Managerial Economics – Application of Economic Theory in Solving Business Problems!

Managerial Economics – Application of Economic Theory in Solving Business Problems!

Managerial economics is concerned with various micro and macro Economic tools and the analysis of which can be used in managerial decision making to solve business problems. Micro Economic tools that are used in this subject include demand analysis, production and cost analysis, break-even analysis, pricing theory and practice, technical progress, location decisions and capital budgeting.

The macro Economic concepts that are directly or indirectly relevant to managerial decision-making comprise national income analysis, business cycles, monetary policy, fiscal policy, central banking, government finance, Economic growth, international trade, balance of payments, free trade protectionism, exchange rates and international monetary system.

The scope of this managerial science is wide and it has close connections with Economic theory, decision sciences and accountancy. Traditional economics talks about the theory and methodology while managerial economics applies Economic theory and methodology to solve business problems. It uses the tools and techniques of analysis to provide with optimal solutions to business problems.


  • Relationship with economics:

Managerial economics borrows concepts from economics just as engineering does from physics and medicine from biology. The analysis of both micro and macro Economic concepts add valuable inputs to the organization. Say, national income forecasting is an important aid to business condition analysis which in turn could be a priceless input for forecasting the demand for specific product groups. The theories of market structure can be analyzed for the purpose of market segmentation.


  • Relationship with decision sciences:

Decision models are created to format the solutions for problem situations and the process utilizes techniques like, optimization, differential calculus and mathematical programming. This also helps to analyze the impact of alternate course of action and evaluate the results obtained form the model.


  • Relationship with accounting:

Accounting data and statements constitute the language of business. The accounting profession considerably influences cost and revenue information and their classification. A manager should therefore be familiar with the generation, interpretation and use of accounting data.

Accounting moreover is viewed as a management decision tool and not anymore as a mere practice of bookkeeping. The concepts and practices of accounting can be very well applied to improve the Economic scope of a project.

Economics is an interesting subject as it deals with the day-to-day problems of a common man and at the same time is concerned with the Economic prosperity of a country as a whole. Its primary focus is on scarce resource allocations among competing ends. Individuals, enterprises and nations face problems of resource allocation. Managerial economics may be viewed as economics applied to problem solving at the level of the firm.


Managerial Economics – Application of Economic Theory in Solving Business Problems!


Managerial economics is the application of economic theory and tools to solve business problems. It is concerned with the application of economic principles and methods to analyze and solve problems faced by businesses and managers. In this article, we will explore the application of economic theory in solving business problems.


  1. Demand Analysis

Demand analysis is an important area of managerial economics. Managers need to understand the demand for their products or services to make informed decisions about pricing, advertising, and production. Economic theory can be used to analyze demand by examining factors such as price elasticity, income elasticity, and cross-elasticity of demand. This analysis can help managers to make decisions about pricing and advertising strategies, as well as product development.


  1. Production Analysis

Production analysis is another area of managerial economics that is concerned with optimizing production processes to maximize efficiency and profitability. Economic theory can be used to analyze production processes and identify ways to increase productivity and reduce costs. This analysis can help managers to make decisions about production methods, input combinations, and capacity utilization.


  1. Cost Analysis

Cost analysis is an important area of managerial economics that is concerned with identifying and minimizing costs. Economic theory can be used to analyze costs by examining factors such as fixed costs, variable costs, and marginal costs. This analysis can help managers to make decisions about pricing strategies, cost-cutting measures, and product development.


  1. Market Structure Analysis

Market structure analysis is an important area of managerial economics that is concerned with understanding the structure of markets and the behavior of firms within them. Economic theory can be used to analyze market structure by examining factors such as the number of firms in a market, the degree of product differentiation, and the presence of barriers to entry. This analysis can help managers to make decisions about pricing strategies, advertising, and market entry.


  1. Strategic Analysis

Strategic analysis is an important area of managerial economics that is concerned with long-term planning and decision-making. Economic theory can be used to analyze strategic decisions by examining factors such as market trends, competitor behavior, and consumer preferences. This analysis can help managers to make decisions about product development, market entry, and pricing strategies.

In conclusion, managerial economics is the application of economic theory and tools to solve business problems. By analyzing demand, production, costs, market structure, and strategic decisions, managers can make informed decisions that increase efficiency, profitability, and competitiveness. The use of economic theory in solving business problems is essential for the success of businesses and managers in today’s global economy.


How Managerial Economics Help To Solve Business Problems.


Managerial economics is a progressist science, it is a continue process of understanding and tool of economic knowledge. It is a application of economic theory to manage business or economy problem.

According to Spencer and Siegelman “Managerial economics is the integration of economic theory with business practice for the purpose of facilitating decision making and and forward planning by management.”

In every an organization 5M’s (Men, Machine, Materials, Money and Management ) is the important element for operating business or in production decision.

Here a question arise why we make a decision?

Because when company start a work. At that time it has have multiple choice, among them manager should choose the best alternative which gives us high satisfaction or maximum productivity with minimum use of means. Company try to use minimum means because of the scarcity of resources and unlimited wants.

Let’s discuss about major business problems( which are arises because of means scarcity, unlimited wants, different priority and means haveing alternative uses) ,these are initial problems of any business,but it is also can be an opportunity for a business if you can answer these question than your an organization can get advantage to earn more profit and sustain in a market.

1)What to produce:

It refers to allocative decision making. Where business solves the first problem what type of good and services to be produced from the available productive resources which is relatively scare. There are two theory for managers to easily decided what to produce.

  • Demand theory: In this theory an organization produce those goods and services which has already demand in a market.
  • Sales law: In this theory an analyst analyze the market to find problem. According the information producer create demand and supply on any particular good and services.


2) How to produce:

After having decision on what to produce then make decision about How to produce? How much to produce and pattern of goods and services? How to combine or use the resources? There are three techniques for help managers to produce product.

  • Manufacture by own: Here company use their own resources and technique to manufacture the product.
  • Contract: Here producer gives the task to another small firms to manufacture different part of goods. After finishing the task producer assemble to give it completion.
  • Branding: Here they import ready product and the company only give logo or branding.


3)Whom or Where to produce:

After produce a product, company have to make decision about distribution. Company distribute products among the verious economic agents. In a market distribution is done on the basis of ability to pay principles.

professor HALM said ” In all economic systems the basic problem is the allocation of scarce means among compteing ends for the achievement or maximum result.”

The business managers should be well aware of current and changing trend in the nation and international. According to information business can make strategy to sustain in a market and retain the customer.

Above we find out business 3 mojor problems related to only decision making so you should keep in mind that decision making plays important role in our formal as well as informal life, what is your future? What you achieve? It depends on your present decision. So whenever you make a decision be calm and rational.

Liberty Magazine requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
Prepare and write by:
Author: Mohammed A Bazzoun
If you have any more specific questions, feel free to ask in comments.


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