Contribution of Economic Theory to Managerial Economics
Baumel believes that economic theory is helpful to managers for three reasons. First, it helps in recognizing the managerial problems, eliminating minor details that might obstruct decision making or in concentrating on the main issue. A manager is able to ascertain the relevant variables or specify the relevant data. Second, economic theory offers them a set of analytical methods to solve problems. Economic concepts like production function, consumer demand economies of scale or marginalism help in analysis of a problem. Third, this theory helps in-clarity of concepts used in business analysis that avoids conceptual pitfalls by logical structuring of big issues. Understanding of interrelationships between economic variables or events provides consistency in business analysis or decisions. For example, profit margins can be reduced despite an increase in sales
due to an increase in marginal cost greater than the increase in marginal revenue.
Ragnar Frisch divided economics in two broad categories - macro & micro. Macroeconomics is the study of economy as a whole. This economy deals with questions relating to unemployment, national income, fiscal policies, inflation or monetary policies. Microeconomics is concerned with the study of individuals like a commodity, a consumer, a market or a producer. Managerial economics analyses the supply or demand in a market, the pricing of specific input, the cost structure of individual goods or services and the like. It is micro-economic in nature because it deals with the study of a firm, which is an individual entity. The macroeconomic conditions of the economy definitely influence working of the firm, for instance, a recession has an unfavorable impact on the sales of companies sensitive to business cycles, while expansion would be beneficial. But Managerial Economics encompasses concepts, variables or models which constitute micro-economic theory, as both the manager and the firm where he works are individual units.
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