Managerial Economics definitions

In simple words, business economics is the discipline which helps a business manager in decision making for achieving the desired results. In other words, it deals with the application of economic theory to business management.

According to Spencer and Siegelman, Business economics is "the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management".

According to Mc Nair and Meriam, "Business economics deals with the use of economic modes of thought to analyse business situation".From the above said definitions, we can say that business economics makes in depth study of the following objectives:

  • Explanation of nature and form of economic analysis

  • Identification of the business areas where economic analysis can be applied

  • Spell out the relationship between Managerial Economics and other disciplines outline the methodology of managerial economics.


The following characteristics of business economics will indicate its nature:

1. Micro economics: Managerial economics is micro economic in character. This is so because it studies the problems of an individual business unit. It does not study the problems of the entire economy.

2. Normative science: Managerial economics is a normative science. It is concerned with what management should do under particular circumstances. It determines the goals of the enterprise. Then it develops the ways to achieve these goals.

3. Pragmatic: Managerial economics is pragmatic. It concentrates on making economic theory more application oriented. It tries to solve the managerial problems in their day-today functioning.

4. Prescriptive: Managerial economics is prescriptive rather than descriptive. It prescribes solutions to various business problems.

5. Uses macro economics: Marco economics is also useful to business economics. Macro-economics provides an intelligent understanding of the environment in which the business operates. Managerial economics takes the help of macro-economics to understand the external conditions such as business cycle, national income, economic policies of Government etc.

6. Uses theory of firm: Managerial economics largely uses the body of economic concepts and principles towards solving the business problems. Managerial economics is a special branch of economics to bridge the gap between economic theory and managerial practice.

7. Management oriented: The main aim of managerial economics is to help the management in taking correct decisions and preparing plans and policies for future. Managerial economics analyses the problems and give solutions just as

doctor tries to give relief to the patient.

8. Multi disciplinary: Managerial economics makes use of most modern tools of mathematics, statistics and operation research. In decision making and planning principles such accounting, finance, marketing, production and personnel etc.

9. Art and science.- Managerial economics is both a science and an art. As a science, it establishes relationship between cause and effect by collecting, classifying and analyzing the facts on the basis of certain principles. It points out to the objectives and also shows the way to attain the said objectives.


  1. Managerial economics provides such tools necessary for business decisions. Managerial economics answers the five fundamental problems of decision making. These problem are : (a) what should be the product mix (b) which is the least cost production technique and input mix (c) what should be the level of output and price of the product (d) how to take investment decisions (e) how much should be the selling cost. In order to solve the problems of decision- making, data are to be collected and analysed in the light of business objectives. Business economics supplies such data to the business economist. As pointed out by Joel Dean "The purpose of managerial economics is to show how economic analysis can be used in formulating business policies"The basic objective of managerial economics is to analyse economic problems of business and suggest solutions and help the managers in decision-making. The objectives of business economics are outlined as below:To integrate economic theory with business practice.

  2. To apply economic concepts: and principles to solve business problems.

  3. To employ the most modern instruments and tools to solve business problems.

  4. To allocate the scarce resources in the optimal manner.

  5. To make overall development of a firm.

  6. To help achieve other objectives of a firm like attaining industry leadership, expansion of the market share etc.

  7. To minimise risk and uncertainty

  8. To help in demand and sales forecasting.

  9. To help in operation of firm by helping in planning, organising, controlling etc.

  10. To help in formulating business policies.

  11. To help in profit maximisation.

Business economics is useful because: (i) It provides tools and techniques for managerial decisions, (ii) It gives answers to the basic problems of business management, (iii) It supplies data for analysis and forecasting, (iv) It provides tools for demand forecasting and profit planning, (v) It guides the managerial economist.Thus, Business economics offers a number of benefits to business managers. It is also useful to individuals, society and government.


Managerial economics is a developing science which generates the countless problems to determine its scope in a clear-cut way. From the following fields, we can examine the scope of business economics.

1. Demand analysis and forecasting.

The foremost aspect regarding scope is demand analysis and forecasting. A business firm is an economic unit which transforms productive resources into saleable goods. Since all output is meant to be sold, accurate estimates of demand help a firm in minimizing its costs of production and storage. A firm must decide its total output before preparing its production schedule and deciding on the resources to be employed. Demand forecasts serves as a guide to the management for maintaining its market share in competition with its rivals, thereby securing its profit.

2. Cost and production analysis.

A firm's profitability depends much on its costs of production. A wise manager would prepare cost estimates of a range of output, identify the factors causing variations in costs and choose the cost-minimising output level, taking also into consideration the degree of uncertainty in production and cost calculations. Production process are under the charge of engineers but the business manager works to carry out the production function analysis in order to avoid wastages of materials and time. Sound pricing policies depend much on cost control. The main topics discussed under cost and production analysis are: Cost concepts, cost-output relationships, Economies and Dis-economies of scale and cost control.

3. Pricing decisions, policies and practices.

Another task before a business manager is the pricing of a product. Since a firm's income and profit depend mainly on the price decision, the pricing policies and all such decisions are to be taken after careful analysis of the nature of the market in which the firm operates. The important topics covered in this field of study are : Market Structure Analysis, Pricing Practices and Price Forecasting.

4. Profit management.

Each and every business firms are tended for earning profit, it is profit which provides the chief measure of success of a firm in the long period. Economists tells us that profits are the reward for uncertainty bearing and risk taking. A successful business manager is one who can form more or less correct estimates of costs and revenues at different levels of output. The more successful a manager is in reducing uncertainty, the higher are the profits earned by him. It is therefore, profit-planning and profit measurement constitute the most challenging area of business economics.

5. Capital management.

Still another most challenging problem for a modern business manager is of planning capital investment. Investments are made in the plant and machinery and buildings which are very high. Therefore, capital management requires top- level decisions. It means capital management i.e., planning and control of capital expenditure. It deals with Cost of capital, Rate of Return and Selection of projects.

6. Inventory management:

A firm should always keep an ideal quantity of stock. If the stock is too much, the capital is unnecessarily locked up in inventories At the same time if the level of inventory is low, production will be interrupted due to non-availability of materials. Hence, a firm always prefers to have an optimum quantity of stock. Therefore,managerial economics will use some methods such as ABC analysis, inventory models with a view to minimising the inventory cost.

7. Linear programming and theory of games :

Linear programming and theory of games have came to be regarded as part of managerial economics recently.

8. Environmental issues:

There are certain issues of macroeconomics which also form a part of managerial economics. These issues relate to general business, social and political environment in which a business enterprise operates. 9. Business cycles: Business cycles affect business decisions. They refer to regular fluctuations in economic activities in the country. The different phases of business cycle are depression, recovery, prosperity, boom and recession.Thus, managerial economics comprises both micro and macro-economic theories. The subject matter of managerial economics consists of all those economic concepts, theories and tools of analysis which can be used to analyse the business environment and to find out solution to practical business problems.