The Importance of Managerial Economics in Decision Making
Role And Importance Of Managerial Economics In Decision Making Process
Decision making is an integral part of management. Managerial economics helps in effective decision making and a business manager is essentially involved in the processes of decision making as well as forward planning. In doing so, managerial economics is of great importance for a business manager.
The fact that a business entity is influenced by the conditions is uncertainty about the future and due to the changes in the business environment resulting complexities in business decisions. Since no information or the knowledge about the future sales, profits or the costs is available for a business executive, the decisions are to be made on the basis of past data as well as the approximations being forecasted. In order that the decision making process is carried out in such conditions in an efficient way, economic theory is of great value and relevance as it deals with production, demand, cost, pricing etc. This gives rise to understand the concepts of managerial economics for business manager, so that he may apply the economic principles to the business and appraise the relevance and impact of external factors in relation to the business.
Having been regarded as micro economic as well as the economics of the firm, managerial economics is related to the economic theory which is to be applied to the business with the objective of solving business problems and to analyze business situations and the factors constituting the environment in which a business is operated. Managerial economics has been defined by Spencer and Siegelman as,“The integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management.”
Managerial economics is very much capable of serving various purposes and useful for managers in making decisions in relation to the internal environment. It aims at the development of economic theory of the firm while facilitating the decision making process with regard to sales and profits etc.
Moreover, it enables to make decisions about appropriate production and inventory policies for the future.
It is a branch of economics that is applied to analyze almost all business decisions. It is meant to undertake risk analysis, production analysis that is useful for production efficiency. Likewise, it is of great use for capital budgeting processes as well.
In the most positive form, it seeks to make successful forecasts with the objective of minimizing the risks involved. It deals with the aspects as how much cash should be available and how much of it should be invested in relation to a choice of processes and projects while making possible the economic feasibility of various production lines.
As regards the pricing of products being produced by a business entity, it is one of the most critical decisions for a manager to fix the price of particular products as it is by means of pricing decisions taken by a manager, the inflow of revenue is determined. The areas that are to be covered through managerial economics application in this respect are, price methods, product line pricing and price forecasting etc.
Written by:
K. A. Fareed (Fareed Siddiqui)
Writer, Trainer, Author, Software Developer
BBA, MBA-Finance, MPhil-Financial Management, (PhD-Management)
MA-English, MPhil-English
Module 1 - Leadership and Management ILM – UK
Pursuing CMA-USA
Individual Member of Institute of Management Consultants of India