Role of managerial_economics_in_business_decision_making
Role of Managerial Economics in
Business Decision Making
Introduction to Economics
Economics is a socio-economic science and it is the study of
Economics is the study of an economic activities related to human
It is the science which studies human behavior as a relationship
between unlimited ends & scare means , which have alternative
Its basic function is to study how people like individuals,
households, firms and nation maximize their gains from their
limited resources and opportunities.
Concept of Business (Managerial) Economics
Managerial economics refers to the application of
economic theory, laws and tools of analysis of decision
science to examine how an organization can achieve its
objectives most efficiently.
It is taken as an applied micro-economics.
It can be broadly defined as the study of economic
theories, logic and tools of economic analysis that are
used in the process of business decision making.
Decision making is an important function of a business executive.
It is a process of selecting a particular course of action from among number of
alternative course of action.
If all the factors of production are easily available, then there is no need of decision
But, the factors of production are limited and can be used for many purpose and
there are unlimited ends of a firm.
So, the question of choice making arises.
Decisions will have to be made in condition of uncertainty and must formulate
plans for the future.
In such situation, managerial economics is of considerable help.
Role of Managerial Economics in Business Decision Making
It is necessary for the firm to study the internal & external factors in order to
make effective business decisions.
The internal & external factors create risk & uncertainties in the decision
The firm has to implement future plans by establishing relationship between
economic variables like:
Demand & its Determinants
Cost & its determinants
Profit & its determinants.
Hence, managerial economics helps in estimating economic relationship
between different economic variables for better decision making process.
1. Estimating Economic Relationship
Prediction of economic quantities implies the calculation of the values of
economic variables of the firm.
With the help of various mathematical & statistical methods, the firm can
forecast various economic variables
E.g. profit , price, demand etc.
For doing such forecasting activities managerial economics plays an vital role.
2. Predicting economic quantities
The importance of managerial economics lies not only in solving the problems
of the firm but it is also related to the study of environmental factors.
External factors includes like political factors, sociocultural factors,
environmental factors etc. have deep effect on the firm’s decision making
Firm has to formulate plans on the basis of these external factors.
Hence Managerial economics helps to generate decisions by making these
external factors favourable to the firm.
3. Helpful in understanding external factors
Managerial economics help the firm to establish economic relationship
between variables & forecast the values of these variables through
mathematical & statistical techniques.
The firm formulates business policies on the basis of predicted economic
In this way managerial economics serves as a basis of business policies of the
4. Basis of business policies