nature and scope of Managerial Economics

According to McNair and Meriam, "Managerial Economics consists of the use of economic modes of thought to analyse business situation."
Spencer and Siegelman have defined Managerial Economics as "the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management."
We may, therefore define Managerial Economics as the discipline which deals with the application of economic theory to business management. Managerial Economics thus lies on the borderline between economics and business management and serves as a bridge between economics and business management.
The prime function of a management executive in a business organization is decision making and forward planning. Decision Making means the process of selecting one action from two or more alternative courses of action whereas forward planning means establishing plans for the future. The question of choice arises because resources such as capital, land, labour and management are limited and can be employed in alternative uses. The decision making function thus becomes one of making choices or decisions that will provide the most efficient means of attaining a desired end, say, profit maximization. Once decision is made about the particular goal to be achieved, plans as to production, pricing, capital, raw materials, labour, etc., are prepared. Forward planning thus goes hand in hand with decision making.

A significant characteristic of the conditions, in which business organizations work and take decisions, is uncertainty. And this fact of uncertainty not only makes the function of decision making and forward planning complicated but adds a different dimension to it. If knowledge of the future were perfect, plans could be formulated without error and hence without any need for subsequent revision. In the real world, however, the business manager rarely has complete information and the estimates about future predicted as best as possible. As plans are implemented over time, more facts become known so that in their light, plans may have to be revised, and a different course of action adopted. Managers are thus engaged in a continuous process of decision making through an uncertain future and the overall problem confronting them is one of adjusting to uncertainty.
In fulfilling the function of decision making in an uncertainty framework, economic theory can be pressed into service with considerable advantage. The way economic analysis can be used towards solving business problems. Constitutes the subject matter of Managerial Economics. Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:
Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions

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