Managerial Economics: Definition, Types, Principles, Nature, Scope, and Limitations

Definition of Managerial Economics

When you apply important aspects of economic principles, theories, tools, and approaches to solve practical problems in your business, you’ve applied managerial economics.

It involves using economic ideas to facilitate the management of your business. This eases decision making and fast-tracks employee-employer relationship in a way that it helps boost the company’s growth.

Having defined managerial economics above, let’s get started with the other aspects of this post.

To begin with, we’ll look at types of managerial economics.

Types of Managerial Economics

Depending on the purpose for which you want to use it in your organization, managerial economics could come in many ways. If to use it to solve the problem of customer service delivery is your concern, managerial economics can be deplored. How about employee motivation to improve output and delivery?

In any case, it will go a long way to add value to the way you do business and would lead to an increase in your ROI.

Below are the different types of managerial economics that you can use for your business, whether it’s a profit-making firm or a non-profit one.

• Nominative
• Liberal
• Radical

1. Normative Managerial Economics

This aspect of management is unique and takes into consideration the idea that a practical solution to managerial problems is given. It places emphasis on the fact that the decision making of an organization be viewed from the point of true happenings, rather than be based on theories alone.

When using this type of managerial economics, you don’t treat as administrative issues through only analysis. You do so using practical, real-life situations.

Such important issues as forecasting, cost management, recruitment, product design and promotion are given a practical approach that enhances decision making and the general administrative responsibilities of an organization.

Here’s a breakdown of how each of the types of nominative managerial economics affects forecasting, cost management, recruitment, product design, and promotion.

Because forecasting helps to see ahead then nature of business operations and decisions, it’s easy to solve any problem that arises when a practical approach is used.

With this mind, your organization would be able to cut cost when problems are detected on time, because they’d be quickly attended to before they grow bigger and harder.

When an organization recruits the best in a particular field, jobs will be done effectively. As a result, you’d not only produce the best product, promoting it will be practical and result-driven because there’s a standard approach to its production.

2. Liberal Managerial Economics

In this context, your organization operates based on market forces and trends. People, your customers have the freedom to buy what they want and need in the market at any given point in time.

They make their own choices and buying decisions by going for whatever they want. So it befits your organization to study customer behavior through adequate data analysis that helps you determine how you respond to your customers’ needs.

This is where your organization’s management comes in. You put in place a good plan to ensure customer satisfaction.

3. Radical Managerial Economics

In order to beat competitions by meeting customer satisfaction, there is a need to ensure that a practical and goal-driven approach is enforced. This would mean the management going out of their way to plan and strategize the best method of meeting set goals.

And what this means is that, to achieve this, management would have put aside the need for profit maximization as they focus on customer satisfaction. This makes sense as satisfying the customers means generating leads. And this set of people will eventually become returning customers from which your organization can continue to generate profit.

Now let’s go on to the next point, the principles of managerial economics, which could also mean the example of managerial economics.

Principles of Managerial Economics

Showing how the principles of managerial economics are deplored to solve real-life problems is the best way to understand the relationship between management and economics.

We’re going to look at the three core principles. Not only that, we’ll also explain the sub-ideas and functions under each of them.

The three major principles we’ll look at are:

• The principles of decision making
• The principles of business communication




• The principles of economic functions

1. The Principles of Decision Making

This involves the way people go about their businesses and the different decision making processes that help them make informed decisions about certain products and services.

• The Choices Made: In order to meet up with the standard set by an organization, you have to decide if doing business with them is favorable to the both of you. In this way, there’ll be series of options to choose from. Then if the people like they can freely choose any aspect of the business that suits them.
• Opportunity Cost: This is part of the decision making that influences people’s choices. When there is a lot of options to choose from, people tend to go with the most convincing.
• The Gains: Before you can convince people to consider engaging in your business, you’d do more than just putting the products right in front of them. That may have some effect. But the real benefit is in letting them see what’s really in it for them when they get involved.
• Attraction Point: When people get positive incentives with an offer, they jump at it.

2. The Principles of Business Communication

Communication is key to the success of every business. This is why it’s an important principle that affects the success or otherwise of any business.

• Win-win Situation

Participation in a business transaction gives mutual benefits. As an exchange culture, both parties have something to gain. When businesses and organizations create products and offer services, the customer in turn needs those products or services.

• Economic Relationship

An atmosphere where relationships can be formed and people can interact for mutual gains is essential for growth. A market is often where the producers and consumers meet for a successful business transaction.

• Government Intervention

Whenever there’s an unfavorable policy for businesses, the government often sets in by communicating with stakeholders to jointly work out the best solution to the problem.

3. The Principles of Economic Functions

No doubt about it, the economic situation of a country has an effect on the business activity of any organization there.

• Improved Living Standard: Business activities which involve selling and buying and offering of services often boost the economy of a country. When businesses meet consumer needs and there is a thriving atmosphere for trading activities, the economy booms.
• Curbs Inflation: When there’s too much money in circulation, inflation sets in. People’s purchasing capacity increases and the prices of goods would increase astronomically. And this would happen when those producing aren’t able to meet consumers’ demand.
• Economic Stability Efforts: When there is inflation in the country, the government intensifies effort to roll out policies that would stabilize the economy. This is key as an aspect of managerial economics.

Next is to look at the nature and scope of managerial economics.

Nature of Managerial Economics       

The following forms of nature show us how it affects people with regard to decision making.

1. Scientific

Managerial economics is scientific in approach because it handles real-life situations in a well-calculated manner. Just like science, it goes through the essential processes of methodical observations, continuous experimentations, and application. In this way, policies formulated that carefully go through these steps often render the final decision solid and really applicable.

2. As an Art

As an art, managerial economics combines proven knowledge and strategies by analyzing the theoretical ideas that form decisions. This is deplored in a step by step way to achieve organizational objectives.

3. Administrative

In order to come up with ideas that help in decision making for the organization, managerial economics helps in making decisions that are right for the business environment and fitting for administrative responsibilities.

4. Resource Control

It is often deplored when ensuring proper management of available resources. With several options to choose from the number of resources provided such as information, human, capital and technological, for effective management, the manager looks at the most fitting ones.

5. Micro-economic

In order to solve problems relating to the organization’s objectives, product demand, price determination, and supply of goods produced, the manager ensures that everything is in place. He analyses the internal environment of the organization to see the best practices for success.

6. Macroeconomic

The external environment of any business often affects its decision-making process. Important decisions bothering on government policies, price determination, state of the economy, exchange rate and other market conditions usually influence the steps taken by the manager.

7. Dynamic

In general, management is a dynamic affair. With differences in human preferences, there is usually a constant change in decisions made.

8. Multidisciplinary

It is the combination of several ideas from different disciplines such as mathematics, statistics, finance, human resource, marketing etc. that forms the decision making process.

9. Prescriptive

The management of an organization deals in achieving a certain goal. So all the ideas formulated and steps taken determine the level of success recorded.

10. Management-driven

What this means is that it is largely a pragmatic approach. It makes use of real time situations.

Now, the next thing is to briefly check out the scope of managerial economics.

Scope of Managerial Economics

The scope is as follows:

1. Analysis of Demand and Forecasting

This means that producers often minimize their production output based on market demand. With this, it becomes necessary for an organization to have a production schedule before going ahead to roll out products.

Demand analysis assists the organization in maintaining market share with its competition and this would result in an increase in profit.

2. Analysis of Cost and Production

One of the key functions of a manager is to look into the cost figures of output. He also finds out costs of production and sees if it meets up with the total expected income. In ensuring that the necessary information is identified, he works on the most fitting pricing policy based on the cost of production and market value.

3. Pricing

As a scope of managerial economics, pricing determines demand and how consumers react to products. This comes after doing a thorough market analysis.

4. Profit Management

As the goal of your organization is to maximize profit, this is part of the scope of management in which the manager finds a balance between cost estimates and profit generation. When a manager is able to reduce uncertainty, the firm makes more profit.

5. Capital Investment

Managing capital is a very important function of management that’s key to success. The investment could come in different forms like equipment, technology, skills, and information. This would affect project selection, cost of capital and the Return on Investment.

Having discussed the scope, let’s go on to the limitations of managerial economics.

Limitations of Managerial Economics

1. Unpredictable

Because economic activities are based on human behaviors, it is prone to errors. The combined process of producing, distributing and consuming goods and the rendering of services is connected to human activities which could sometimes be unpredictable.

2. Non-replicable

Most times predicting market behaviors is not easy. That’s why using the same method over and over again would not work as there is no specific solution that could meet up with what earlier happened in the market.

3. No Unified Solution

In trying to address an economic situation in the country, different economic managers will be tasked with coming up with the solutions. Even when they work together, they can hardly come up with the same conclusions. So their predictions about how the market will react to the problems may not work as expected.

4. Open to Political Manipulation

Political economists are among many people given to criticism of the process of decision making. Using normative economics, politicians often call for changes in policies which if closely looked at, are for their gain.

5. Inaccurate Conclusion

Most theories often put forward by economic experts to forecast future policies that sometimes contradict one another.

You might have a question about the difference between managerial economics and business economics, how managerial economics differs from economics and the techniques of managerial economics.

While managerial economics deals with the theoretical application of management using statistics, business economics uses quantitative methods to analyze the difference in organizational structures and the relationship of companies.

Common FAQs

1. What is the difference between managerial economics and business economics?

While managerial economics deals with the theoretical application of management using statistics, business economics uses quantitative methods to analyze the difference in organizational structures and the relationship of companies.

2. How managerial economics differs from economics?

Managerial economics differs from economics in that the former:

• Is essentially normative while the latter is both positive and normative
• Deals in the practical aspect of the business while the latter is theory-based
• Focuses on practical problems which are not always right while the latter studies human behavior based on assumptions

3. What are the techniques of managerial economics?

The techniques of managerial economics include:

• Using scientific and systemic methods to analyze market forces.
• The use of statistics for study, comparison, and interpretation.
• Analysis of intellectual experiment to find out relationships between cost, price, and output.
• The use of the simulation method to program a complex business structure.
• Use of historical method to discover some basis for business activity.
• Using a descriptive method to observe general situations by studying current trends.

Wrapping Up

Managerial economics helps your business grow using a carefully planned approach. This approach combines several structures which are relevant to micro and macro-economic decisions that would make your business thrive.