Monday, May 19, 2014

Managerial Economics and Traditional Economics

In the words of Haynes “The relation of managerial economics to economic theory is much like that of engineering to physics, or of medicine to biology or bacteriology. It is the relation of an applied field to the more fundamental but more abstract basic discipline from which it borrows concepts and analytical tools. The fundamental theoretical fields will no doubt on the long run make the greater contribution to the extension of human knowledge. But the applied fields involve the development of skills that are worthy of respect in themselves and that require specialized training. The practicing physician may not contribute much to the advance of biological theory but he plays an essential role in producing the fruits of progress in theory. The managerial economist stands in a similar relation to theory with perhaps the difference that the dichotomy between the pure and the “applied” is less clear in management than it is in medicine.”
Managerial economics has been defined as economics applied in decision-making. It is a special branch of economics bridging the gap between economic theory and managerial practice. The relationship between managerial economics and traditional economics is facilitated by considering the structure of traditional study. The traditional fields of economic study about theory, Micro economics focuses on individual consumers firms and industries. Macro economics focuses on aggregations of economics units, especially national economics.
The emphasis on normative economics focuses on prescriptive statements that are established rules on the specified field. Positive economics focuses on description that describes that manner in which economics forces operate without attempting to state how they should operate. The focus of each field of study is sufficiently well defined to warrant the breakdown suggested. 
Since each area of economics has some bearing on managerial decision making, managerial economics draws from them all. In practice, some are more relevant to the business firm that others and hence to managerial economics. Both microeconomics and macro economics are important in managerial economics but the micro economic theory of the firm is especially significant. The theory of firm is the single most important element in managerial economics. However, because the individual firm is influenced by the general economy, that is domain of macro economics. Managerial economics is certainly on normative theory. We want to establish decision rules that will help managers attain the goals of their firm, agency or organization; this is the essence of the word normative. If managers are to establish valid decision rules, however, they must thoroughly know the environment in which they operate for this reason positive or descriptive economics is important.
Surveys conducted in various countries showed that business economists have found economic concepts such as price elasticity of demand, income elasticity of demand, opportunity casts, the multiplier, propensity to consume, marginal revenue products,. Speculative motive, production function, balanced growth, liquidity preference etc., quite useful and of frequent application. They have also found the following main areas of economics as useful in their works:
1.       Demand theory
2.       Theory of the firm-price and output
3.       Business financing
4.       Public Finance and Fiscal Policy
5.       Money and banking
6.       National income and Social accounting
7.       Theory of international trade, and
8.       Economics of developing countries.

Difference between Managerial Economics and Traditional Economics:
The difference between managerial economics and economics can be understood with the help of the following points:
1.       Managerial economics involves application of economic principles to the problems of a business firm whereas; economics deals with the study of these principles only. Economics ignores the application of economic principles to the problems of a business firm.
2.       Managerial economics is micro-economic in character; however, Economics is both macro-economic and micro-economic.
3.       Managerial economics, though micro in character, deals only with a firm and has nothing to do with an individual’s economic problems. But microeconomics as a branch of economics deals with both economics of the individual as well as economics of a firm.
4.       Economics is both positive and normative science but the Managerial Economics is essentially normative in nature.
5.       Economics deals mainly with the theoretical aspect only whereas Managerial Economics deals with the practical aspect.
6.       Managerial Economics studies the activities of an individual firm or unit. Its analysis of problems is micro in nature, whereas Economics analyzes problems both from micro and macro point of views.
7.       Under Economics we study only the economic aspect of the problems but under Managerial Economics we have to study both the economic and non-economic aspects of the problems.
8.       Economics studies principles underlying rent, wages, interest and profits but in Managerial Economics we study mainly the principles of profit only.
9.       Sound decision-making in Managerial Economics is considered to be the most important task for the improvement of efficiency of the business firm; but in Economics it is not so.
10.   The scope of Managerial Economics is limited and not as wide as that of Economics. Thus, it is obvious that Managerial Economics is very closely related to Economics but its scope is narrow as compared to Economics.
11.   Under microeconomics, the distribution theories, viz., wages, interest and profit, are also dealt with. Managerial economics on the contrary is mainly concerned with profit theory and does not consider other distribution theories.
12.   Economics involves the study of certain assumptions like in the law of proportion where it is assumed that “The variable input as applied, unit by unit is homogeneous or identical in amount and quality”. Managerial economics on the other hand, introduces certain feedbacks. These feedbacks are in the form of objectives of the firm, multi-product nature of manufacture, behavioral constraints, environmental aspects, legal constraints, constraints on resource availability, etc.

Thus managerial economics, attempts to solve the complexities in real life, which are assumed in economics. this is done with the help of mathematics, statistics, econometrics, accounting, operations research, etc.