Managerial economics is a combination of economics theory & managerial theory. Managerial economics deals with the application of economic concepts, theories, tools, and methodologies to solve practical problems in a business. It is sometimes discussed as business economics and is a branch of economics that applied microeconomic analysis to decision methods of businesses or other management units.
Definition of Managerial Economics :
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 organization 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.”
Concepts of Managerial Economics:
- The Incremental Concept
- The Concept of Time Perspective
- The Concept of Discounting Principle
- The Opportunity Cost Concept
- The Concept of the Equimarginal Principle
1.The Incremental Concept
The incremental concept is thoroughly related to the marginal cost and managerial revenues of economics theory. The two major concepts in this analysis are Incremental cost and Incremental revenue. Incremental Cost means a change in total cost, while incremental revenue means a change in total revenue resulting from a decision of the firm. A decision is undoubtedly a profitable one if :
- It raises revenue more than costs.
- It declines some cost to a great extent than it increases others.
- It rises some revenues more than it declines others.
- It reduces costs more than revenues.
2.The Concept of Time Perspective
In a short period, the firm can change its output without varying its size. But in the long period, the firm can change its output by varying its size. In the short period, the output of the industry is fixed because the firms cannot change the size of the operation and they can vary only variable factors. In the long period, the output of the industry is expected to be more because the firms have adequate time to increase their sizes and also use both variable and fixed factors.
3.The Concept of Discounting Principle
This concept is an allowance of the concept of time perspective. Since the future is unknown and incalculable, there is a lot of risk and uncertainty in the future.
Everyone knows that a rupee today is valued more than a rupee will be two years from now. This appears alike to the saying that “a bird in hand is more worth than two in the bush.” This judgment is made not on account of the uncertainty surrounding the future or the risk of inflation.
It is merely that in the prevailing period a sum of money can earn a return which is ruled out if the same sum is available only at the end of the period. In technical parlance, it is said that the present value of one rupee available at the end of two years is the present value of one rupee available today. The mathematical technique for adjusting for the time value of money and computing present value is called ‘discounting’.
4.The Opportunity Cost Concept
In Managerial Economics, an opportunity cost concept is useful in a decision involving a choice between different alternative courses of action.
Opportunity cost of a decision is the sacrifice of alternatives required by that decision. The sacrifice of alternatives is involved when carrying out a decision needs using a resource that is limited in supply with the firm. Opportunity cost, therefore, denotes the benefits or revenue forgone by following one course of action rather than another.
5. The Concept of the Equimarginal Principle
The principle states that input should be allocated so that the value added by the last unit is the same in all cases. This generalization is popularly called the Equi-marginal principle.