Managerial economics combines economic theory and concepts with business situations in order to increase efficiency in business decisions. Managerial economics is seen as the application of economic theory in allocating a firm’s resources. It is beneficial to a manager’s decisions regarding a firm’s customer base, competitors, and strategic future decisions.
Managerial economics uses approaches from micro and macro economics and applies them when making decisions about resource allocation and utilization. Statistics and other mathematical concepts are used in the decision-making process.
The most commonly used economic techniques are risk analysis, production analysis, pricing analysis, and capital budgeting. Risk analysis uses models to quantify risk and asymmetric information and uses the data to decide how to manage risk. Production analysis is a microeconomic technique that analyzes production efficiency, costs and economies of scale, and optimum factor allocation. Production analysis is also used to estimate a firm’s cost function. Pricing analysis is another microeconomic technique that is used to make pricing decisions. This entails transfer pricing, price discrimination, price elasticity estimations, and optimal pricing methods. Capital budgeting is an investment theory that assesses a firm’s capital purchasing decisions.
This branch of economics focuses on the theory of demand, theory of capital and investment, environmental issues, production, and profit. Managerial economics provides analytic tools and techniques that show the best method or decision to using the optimal level of resources and how to allocate them efficiently.