“Managerial decisions are an important cog in the working wheel of an organisation. The success or failure of a business is contingent upon the decisions taken by managers. Increasing complexity in the business world has spewed forth greater challenges for managers. Today, no business decision is bereft of influences from areas other than the economy. Decisions pertinent to production and marketing of goods are shaped with a view of the world both inside as well as outside the economy.
Rapid changes in technology, greater focus on innovation in products as well as processes that command influence over marketing and sales techniques have contributed to the escalating complexity in the business environment. This complex environment is coupled with a global market where input and product prices are have a propensity to fluctuate and remain volatile. These factors work in tandem to increase the difficulty in precisely evaluating and determining the outcome of a business decision.
Such evanescent environments give rise to a pressing need for sound economic analysis prior to making decisions. Managerial economics is a discipline that is designed to facilitate a solid foundation of economic understanding for business managers and enable them to make informed and analysed managerial decisions, which are in keeping with the transient and complex business environment. The discipline of managerial economics deals with aspects of economics and tools of analysis, which are employed by business enterprises for decision-making.
Business and industrial enterprises have to undertake varied decisions that entail managerial issues and decisions. Decision-making can be delineated as a process where a particular course of action is chosen from a number of alternatives. This demands an unclouded perception of the technical and environmental conditions, which are integral to decision making. The decision maker must possess a thorough knowledge of aspects of economic theory and its tools of analysis.
The basic concepts of decision-making theory have been culled from microeconomic theory and have been furnished with new tools of analysis. The methods of operations research and programming proffer scientific criteria for maximising profit, minimising cost and determining a viable combination of products. Decision-making theory and game theory, which recognise the conditions of uncertainty and imperfect knowledge under which business managers operate, have contributed to systematic methods of assessing investment opportunities.
Almost any business decision can be analysed with managerial economics techniques. However, the most frequent applications of these techniques are as follows: Risk analysis: Various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk. Production analysis: Microeconomic techniques are used to analyse production efficiency, optimum factor allocation, costs and economies of scale.
They are also utilised to estimate the firm’s cost function. Pricing analysis: Microeconomic techniques are employed to examine various pricing decisions. This involves transfer pricing, joint product pricing, price discrimination, price elasticity estimations and choice of the optimal pricing method. Capital budgeting: Investment theory is used to scrutinise a firm’s capital purchasing decisions. “