NATURE AND SCOPE OF MANAGERIAL ECONOMICS

Taking appropriate business decisions requires a clear understanding of the technical and Environmental
conditions under which business decisions are taken. Application of economic theories to explain and
analyze the technical conditions and the business environment contributes a good deal to the rational
decision-making process. Economic theories have, therefore, gained a wide range of application in the
analysis of practical problems of business. With the growing complexity of business environment, the
usefulness of economic theory as a tool of analysis and its contribution to the process of decisionmaking has been widely recognized.
Baumol has pointed out three main contributions of economic theory to business economics. First, one
of the most important things which the economic (theories) can contribute to the management science
is building analytical models, which help to recognize the structure of managerial problems, eliminate
the minor details, which might obstruct decision- making and help to concentrate on the main issue.
Secondly, economic theory contributes
to the business analysis a set of analytical methods which may not be applied directly to specic
business problems, but they do enhance the analytical capabilities of the business analyst. Thirdly,
economic theories offer clarity to the various concepts used in business analysis, which enables the
managers to avoid conceptual pitfalls.

Scope of Managerial Economics

The problems in business decision-making and forward planning can be grouped into four
categories as follows:

Problems of Resource Allocation: Source resources are to be used with utmost efciency to get
the optimal results. These include production programming and problems of transportation, etc.
Inventory and Queuing Problems: inventory problems involve decisions about holding of optimal
levels of stocks of raw materials and nished goods over a period. These decisions have to be
taken by considering demand and supply conditions. Queuing problems involve decisions about
installation of additional machines or not hiring labor, against the cost of such machines or
labor.
Pricing Problems: Fixing prices for the products of the rm are important decision making
problems. Pricing problems involve decisions regarding various methods of pricing to be
followed.
Investment Problems: It is related of allocating resources over time. These normally relate to:
investing new plants, how much to invest, expansion programs for the future, sources of funds,
etc.

Managerial Economics (ME) seeks solutions to these problems. So, there is a wide Spectrum of topics
that fall under ME and they are as follows:

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Profit analysis
Cost analysis
Production possibility chart
Pricing theory and policies
Demand analysis
Market penetration studies
Economic forecasting
Sales forecasting
Marginal analysis
Break even analysis
Competitive market studies
Anti-trust issues
Plant location studies
Mergers and acquisitions
Labor cost studies
Inventory problems
Investment analysis
Capital budgeting
Cost of capital
Government regulations

Out of the above list, there are some major areas which are very much important for management ,
they are as follows :

Demand analysis and forecasting

Production and cost,
Competition
Pricing and output, and
investment and capital budgeting