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What Is Managerial Economics?

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  • Written By: Osmand Vitez
  • Edited By: Jenn Walker
  • Last Modified Date: 22 June 2014
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Managerial economics is a form of economics that focuses on the application of economic analysis and statistics for business or management decisions. It is usually a combination of traditional economic theory and the practical economics seen every day in the business environment. Managerial economics provides users with a more quantitative analysis of business situations through the use of mathematical formulas and other calculations, including risk analysis, production analysis, pricing analysis and capital budgeting. Most businesses use some form of managerial economics in their business operations.

Companies often include risk in a managerial economic process to determine what might happen if a significant shift occurs in the economy or competing companies began selling similar goods and services to consumers. Risk analysis is the business function of assessing the amount of risk in business decisions and the overall economic environment. Common economic risk models include decision trees, Nash game theory or the capital asset pricing model (CAPM).

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Production analysis is a managerial economics function that focuses on the internal production processes of a company. Managers review internal production processes to determine how efficient the company is using economic resources or inputs to produce goods and services sold to consumers. This economic function may include the use of management accounting, which develops cost allocation methods that apply business costs to individual goods or services. Finding ways to increase production efficiency can help companies achieve an economy of scale, which is the economic theory that companies that maximize their production processes can lower overall business costs.

Pricing analysis is a classic economic tool based on the economic theory of supply and demand curves. Basic supply and demand theory states consumers will purchase more goods at cheaper prices and fewer goods at more expensive prices. Companies who supply too many goods at low prices may not make enough profit, while offering goods at higher prices can limit the company’s market share. Managerial economics uses pricing analysis to find the equilibrium point, which is where the company will maximize its profits through a specific amount of sales to consumers.

Capital budgeting is the investment process companies use when purchasing major business assets to produce goods or services for consumers. Companies may use the corporate finance function found in managerial economics to determine how much debt the company should use when purchasing major assets. Using a mix of bank debt or equity and private investment financing can help companies maximize their capital resources when making capital investment or budget decisions.

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Discuss this Article

cupcake15
Post 4

@Latte31 - I have to say that I don’t blame these companies because they have to price their products and services competitively otherwise people won’t use their products or services.

Consumers want value and this is one way that companies can do this without compromising the initial product or service. At least we still have a market economy and not a command economy in which the government decides how much of a product a company will produce and what price they will charge.

They do this in China and while companies are still profitable the Chinese government does take a huge amount of the profits.

latte31
Post 3

@Sunny27 - I agree and have to say that outsourcing production is really how a lot of companies are thriving because the increased costs and regulations in the United States has forced companies to look elsewhere when investing in manufacturing.

Economist have seen this trend continue which may take opportunities away from many American workers. For example, at my husband’s company they moved their accounting operation to Costa Rica so that the company could be more profitable and apparently so did a lot of other companies because there were many American companies with a strong presence there.

Sunny27
Post 2

I think that the fundamentals of managerial economics require the optimal production level as well as the right market price.

I think that many companies choose to outsource aspects of production to third world countries because the economies of scale are so much better. If the production of a product can be done for a fraction of the price then most economists would see that the company could offer the same product for a far cheaper price than if they produced the product domestically.

This can ensure that the product line would continue to be profitable for some time. I know that many people want products made in the USA but many consumers are not willing to pay the higher prices for these products because they have been spoiled with the lower prices offered from goods made abroad.

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