Nature of managerial economics

You need to know about its various characteristics to get more information about managerial
economics. In the mentioned below points let’s read about the nature of this concept:

• Art and Science: Management theory requires a lot of critical and logical thinking and
analytical skills to make decisions or solve problems. Many economists also find it a source
of research, saying it includes applying different economic concepts, techniques and
methods to solve business problems.

• Micro Economics: In managerial economics, managers typically deal with the problems
relevant to a single entity rather than the economy as a whole. It is therefore considered an
integral part of microeconomics.

• Uses Macro Economics: A corporation works in an external world, i.e. it serves the
consumer, which is an important part of the economy.

• For this purpose, it is important that managers evaluate the various macroeconomic factors
such as market dynamics, economic changes, government policies, etc., and their effect on
the company.

• Multidisciplinary: It uses many tools and principles that belong to different disciplines,
such as accounting, finance, statistics, mathematics, production, operational research,
human resources, marketing, etc.

• Prescriptive/Normative Discipline: By introducing corrective steps it aims at achieving the

objective and solves specific issues or problems.

• Management Oriented: This serves as an instrument in managers’ hands to deal effectively

with business-related problems and uncertainties. This also allows for setting priorities,
formulating policies, and taking successful decision-making.

• Pragmatic: The solution to day-to-day business challenges is realistic and rational.

Scope of Managerial Economics

Managerial economics is commonly used to deal with various business problems within
organizations. Both micro and macroeconomics have an equal effect on the organization and its
working. The points which follow illustrate its significance:

Micro-economy Applied to operational matters

The various theories or principles of microeconomics used to solve the internal problems of the
organization arising in the course of business operations are as follows:

• Demand Theory: Demand Theory emphasizes the behavior of the consumer towards a
product or service. This takes into account the customers’ desires, expectations,
preferences, and conditions to enhance the manufacturing process.

• Decisions on Production and Production Theory: This theory is primarily concerned with
the volume of production, process, capital and labor, costs involved, etc. It aims to optimize
production to meet customer demand.

• Market Structure Pricing Theory and Analysis: It focuses on assessing a product’s price
taking into account the competition, market dynamics, production costs, optimizing sales
volume, etc.

• exam and management of profit: the companies are operating for assets hence they always
aim to maximize profit. It also depends on demand from the market, input costs, level of
competition, etc.

• Decisions on capital and investment theory: Capital is the most important business element.
This philosophy takes priority over the proper distribution of the resources of the company
and investments in productive programs or initiatives to boost operational performance.

Macro-Economics Applied to Business Environment

Any organization is greatly affected by the environment in which it operates. The business climate
can be defined as:

• Economic environment: A country’s economic conditions, GDP, government policies, etc.

have an indirect effect on the company and its operations.
 • Social environment: The society in which the organization, like employment conditions,
trade unions, consumer cooperatives, etc., functions also affects it.

• Political environment: a country’s political system, whether authoritarian or democratic;

political stability; and attitude towards the private sector, impact the growth and
development of the organization.

Management economics is an important method for assessing the company’s priorities and
objectives, the organization’s current role, and what the management can do to fill the void
between the two.

As you now know the definition of managerial economics and what is it, we have listed down the
best options you can pursue in this field.

• Banking Sector

• Government Sector

• Research and Development

• Teaching

• Higher Studies

• Professional Economist

• Financial Risk Analyst

• Data Analyst (Banking)

• Financial Planner (Banking)

• Financial Controller/Financial Economist

• Equity Analyst

• Cost Accountant

• Economic Researcher

• Business Economist
 • Agricultural Economist

• Investment Analyst

• Actuary

Banking sector job profiles are financial analysts, consultants, financial advisers, investment
bankers, and being an environmental policymaker, development officer, or part of Research and
Development you can also work for the government. If you want to be a lecturer or become a
senior economics teacher in private schools, apply for the NET / CTET exam in the field of
education. Job for newspapers, and become an economic or editorial journalist.

• Business Economist: They deal with various sectors and companies and their main role is
to serve as an intermediary between the corporate and the outside world.

• Asset Manager: They deal with different sectors and businesses and their main role is to
act as an intermediary between the corporate and the outside world.

• Credit and risk manager: We analyze the company’s financial details and calculate the
associated default risk to help both the lender and the buyer.

• Market Analyst: A Market Analyst analyses the market so that their employers can make
a better decision with respect to product launching or rendering services.

• Operations Manager: From output to review of statistics to educating new staff, an

Operations manager manages all day-to-day activities in the company and needs to make
sure that the organization runs at an optimal level.

• Teaching: After completing an M.A in Economics with a mark of at least 55 percent an

applicant can either seek a Ph.D. at any college or appear for the National Eligibility exam
of the UGC currently being administered by the NTA.

• Equity Analyst: An equity analyst extracts equity information for investment purposes and
explores stock market insights as to where to invest or whether to proceed or sell on the
market.
 • Economic services of India: You will complete M.Sc. And MA. in economics with marks
of at least 55 percent before appearing in the Indian Economic Service Exam. The age
range is from 21-30 years. The test is administered by UPSC.

• Public sector Banking Services: Reserve Bank of India also recruits banking-sector
economists through their own various recruitment exams. The age limit is 21-28 years.

• Private and foreign banks: A holder of an Economics degree can try for both private and
foreign banks. The Banking job categories are branch managers, clerks, economic analysts,
planning and development officers, etc.

• Agencies Worldwide: Experienced and famous economists in a well-known international

organization such as the World Bank and the International Labor Organisation (ILO) can
get employment opportunities.

• Work as an advisor: Graduates in Economics can work as an economic consultant

independently. In the case of various scientific research and consulting in the private sector,
companies can ensure optimal job opportunities.

• Entrepreneurship: Economists should have a profound understanding of the market. They

will easily understand industry dynamics and competitive business sectors. Then they will
soon be able to achieve exponential growth by creating their own business. So, this will
generate a huge number of work opportunities. It’ll also help to reduce the country’s
unemployment problem.

1. What are the Basic Central Problems of an Economy?

A. The economy is facing three major problems nationwide. They are-

• What to produce?

This is the major problem facing the central government. Because most of the time, we have
scarcity in resources and the desires are unlimited, which is infinity. So to produce one good, they
need to sacrifice other goods. Choosing or selecting that particular well is the major issue.
 • How to produce?

After selecting the goats, the government needs to think about how to produce them. For producing
goods, generally, they use two techniques. Namely- labor-intensive technique. It involves more
labor and less capital. The second technique is the capital-intensive technique. It requires more
capital and less labor.

• To whom we need to produce?

This is also another important issue that the government should take care of all the people in the
country to whom the product needs to satisfy mostly.

2. What is the Nature of Economics?

A. The nature of Economics can be described with multiple factors. These are also termed as
characteristics or attributes of economics. They are as follows-

• Product pricing
• Consumer behavior
• Factor pricing
• The economic conditions of a segment of people
• The behavior of organizations and
• Location or place of the industry.

3. What is an Economic System? What are its types?

A. The economic system is a system which involves the mechanism of various activities of
Economics like planning, organizing, executing, etc with the help of consumption of goods and to
produce the required output by forecasting before itself. It has multiple types based on the
methodology used and the ownership. They are-

• Market economy
• Socialistic economy
• Capitalistic economy
 • Planned economy
• Central economy

Economics is not only a subject but also a regular practice in every individual's life. It is a way of
balancing the financial inputs and outputs. Whether it is a small family or large family, small
business firm or a big organization, and individuals pocket money, etc. whatever it is one should
plan before the month or count at the end of the month or year. This is what economics is trying
to balance the unlimited requirements with limited resources.

The Basic Concepts of Economics

Along with the meaning and the definition of economics, it is important to understand the basic
economic terms and concepts in detail to get the awareness of maintaining a proper budget for the
house or task or any organization. We have five fundamental economic concepts in general. They
are as follows-

• Supply and demand

• Scarcity

• Opportunity cost

• Time value of money

• Purchasing power

Supply and Demand: -

It is one of the basic economic concepts and theories. Supply and demand can be seen everywhere
in our daily life. To understand this concept more clearly, let's take a common example like food
products. If we take food and drinks, they need to travel from the farmer to the consumer with
multiple mediators. So, the price may vary. The exact point of the price at which the buyer and
consumer will get to a compromising position, that point is nothing but the state of supply and
demand, it means where the demand meets the supply.
For example, if in India the worst drought arises, as a consumer, your economic knowledge
should lead you to the conclusion that food prices will rise in the future; so, go do your grocery
shopping before you pay an arm and a leg for your dinner.

Scarcity:
This concept goes hand in hand with supply and demand. Scarcity is defined by as “the basic
economic problem that arises because people have unlimited wants but resources are limited.”
Examples of scarce resources include time, money and natural resources; essentially anything that
is finite falls under this category.

The reason that this is an important concept to understand is because it helps us place a value on a
good or service. The scarcer a resource and the higher the demand for it, the more expensive it is
going to be.
When allocating your resources for any project, you must learn how to prioritize your resources.
The scarcest resource is your most valuable, so plan accordingly.

Opportunity Cost: -

It is like a trade-off market. It is also termed as exchange policy like if we want something we need
to give others in the form of cash or product or whatever it is. We are creating an opportunity to
sell our goods in return for getting our requirements.
For example, every time that you skip class to sleep in, your upfront, sunk costs are what you
directly paid in tuition for that class. You also, however, could have used that time that you spent
in bed to go to work, go to the gym, or be productive and get your homework done. Your
inaction itself is a cost, whether it is missing out on making some money at work, the calories
you could have burned from lifting or the improved grades that you could have made from
studying.

Before making any decision, be sure that what you are choosing to do is more valuable to you
than the things that you are missing out on.
4. Time value of money
This concept is a fundamental truth for any student that wants to effectively manage their money.
The theory behind the time value of money states that, in purely economic terms, a dollar today
is worth more than a dollar tomorrow.

This is illustrated by the fact that, generally speaking, investing a dollar today will generate some
sort of interest return that will give you more than a dollar tomorrow.

The time value of money guides us to do several things. In addition to encouraging us to invest
our money to beat market interest rates, it also tells us to factor in the concepts of inflation.

Inflation, which is the general increase in prices of goods and services over time, can affect
consumers drastically. Over the years, as our economy and gross domestic product continue to
grow, goods and services will continue to become more expensive.

As a consumer, your ultimate goal is to increase your income rate at a higher rate than inflation;
only then will you be able to sustain your lifestyle.

5. Purchasing power
I remember when I was in first grade, I received a Rs. 2500 gift card for winning a bookmark
design contest. Back then, I thought I was rich; I had never held so much money in my life. I was
able to buy several things that I wanted and was a happy camper.

Today, however, that same Rs. 2500 can only buy me about half of the goods I bought back then.
As inflation continues to grow, our purchasing power goes down. Purchasing power is the
amount that money can buy us.

We have to remember that wealth is relative to how much we can buy with it. If prices continue
to increase and all else stays the same, our purchasing power decreases.

The way to counter this is to make your money grow. Invest in funds that take calculated risks
and look for investment arrangements that give you a higher return than the inflation rate.
What is Microeconomics?

Microeconomics focuses on the choices made by individual consumers as well as businesses

concerning the fluctuating cost of goods and services in an economy. Microeconomics covers
several aspects, such as –

• Supply and demand for goods in different marketplaces.

• Consumer behavior, as an individual or as a group.

• Demand for service and labour, including individual labour markets, demand, and
determinants like the wage of an employee.

One of the main features of microeconomics is it focuses on casual situations when a marketplace
experiences certain changes in the existing conditions. It takes a bottom-up approach to analyze
the economy.

What is Macroeconomics?

Macroeconomics studies the economic progress and steps taken by a nation. It also includes the
study of policies and other influencing factors that affect the economy as a whole.
Macroeconomics follows a top-down approach, and involves strategies like –

• The overall economic growth of a country.

• Reasons that are likely to influence unemployment and inflation.

• Fiscal policies that are likely to influence factors like interest rates.

• Effect of globalization and international trade.

• Reasons that affect varying economic growths among countries.

Another feature of macroeconomics is that it focuses on aggregated growth and its

economic correlation.

There are a few differences between these two categories. Here are the primary dissimilarities –

Microeconomics Vs Macroeconomics
SL. NO Microeconomics Macroeconomics

Macroeconomics studies a nation’s

Microeconomics studies individual economic
1. economy, as well as its various
units
aggregates.

Macroeconomics is the study of

Microeconomics primarily deals with aggregates such as national output,
2.
individual income, output, price of goods, etc. income, as well as general price
levels.

Microeconomics focuses on overcoming issues Macroeconomics focuses on

3. concerning the allocation of resources and price upholding issues like employment
discrimination. and national household income.

Macroeconomics account for the

Microeconomics accounts for factors like
4. aggregated demand and supply of a
demand and supply of a particular commodity.
nation’s economy.

Microeconomics offers a picture of the goods

Macroeconomics helps ensure
and services that are required for an efficient
5. optimum utilisation of the resources
economy. It also shows the goods and services
available to a country.
that might grow in demand in future.

Macroeconomics help determine

Microeconomics helps point
the equilibrium levels of
6. how equilibrium can be achieved at a small
employment and income of the
scale.
nation.
 The primary component of
Microeconomics also focuses on issues arising
7. macroeconomic problems is
due to price variation and income levels.
income.

Examples of Microeconomics and Macroeconomics

Example of Microeconomics –

• Price determination of a particular commodity.

• Consumer equilibrium.

• Output generated by an individual organisation.

• Individual income and savings.

Example of Macroeconomics –

• National income and savings.

• General price level.

• Aggregated demand as well as supply.

• Poverty.

• Rate of unemployment.

Similarities Between Micro and Macro Economics

The unique characteristics of microeconomics and macroeconomics form a corresponding and co-
dependent relation between the two schools of economics. Factors that might directly affect
microeconomic factors can also impact macroeconomics in the long run.
Similarly, State-level policies, a component of macroeconomics, can also affect individual
consumers and businesses. For example, a tax hike (macroeconomics) can increase the retail price
of certain products, affecting the rate of consumption (microeconomics).

Effect of Micro and Macro Economics

Any changes in these categories have a direct impact on a country’s economy. Several factors
affect it; let’s take a look –

• Decision Making

Uncontrollable external factors such as changes in interest rate, regulations, number of competitors
present in the market, cultural preferences, etc. play a key role influencing an organization’s
strategies and performance. These can have a cumulative effect on a nation’s economy as well.

• Economic Cycles

Experts consider macroeconomics as a cyclic design. Higher demand level, personal income, etc.
can influence price levels, which in turn can affect a nation’s economy. Contrarily, when supply
outweighs demand, the cost of daily goods reduces. This pattern continues until the next cycle of
supply and demand.

• Price of Products and Services

The primary goal of an organisation is to keep cost at the minimum and increase the profit margin.
The cost of labour is one of the highest expenses incurring factors in microeconomics, thereby
directly affecting the overall cost of production and retail.

Economic objectives of firms

The main objectives of firms are:

1. Profit maximization

2. Sales maximization

3. Increased market share/market dominance

 4. Social/environmental concerns

5. Profit satisficing

6. Co-operatives

Sometimes there is an overlap of objectives. For example, seeking to increase market share, may
lead to lower profits in the short-term, but enable profit maximization in the long run.

Profit maximization

Usually, in economics, we assume firms are concerned with maximizing profit. Higher profit
means:

• Higher dividends for shareholders.

• More profit can be used to finance research and development.

• Higher profit makes the firm less vulnerable to takeover.

• Higher profit enables higher salaries for workers

Alternative aims of firms

However, in the real world, firms may pursue other objectives apart from profit maximization.

1. Profit Satisficing:

• In many firms, there is a separation of ownership and control. Those who own the company
(shareholders) often do not get involved in the day to day running of the company.

• This is a problem because although the owners may want to maximize profits, the managers
have much less incentive to maximize profits because they do not get the same rewards,
(share dividends)

• Therefore, managers may create a minimum level of profit to keep the shareholders happy,
but then maximize other objectives, such as enjoying work, getting on with other workers.
(e.g., not sacking them) This is the problem of separation between owners and managers.
 • This ‘principal-agent’ problem can be overcome, to some extent, by giving managers share
options and performance related pay although in some industries it is difficult to measure
performance.

• More on profit-satisficing.

2. Sales maximization

Firms often seek to increase their market share – even if it means less profit. This could occur for
various reasons:

• Increased market share increases monopoly power and may enable the firm to put up prices
and make more profit in the long run.

• Managers prefer to work for bigger companies as it leads to greater prestige and higher
salaries.

• Increasing market share may force rivals out of business. Eg. the growth of supermarkets
has led to the demise of many local shops. Some firms may actually engage in predatory
pricing which involves making a loss to force a rival out of business.

3. Growth maximization

This is similar to sales maximization and may involve mergers and takeovers. With this objective,
the firm may be willing to make lower levels of profit in order to increase in size and gain more
market share. More market share increases its monopoly power and ability to be a price setter.

4. Long run profit maximization

In some cases, firms may sacrifice profits in the short term to increase profits in the long run. For
example, by investing heavily in new capacity, firms may make a loss in the short run but enable
higher profits in the future.

5. Social/environmental concerns

A firm may incur extra expense to choose products which don’t harm the environment or products
not tested on animals. Alternatively, firms may be concerned about local community / charitable
concerns.
 • Some firms may adopt social/environmental concerns as part of their branding. This can
ultimately help profitability as the brand becomes more attractive to consumers.

• Some firms may adopt social/environmental concerns on principal alone – even if it does
little to improve sales/brand image.

6. Co-operatives

Co-operatives may have completely different objectives to a typical PLC. A co-operative is run to
maximize the welfare of all stakeholders – especially workers. Any profit the co-operative makes
will be shared amongst all members