Managerial Economics

Managerial economics is a sub-discipline of economics that applies microeconomic theory and analysis to decision making processes of businesses, firms or other non-profit organisations. It is also sometimes referred to as business economics, though the two are now studied as different but related sub-fields of economics.

Managerial Economics can be defined as application of economic theory and analysis to the business practices to ease decision-making and future planning by the management. Managerial Economics helps the managers of a firm in a rational solution of problems faced in the business activities of the firm by making use of economic theory and concepts. It assists the managers in taking decisions relating to the firm’s customers, competitors and suppliers.

Managerial Economics techniques can be used extensively in price analysis, production analysis, capital budgeting, risk analysis and determination of demand.

Managerial economics uses both Economic theory as well as Econometrics for rational managerial decision making. Decision making in managerial economics normally involves the following five steps:

• Establishing a firm’s objectives
• Identifying the future obstacles in achievement of those objectives
• Development & provision of various alternative solutions
• Selection of the best alternative
• Implementation of the decision

Managerial Economics is associated with the ‘Theory of Firm’. The theory of firm states that the primary objective of the firm is to maximize wealth.