Managerial Economics Definitions


In the words of TJ. Webster, "Managerial economics is the synthesis of microeconomic theory and quantitative methods to find optimal solutions to managerial decision-making problems?

In the words of Hirschey and Pappas, "Managerial economics applies economic theory and methods to business and administrative decision making"

According to Mansfield, "Managerial economics provides a link between economic theory and decision sciences in the analysis of managerial decision making?

Brigham and Poppas believe that managerial economics is "the application of economic theory and methodology to business administration practice."

Hague on the other hand, considers managerial economics as "a fundamental academic subject which seeks to understand and to analyse the problems of business decision-making."

According to McNair and Meriam, “Managerial economics is the use of economic modes of thought to analyse business situations.”

According to Prof. Evan J Douglas, ‘Managerial economics’ is concerned with the application of economic principles and methodologies to the decision making process within the firm or organisation under the conditions of uncertainty”. Spencer and Siegelman define it as “The integration of economic theory with business practices for the purpose of facilitating decision making and forward planning by management.”

According to Hailstones and Rothwel, “Managerial economics is the application of economic theory and analysis to practice of business firms and other institutions.” A common thread runs through all these descriptions of managerial economics which is using a framework of analysis to arrive at informed decisions to maximize the firm’s objectives, often in an environment of uncertainty. It is important to recognize that decisions taken while employing a framework of analysis are likely to be more successful than decisions that are knee jerk or gut feel decisions.

Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:

  1. Risk analysis - various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk.

  2. Production analysis - microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm's cost function.

  3. Pricing analysis - microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.

  4. Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions.