropriate pricing levels for their products and services. Some common analysis methods are price discrimination, value-based pricing and cost-plus pricing.

Elastic vs. Inelastic Goods

Economists can determine price sensitivity of products through a price elasticity analysis. Some products, such as milk, are consider a necessity rather than a luxury and will purchase at most price points. This type of product is considered inelastic. When a business knows they are selling an inelastic good, they can make marketing and pricing decisions easier. Sponsored Links

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Operations and Production

Managerial economics uses quantitative methods to analyze production and operational efficiency through schedule optimization, economies of scale and resource analyses. Additional analysis methods include marginal cost, marginal revenue and operating leverage. Through tweaking the operations and production of a company, profits rise as costs decline.

Investments
Many managerial economic tools and analysis models are used to help make investing decisions both for corporations and savvy individual investors. These tools are use to make stock market investing decisions and decisions on capital investments for a business. For example, managerial economic theory can be used to help a company decide between purchasing, building or leasing operational equipment.

Risk
Uncertainty exits in every business and managerial economics can help reduce risk through uncertainty model analysis and decision-theory analysis. Heavy use of statistical probability theory helps provide potential scenarios for businesses to use when making decisions.

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A business manager is essentially involved in the processes of decision making as well as forward planning. Decision making is an integral part of management. Management and decision making are to be considered as inseparable. It is the intellectual process and a purposeful activity which at varied times takes in hands all the managerial activities, such as, planning, organizing, staffing, directing and controlling. It is the process wherein an executive, by taking in to consideration several alternatives reaches at the conclusion about how it should be dealt successfully in a given situation. Thus, being a continuous activity, decision making is regarded to be the heart of management.

Decision making is nothing but choice-making and the importance of choice-making emerges due to the fact that a business faces the changes in the conditions in which it operates and there arise unforeseen contingencies. The survival and the growth of a business in such situations is directly determined through decision making process. It can be defined clearly as selecting one of the best alternatives available - that entails being two or more alternatives. According to George Terry, Decision making is the selection of a particular course of action, based on some criteria, from two or more possible alternatives. Decision making is thus choosing the best course of action out of the available options while aiming at the achievement of particular organizational objectives. Since a business organization has the available resources, such as, capital, land and labor, a business manager needs to select the best alternative among others and employ in the most efficient manner so as to attain the desired results. After a particular decision is made relating to resources, plans about production, pricing and materials are to be implemented. In this way, decision making and forward planning go conjointly. The fact that a business entity is influenced by the conditions is uncertainty about the future and due to the changes in the business environment resulting complexities in business decisions. Since no information or the knowledge about the future sales, profits or the costs is available for a business executive, the decisions are to be made on the basis of past data as well as the approximations being forecasted. In order that the decision making process is carried out in such conditions in an efficient way, economic theory is of great value and relevance as it deals with production, demand, cost, pricing etc. This gives rise to understand the concepts of managerial economics for business manager so that he may apply the economic principles to the business and appraise the relevance and impact of external factors in relation to the business. Having been regarded as micro economic as well as the economics of the firm, managerial economics is related to the economic theory which is to be applied to the business with the objective of solving business problems and to analyze business situations and the factors constituting the environment in which a business is operated. Managerial economics has been defined by Spencer and Siegelman as, The integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. Managerial economics is very much capable of serving various purposes and useful for managers in making decisions in relation to the internal environment. It aims at the development of economic theory of the firm while facilitating the decision making process with regard to sales and profits etc. Moreover, it enables to take decisions about appropriate production and inventory policies for the future. It is a branch of economics that is applied to analyze almost all business decisions. It is meant to undertake risk analysis, production analysis that is useful for production efficiency. Likewise, it is of great use for capital budgeting processes as well. In the most positive form, it seeks to make successful forecasts with the objective of minimizing the risks involved. It deals with the aspects as how much cash should be available and how much of it should be invested in relation to a choice of processes and projects while making possible the economic feasibility of various production lines. A business produces goods which are in course of time to be sold in the market on the basis of demand of consumers. Demand can be defined in brief as the quantity of goods that the consumers are willing to buy at certain prices. In this pursuit, the decisions related to demand are of much significance for managers as the process entails making appropriate

estimates with successful forecasts on sales before the activity of production is to be carried out. It is therefore demand analysis is essential part of managerial economics since it enables to analyze the demand determinants and forecasting with a deep involvement of value judgments. Above and beyond, by considering whether the competitions are likely to increase or decrease, a business manager with the help of managerial economics applications is able to asses demand prospects as well as the social behavior that can result in the expansion or the reduction of the sales of business products. As regards the pricing of products being produced by a business entity, it is one of the most critical decisions for a manager to fix the price of particular products as it is by means of pricing decisions taken by a manager, the inflow of revenue is determined. The areas that are to be covered through managerial economics application in this respect are, price methods, product line pricing and price forecasting. Further, Managerial economics deals with the cost estimates that are helpful for management decisions. More to the point, it is important for a manager to undertake production analysis and to determine economic cost with the objective of profit planning and cost control processes. Since the objective of a business entity in general is to generate profits, profit is the chief measure of success in this way. In respect of this, managerial economics cover the aspects, such as, Profit policies and the techniques of profit planning Break Even Analysis also called as cost volume profit analysis - that assists significantly in profit planning and cost control methods with a view to maximize profits of the business Managerial economics plays a significant role in the business organizations. It is very much effective to the management in decision making and forward planning in relation to the internal operations of a business as it gives clear understanding of market conditions as well as analytical tools through which the competitions prevailing in the markets can be studied, at the same time the market behavior can be predicted. It enables to analyze the information about the business environment in which a business is managed. It is meant to undertake systematic course of business plans by making possible forecasts. Managerial economics contributes to the profitable growth of business and effective solutions of the business problems by changing the economic scenario in to the feasible business opportunities for business organizations while enabling managers to optimize business decisions as well as involving them in the activity of forward planning efficiently.
Following are the steps helps to managers while taking decisions.. 1.Establish objectives. 2.Define the problem. 3.identify factors that affect the problem. 4.specify alternative solutions. 5.collect data and other informations. 6.Evaluate and screen alternatives. 7.Implement best alternative and monitor result. I think these are the main process in managerial economics.. By -Nsk Read more: http://wiki.answers.com/Q/How_does_managerial_economics_helps_in_decision_making#ixzz2 200IZ1BX