Firms and Managers | Nature of Managerial Economics
Firms and Managers
Firms exist because they are useful in the process of producing and distributing goods and services. They are basically economic entities. A business enterprise is a combination of people, physical and financial assets, and information (financial, technical, marketing, and so on). People directly involved in an enterprise include stockholders, management, labor, suppliers, and output. In addition, all of society is affected by a firm’s activity, because businesses use resources that would otherwise be available for other purposes, pay taxes if operations are profitable, provide employment and produce most of society’s material and services output.
It is very difficult to manage business organizations for the managers. They must develop effective policies so that the objectives of the organization can be efficiently realized. From CEO of large corporations to managers of small, privately held companies – and public enterprises and even non-profit organizations such as universities, hospitals and so on managers cannot expect to succeed in business without a clear understanding of how market forces create both opportunities and constraints for business enterprises. Economic forces in the marketplace determine the demand for products, the prices of resources and costs of production, the number of rival firms, the nature of pricing strategies, and ultimately the profitability of business investments. Extensive knowledge and a wide variety of skills are required to complete each of these important forces so that appropriate decisions can be made. One of the most important requirements for a successful manager is the ability to make good decisions and one of the most important tools used by successful managers is the methodology of managerial economics. It provides a systematic, logical way of analyzing business decisions.
Each organization seeks to achieve some goals or objectives subject to the given constraints. For example:
- A biscuit factory may seek to maximize profit subject to limited inputs and legal constraints.
- A hospital may seek to treat as many patients as possible at an adequate medical standard with its limited physical resources (doctors, technicians, nurses, equipment) and budget.
- The goal of a university may be to provide education to as many students as possible, subject to physical and financial constraints.
- A municipality seeks to provide its service to as many people as possible at the lowest possible cost.
Nature of Managerial Economics
Managerial economics may be defined as the application of economic theory to the problems of management. Jn other words, business or managerial economics is that part of economic theory that deals with the application of economic tools and concepts to the solution of business problems or the problems of resource allocation among the competing ends. Managerial or business economics has been viewed differently by different scholars. Some of the popular definitions of managerial economics are given as under:
Brigham and Pappas believe that “Managerial economies is the application of economic theory and methodology to Managerial ad”administrative practices.”
According to Mc Nair and Meriam, “Business economics is the use of economic modes of thought to analyze managerial situations.”
According to Spencer and Siegelman, “Business economics is the integration of economic theory with managerial practices for the purpose of facilitating decision-making and forward planning by management.”
prof. Even Douglas says, “Business economics is concerned with the application of economic principles and methodologies to the decision-making process within the firm or organization under the conditions of uncertainty.”
According to Edwin Mansfield, “Managerial or-business economics is concerned with the ways in which managers should make decisions in order to maximize the effectiveness or performance of the organizations they manage.”
In the words of D.C. Hauge, “Managerial economics is a fundamental academic subject which seeks to understand and to analyze the problems of managerial decision-making.
According to Joel Dean, “The purpose of managerial or business economics is to show how economic analysis can be used in formulating managerial policies.
It is concluded that managerial economics is the discipline that deals with the application of economic theory to business management. In other words, business economics refers to the application of economic theory and decision science tools to find the optimal solution to business decision problems.
It helps managers arrive at a set of operating rules that aid in the efficient utilization of scarce human and capital resources. The use and value of managerial economics can be appreciated by examining both its perspective and descriptive components. Managerial economics prescribes rules for improving managerial decisions. It tells managers how action should be undertaken to achieve organizational goals efficiently. Managerial economics also helps managers recognize how economic forces affect organizations and describes the economic consequences of management behavior.
