Application of Managerial Economics
The application of managerial economics is these examples. Tools of managerial economics can be used to achieve all the goals of a business organization in an efficient manner. Typical managerial decision making may involve one of the following issues:
Deciding the price of a product and the quantity of the commodity to be produced.
Deciding whether to manufacture a product or to buy from another manufacturer.
Choosing the production technique to be employed in the production of a given product.
Deciding on the level of inventory a firm will maintain of a product or raw material.
Deciding on the advertising media and the intensity of the advertising campaign.
Making employment and training decisions.
Making decisions regarding further business investment.
It should be noted that the application of managerial economics is not limited to profit-seeking business organizations. Tools of managerial economics can be applied equally well to decision problems of nonprofit organizations. While a nonprofit hospital is not like a typical firm seeking to maximize its profits, a hospital does strive to provide its patients the best medical care possible given its limited staff (doctors, nurses, and support staff), equipment, space, and other resources.
The hospital administrator can use the concepts and tools of managerial economics to determine the optimal allocation of the limited resources available to the hospital. In addition to nonprofit business organizations, government agencies and other nonprofit organizations (such as cooperatives, schools, and museums) can use the techniques of managerial decision making to achieve goals in the most efficient manner.
ECONOMIC CONCEPTS USED IN MANAGERIAL ECONOMICS
Managerial economics uses a wide variety of economic concepts, tools, and techniques in the decision-making process. These concepts can be placed in three broad categories:
The theory of the firm, which describes how businesses make a variety of decisions
The theory of consumer behavior, which describes decision making by consumers
The theory of market structure and pricing, which describes the structure and characteristics of different market forms under which business firms operate.
Role of Managerial Economics
Managerial economics, or business economics, is a division of microeconomics that focuses on applying economic theory directly to businesses. The application of economic theory through statistical methods helps businesses make decisions and determine strategy on pricing, operations, risk, investments and production. The overall role of managerial economics is to increase the efficiency of decision making in businesses to increase profit.
Pricing
Managerial economics assists businesses in determining pricing strategies and appropriate pricing levels for their products and services. Some common analysis methods are price discrimination, value-based pricing and cost-plus pricing.
Elastic vs. Inelastic Goods
Economists can determine price sensitivity of products through a price elasticity analysis. Some products, such as milk, are consider a necessity rather than a luxury and will purchase at most price points. This type of product is considered inelastic. When a business knows they are selling an inelastic good, they can make marketing and pricing decisions easier.
Operations and Production
Managerial economics uses quantitative methods to analyze production and operational efficiency through schedule optimization, economies of scale and resource analyses. Additional analysis methods include marginal cost, marginal revenue and operating leverage. Through tweaking the operations and production of a company, profits rise as costs decline.
Investments
Many managerial economic tools and analysis models are used to help make investing decisions both for corporations and savvy individual investors. These tools are use to make stock market investing decisions and decisions on capital investments for a business. For example, managerial economic theory can be used to help a company decide between purchasing, building or leasing operational equipment.
Risk
Uncertainty exits in every business and managerial economics can help reduce risk through uncertainty model analysis and decision-theory analysis. Heavy use of statistical probability theory helps provide potential scenarios for businesses to use when making decisions.