This article will focus on managerial economics. It will provide an analysis of the different types of economic tools, methods, and approaches used by business managers to solve business decisions. Examples of managerial economic tools and techniques include the theory of the firm, demand theory, production and cost analysis, pricing analysis, capital budgeting, and game theory. A case study about managerial economic approaches to the problem of cyberslacking in the workplace will be included. The issues associated with current developments in managerial economics will be addressed.
Keywords Business Managers; Capital Budgeting; Demand Theory; Managerial Economics; Pricing Analysis; Theory of the Firm
Business managers and economists, though both interested in markets and money, have different knowledge bases and goals. Business mangers use branches of economic theory selectively based on their degree of applicability and relevance. Business managers, unlike economists, must make decisions and act before transactional data becomes available. Most business decisions are based on non-transactional data or data collected in advance of market transactions. Examples of non-transactional data include market research and consumer research. Economists generally do not value non-transactional data while business mangers rely on it to make business decisions (Calfee and Rubin, 1993). Business managers rely on applied economics to inform their decision making process. In particular, business mangers use managerial economics to optimize firm profits and secure an ever-larger market share.
Corporate leaders and managers, including the chief executive officers of large firms and the business managers of small family businesses, need to have an understanding of how market forces affect business practices in order to be competitive in their industry. Corporate decision makers use and rely on the tools, methods, and approaches of managerial economics to make informed business decisions that maximize profit and secure market share. Managerial economics is ultimately a short-hand for applying microeconomic theory to business problems. Managerial economics is one of the most applied fields of economic theory.
Managerial economics, a type of applied economics, refers to microeconomic analysis of business decisions. Managerial analysis uses techniques such as regression and correlation analyses to optimize business decisions based on the business' stated goals and objectives and available resources. Managerial economics is one of the strongest tools of financial management and managerial decision-making. Managerial economics serves as a general method for solving optimization problems. It includes numerous tools and techniques for managers to achieve optimization under constraints and satisfy the objectives of the firm.
In the twenty-first century, managerial economics is usually applied by business managers in business environments with the following characteristics (Egan, 1995):
- The modern corporation is usually organized into business units (BU);
- Each business unit within the modern corporation is responsible for its' own profits or losses;
- Business planning is generally decentralized;
- Business unit product line managers focus on profits for single products over the shorter term;
- Rapid development and innovation in information technology will continue to change production methods and the way products and services are sold and delivered to customers.
While managerial economics can be used to analyze a wide range of business decisions, the main aspects of managerial economics and the most common applications of managerial economics include the theory of the firm, demand theory, production and cost analysis, capital budgeting, and game theory. The following sections will describe and analyze the main techniques of managerial economics. This section will serve as the foundation for a discussion of the issues associated with the adaptation of managerial economics to new twenty-first century business organizations and will provide a case study about managerial economics and cyberslacking.
Managerial economics is an economic tool kit for business leaders and managers. The following theories, techniques, and approaches, including the theory of the firm, demand theory, production and cost analysis, capital budgeting, and game theory, are used by business managers to optimize firm profits and market share.
The Theory of the Firm
Managerial economics builds on the theory of the firm. The theory of the firm (a microeconomic approach to business analysis of inputs, production methods, output, and prices) argues that profit maximization is the main goal of all firms. The theory of the firm, developed in the nineteenth century by French and English economists, focuses on profit maximization, demand and price, production and factor utilization, and cost minimization. Limitations of the theory of the firm rest in its traditional approach to business practices. The theory of the firm emphasizes the optimization of quantity, price, costs and profits in a single time period for a single kind of product produced in a single facility. While the theory of the firm approach, with its focus on optimization, remains relevant for small farms, small natural resource producers, or small factories serving local markets, the approach is not useful for mid to large size businesses with multiple products, production facilities, and markets. The optimization goals and objectives of mid to large-scale companies vary from small, single-product and single-market businesses (Egan, 1995).
Business managers are responsible for forecasting and estimating the demand for a product within the marketplace and producing the product in appropriate volume. Demand theory refers to the amount of product that a buyer is willing and able to buy at a specified price. Customers who once demanded a single, easily-produced product are increasingly demanding a combination of physical units and bundles of associated support services and quality attributes. Managerial economics offers tools to create a demand forecast that represents the quantity of both units and support services demanded as a function of price (Egan, 1995).
Production and cost analysis refers to the microeconomic techniques used to analyze production efficiency, optimum factor allocation, economies of scale, and cost function. Production and cost analysis incorporates the expenses associated with raw materials, components, subassemblies, communications, transportation, and customer support services. Business managers work to add more value to the products that their companies produce. Business managers often face transfer pricing problems as they determine product price points (Egan, 1995).
Capital budgeting refers to the branch of managerial economics that is concerned with investment decisions and capital purchasing decisions. Capital budgeting is the analytical process of determining the optimal investment of scarce capital so as to realize the greatest profit from that investment. Capital budgeting ranks proposed investments in order of their potential profitability. There are two main criteria for selecting potential business investments:
- Business managers, engaged in capital budgeting, generally have a minimum desired rate of return specified as the cut-off point to determine whether or not a project should be accepted or rejected.
- Business managers, engaged in capital budgeting, generally experience constraint from top management regarding the total amount of potential investment.
Business managers, engaged in capital budgeting, take hold of stockholders' funds and work to maximize their earning potential through four main strategies:
- The postponability method: The postponability method, also referred to as the urgency...
(The entire section is 3601 words.)