The scope or areas is the thing which tells us how far away a specific subject will work. Thus, the subject matter and area or scope of managerial economics tell about the subject matter enclosed by the study of such a particular subject. It takes into account almost all the problem areas of managers and firms.
So, the scope of business economics is very wide and it is increasing day by day. The scope of managerial economics may deal with demand analysis and forecasting, production analysis, cost analysis, inventory management, advertising, pricing system, resource allocation, and so on.
The Subject matter and area of managerial economics to which economic theories can be applied may be broadly categorized into two sections;
- Operational Issues or Internal Issues, and
- External or Environmental Issues
Operational Issues or Internal Issues
The operational issues are located inside the organization and so that within the conduct of managers. These issues always answer to the decision problems like which good and service is to be produced, what quantity should be produced, how to produce, how much price should be charged, how to promote the produced commodities, how to decide a new investment, how to manage the capital, cost of capital and rate of profit, etc.
All these choice problems are subject matters of microeconomics. Managerial economics includes the study of microeconomic principles to give a measure for rational decision making in the business firm. Thus the subject matter and area of managerial economics inside the business organization can be discussed with help of following points;
Demand analysis and forecasting
Economists use the term ‘demand’ to mean the desire to have something is backed up by willingness to pay for that thing. Demand for a product is affected by several factors and called the determinant of demand in economics.
Demand analysis gives an idea to management about several factors that may influence demand and with the help of this management can make a plan for the future. Knowing about determinant is also useful for the future of the commodity.
So demand analysis and forecasting ensure the study of current demand and future demand and with the help of this, a business takes its steps towards the future.
Cost and production analysis
Production is the process of creating’ utilities’. Production decisions have many facets/areas. It makes available both consumer and capital goods. With limited resources, the firm has to produce different alternative products at possible least cost.
Achieving a certain level of profit requires the production of a certain level of output and to obtain such production some cost also has to be incurred. Managerial economics is responsible for determining the optimum level of production with a minimum average cost of production.
Under this cost combination, production function, determinants of cost, the relation between production and cost in the short and long run, the optimum size of the firm, and determination of the size of production is studied.
Pricing is a very important area of business economics as it is the basis of the revenue of a firm. It is giving value to the output of the business firm. Pricing is important to generate revenue and ensuring profitability. The future of the business firm is based on the pricing as it ensures profit and profit is the future of the business.
In the case of excess supply, there are fewer prices and if there is excess demand there is a high price in the market. Pricing policy and study about different factors affecting the pricing of the product are important issues of managerial economics. Different pricing strategies and techniques are used in different market structures.
For a business, profit is the tool for generating internal funds. Every business is there to generate and earn profit as much as possible and it is considered as the chief indication of the success of the business and managers’ ability.
Different economics and their different theories advocated that profit is the outcome of risk-taking and bearing of uncertainty. So every business has to make an appropriate policy and strategy for the maximization of the profit. It is the lifeblood of the growing business and base for their future.
Thus, profit planning and management of profit is another core issue of managerial economics. The manager has to make clear decisions on the sources, nature, and measurement of profit, and managerial economics helps him to ensure the profit targets.
Capital is the foundation of a business. Managing capital and minimizing the cost of capital is among the most challenging issues for modern business. The value of capital and sources of capital or structure of capital determines the profitability and expansion of a business.
Capital management requires a critical and top-level decision as it takes a huge amount of investment for a long period. Effective financial decision is the core thing for the successful business and if the manager is the skillful and competent financial decision will be cost-effective and such efficiency is based on the source of capital, cost of capital, and use of capital.
So capital management refers to plan and control of capital spending, and managerial economics ensures assistance to top-level management in making capital decisions.
The term inventory refers to stock. Stock refers to the stock of raw materials, finished goods, or semi-finished goods that a firm needs to keep or store. It should be an ideal quantity because both high and low quaintly are not good for the business.
Managerial economics uses some methods like ABC analysis in its management and to keep desirable stock of inventory for the business. So managerial economics helps to control inventory costs and keep an efficient quantity of inventory.
Managerial economics with the help of macroeconomic variables and phenomenon deals with external components also. These components are related to the social and political environment in which businesses and industries have to operate.
Environmental issues are related to the general business environment in which a business operates. Subject matter and area of managerial economics outside the business organization can be briefly presented with help of following points;
- The political system of the country including political ideologies (democratic, socialistic, communist, capitalist, authoritarian, etc.) and the view of the state towards the private sector and private enterprises, policies of the government, agenda of the political parties, role, and involvement of the public sector, etc.
- Macroeconomic trend ( Trade cycle means overall fluctuations of aggregate economic activities including employment, inflation, income, saving, investment,) and so on.
- Government policies including fiscal, monetary and income policies
- The general trend and structure of the financial system of the nation. It includes financial institutions, financial securities, and financial markets.
- General trend and attitude of civil societies, trade unions, and consumer groups, cooperatives societies,
- Threats and opportunities from foreign businesses and so on
The management of an organization is responsible to deal with both internal as well as external factors for rational and effective decision making. It comes in the responsibility of the managers to investigate and analyze all the components of internal as well as the external business environment and to make business decisions coping with environmental issues so that the organization could achieve its objectives at possible least cost, time, and effort.
So managerial economics is there to help with studying several internal and external components with principles, theories, and concepts of microeconomics and tools of mathematics and statistics in the business decisions, plans, and minimization of loss and risk involved. Managerial economics always aims to take a business at the peak of its success and make it sustain for a long period of time. The use of managerial economics in the business sector is, therefore, increasing day by day.