Important scopes of managerial economics are given below:
1. Demand analysis and forecasting.
2. Cost and production analysis.
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3. Pricing decisions, policies and practice.
4. Profit management.
5. Capital management.
6. Analysis of business environment.
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7. Allied disciplines.
Now we discuss these in detail:
1. Demand analysis:
A business firm is an economic organization which is engaged in transforming productive resources into goods that are to be sold in the market.
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A major part of managerial decision-making depends on accurate estimates of demand. A forecast of future sales serves as a guide to management for preparing production schedules and employing resources.
It will help management to maintain or strengthen its market position and profit-base. Demand analysis also identifies a number of other factors influencing the demand for a product. Demand analysis and forecasting occupies a strategic place in Managerial Economics.
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2. Cost analysis:
Cost estimates arc most useful for management decisions. The different factors that cause variations in cost estimates should be given due consideration for planning purposes.
There is the clement of uncertainty of cost as other factors influencing cost arc either uncontrollable or not always known.
If one is able to measure cost it is very important for more sound profit planning, cost control and often for sound pricing practices.
3. Pricing practices and policies:
As price gives income to the firm, it constitutes as the most important field of Managerial Economics.
The success of a business firm depends very much on the correctness of the price decisions taken by it.
The various aspects that are dealt under it cover the price determination in various market forms, pricing policies, pricing method, differential pricing, productive pricing and price forecasting.
4. Profit management:
The chief purpose of a business firm is to earn the maximum profit. There is always an element of uncertainty about profits because of variation in costs and revenues.
If knowledge about the future were perfect, profit analysis would have been very easy task. But in this world of uncertainty expectations are not always realized.
Hence profit planning and its measurement constitute the most difficult area of Managerial Economics.
Under profit management we study nature and management of profit, profit policies and techniques of profit planning like Break Even Analysis.
5. Capital management:
The problems relating to firm’s capital investments are perhaps the most complex and troublesome.
Capital management implies planning and control of capital expenditure because it involves a large sum and moreover the problems in disposing the capital assets of arc so complex that they require considerable time and labour.
The main topics dealt with under capital management arc cost of capital, rate of return and selection of projects.
The topics discussed under headings from 1 to 5 are related with operational issues of a firm.
6. Analysis of business environment:
The environmental factors influence the working and performance of a business undertaking. Therefore, the managers will have to consider the environmental factors in the process of decision-making.
Decisions taken in isolation of environmental factors would prove harmful to the firm. Therefore, the management must be fully aware of economic environment, particularly those economic factors which constitute the business climate.
Nevertheless, the management must have an idea of social and political trends. Also the main factors that affect the business climate are : general trend in national income and consumption expenditure, general price trends, trading relations with other countries, trends in world market, economic and business policies of the government, industrial relations etc.
Certain macro-economic theories such as income and employment theory, monetary theory etc. help in analyzing business climate.
Analysis of monetary policy, fiscal policy, industrial policy, foreign trade policy and other direct controls also help in forecasting business climate.
Therefore, macro- economic theory and government policies arc also included in the scope of managerial economics.
7. Allied disciplines:
The concepts that help the management in taking business decision are quantitative in nature. Therefore, mathematical tools are widely used in determining relationships between economic variables.
The linear programming techniques, which is mathematical, is used by firms to maximize or minimize their objective function.
Similarly statistical and accounting principles are used in taking business decision. Therefore, mathematical tools, statistical technique and accounting principles that are used in analyzing business problems also come under the scope of Managerial Economics.