Managerial economics (also called business economics), is a branch of economics that applies microeconomic analysis to specific business decisions. As such, it bridges economic theory and economics in practice. It draws heavily from quantitative techniques such as regression and correlation, Lagrangian calculus, linear programming, decision theory, and game theory. It is similar to operations research in this regard, and indeed uses operations research techniques.
If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity.
Almost any business decision can be analysed with managerial economics techniques, but it is most commonly applied to:
- Demand estimation - statistical techniques such as regression analysis are used to determine the level of demand for a product, service, or brand.
- Risk analysis - various uncertainty models, decision rules, and risk quantification techniques are used to assess the riskiness of a decision.
- Production analysis - microeconomic techniques are used to analyse production efficiency, optimum factor allocation , costs, economies of scale and to estimate the firm's cost function.
- Pricing analysis - microeconomic techniques are used to analyse various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.
- Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions.
At universities, the subject is taught primarily to advanced undergrads. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses.
See also
Finding related topics
External sources
- Baumol, W. J. (1961) What can economic theory contribute to managerial economics?, American Economic Review, vol. 51, no. 2, May 1961, pp 142-46.
