What is the importance of managerial economics in the decision-making process of business?

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mybrothermycroft | In Training Educator

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Managerial economics serves several purposes in business decision-making. To start with, managerial economics provides a logical and experiential framework for analyzing the question. To the somewhat vague question of "what or how much should I make, and who should I sell it to?", or "should I try to retail something like 'this'?", it provides the framework for applying to your question concepts such as supply and demand, market segmentation, competition, and so on. It takes your question from something vague and applies tested concepts to frame a more precise question (and answer). 

Second, it provides an opportunity for a quantitative question: "how much should I make?" or "what price should I charge?" Rather than punting at an answer, managerial economics provides either a pre-existing framework for obtaining a direct answer, or at least provides a framework for testing volume or pricing in this case. 

Third, it lends meaning to the answer. If you get back an answer "price it at $88.50 if you want to sell 2,000, or at $115.50 if you want to sell 600," you have an answer with much more utility and you can both test the answer (which is important) and extrapolate, say, to production limited to 400. At this point, you have used managerial economics to help make important business decisions. 

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thetall | (Level 3) Educator

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Managerial economics is the application of economic theory to economic practice with an aim of ensuring that business decisions meet their intended goal. It is through management economics that a business understands how to access and utilize scarce resources to ensure optimal performance of the same to generate revenues and profits. The application assists in decision making with regards to issues about optimum production, profit maximizing prices and type of product among other economic variables. For instance, a manufacturing company needs to understand what type of product or which additional features would boost the utility and sales of their product. This will be determined against analyzing competitor product offerings or substitutes that exist in the market. The market research is part of economic theory and application of the information in the business when making the choice of the product is regarded as economic practice.

In a term paper, one can begin by stating the definition of managerial economics followed by its importance in business operations. It is also important to give a detailed case of how managerial economics is applied and some of the decisions that such study affects in an actual business operation.

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gsenviro | College Teacher | (Level 1) Educator Emeritus

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You can start with defining what managerial economics is and what is required for decision making in a business environment. Then you can explain the importance of managerial economics in business decision making, using some examples or short case study. 

Managerial economics is simply the application of economic theories to solving business problems. It is a combination of economic theory and business management. Some of the common decisions that a manager has to make include the price of the commodity, size of plant or manufacturing capability, level of inventory, employees to be hired, etc. Managerial economics uses the concepts of microeconomics to study the internal issues related to the business, while also employing macroeconomic principles to understand the bigger picture economics. Hence a knowledge of managerial economics is essential for business managers, unless managerial economists are hired to help the business.

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carlson8488 | In Training Educator

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Businesses derive usable, on-the-ground information about customers, markets and their own employees when they apply managerial economics in making decisions. Owners and managers see many near-term and even immediate results from their increasingly data-driven decisions. In tapping this rich data in a fast-paced competitive environment, they must reach customers and staffs in a tangible way that can quickly reveal what works and what does not work. Owners, managers and key employees can turn to managerial economics, which applies economic principles and analysis to making strategic decisions. The discipline has shown healthy development “and is still grounded in practical applications,” as Rubin and Dries (2010) put it.

A manager may apply data or an operating model in analyzing risks inherent in adding capacity or changing a product lineup, in shifting employee tasks to improve efficiency without adding turnover, or in adjusting prices. A student could focus an APA-formatted paper on a challenge a business faces, as documented in recent news. He or she could include a thesis and supporting detail in presenting a managerial-economics solution. For example, the Disney-owned ESPN sports network faces higher programming costs at the same time customers move away from the many-channel menus offered by traditional cable and satellite companies. Online retail platform Alibaba may need to get bigger given stiff competition from Amazon. Since ESPN and Alibaba both see strong demand for their offerings, they need to tap that demand more effectively. They can use managerial economics to help determine how.

APA citation: Rubin, P. H., & Dnes, A. W.. (2010). EDITORIAL: Managerial Economics: A Forward Looking Assessment. Managerial and Decision Economics, 31(8), 497–501. Retrieved from http://www.jstor.org/stable/40958978

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ballen89 | eNotes Newbie

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Think about economics as a whole. How is it beneficial for a company to keep economic principles in mind when making business decisions on a large scale? What if the board of directors has one goal in mind, but the managers either aren't aware of that goal, or aren't working towards it? Business managers are decision makers on some level. Even if it's a low level, it's important that the information that the managers are using to make those decisions are in line with what the company's goals are. 

If a company keeps managers informed with goals (specifically relating to human capital, cost structure, output expectations, etc), managers are able to reflect on that information when making departmental decisions. Create a scenario in which you can provide details of this.

When you write your paper, make an effort to tie in certain key words that you've been using in class. If you're in a beginner's class, and are talking about supply and demand, make a reference to that. You could say the manager knows what output goals are, and should be able to determine the supply necessary. If you're in a human capital course, make a reference to worked hours and productivity. Make sure you reflect back to the specifics of your course. 

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