The application of economics to business management or the integration of economic theory with business practice as Spencer and Segelman have put it has the following aspects:
Applications
1. Reconciling theoretical concepts of economics in relation to the actual business behaviour and conditions:
Analytical techniques of economic theory builds models by which we arrive at certain assumptions and conclusions arc reached thereon in relation to certain firms.
There is need to reconcile the theoretical principles based on simplified assumptions with actual business practice and develop or reformulate the economic theory, if necessary.
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For example, it is assumed in economic theory that a firm always acts to maximize profits and on that basis the theory suggests how much the firm will produce and at what price it would sell.
But in actual practice firms do not always aim at maximizing profits and theory of firm fails to explain this behaviour of the firms.
Moreover certain terms such as profits and costs are not used in business at they are used in economics.
In managerial economics an attempt is made to reconcile the accounting concepts with the economic concepts so that financial data may be used more effectively.
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2. Estimating economic relationship:
Measurement of various types of elasticities of demand like price elasticity, income elasticity, cross elasticity, substitution elasticity, etc., arc provided by economics. The estimates of these economic relationships can be used for purpose of business forecasts.
3. Predicting economic quantities:
Most of the business decisions arc taken in an environment of uncertainty. Economic analysis makes possible the forecasting of economic quantities like profit, demand, production costs, price, capital and other relevant quantities.
The task of taking business decisions and formulating forward plans becomes simpler and less risk)’ due to prediction of economic quantities.
4. Basis of business policies:
Business policies and plans for the future can be formulated on the basis of economic quantities.
5. Helpful in understanding the external forces constituting the environment:
The business management has to sec the relevance and affects of external forces such as business cycle, trends in national income and expenditure, government policies relating to taxation, licensing and price control etc., and adjust his business policies the bearing in mind the full impact of these external forces. Economic theories are applied to know the impact of these external forces on business.
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It is amply clear from the above discussion that economic analysis and economic theories are widely used in business management.
Managerial economics analyze the practical application of economic logic and principles Managerial Economics elaborates how economic concepts, principles and economic logic can be applied in taking business decisions and formulating future plans.
Therefore, managerial economics integrates economic theory with business practice for facilitating decision-making and forward planning by management.
Managerial economics lies on the borderlines between economics and business management and bridges the gap between the two.
In the words of Hague, “Managerial economics is concerned with using logic of economics, mathematics and statistic? to provide effective ways of thinking about business decision problems.”