For any business to truly gain a competitive edge, integrating managerial economics into its decision-making process is essential. Managerial economics, according to Mark Hirschey and Eric Bentzen, is the study of how economic forces affect organizations and how their leaders can use economic principles to achieve optimal outcomes. Found everywhere from large corporations to nonprofits, in all sectors of the economy, this concept is a profoundly useful tool that helps leaders make sound business decisions.
Leaders use managerial economics to ensure they are making the best possible decisions for their organizations. Problems they might look to solve include:
- Selecting or developing products
- Deciding on product output and pricing
- Creating an internet strategy
- Organizational design
- Promotional strategies
- Worker hiring and training
- Investment and financing
Specifically, managerial economics utilizes particular concepts and quantitative methods to ensure the maximal use of resources and minimization of waste. Practical applications might involve:
- Marginal analysis. As the study of changes caused by economic decisions, using marginal analysis might help a company understand whether or not a customer will decide to still buy a product if its price increases.
- Public choice theory, which (according to The Concise Encyclopedia of Economics) helps companies understand the decision-making behavior of the public.
- Theory of the firm, which describes the basic model of any business enterprise.
- Game theory techniques. As the study of how groups of people interact, they may help companies understand broad-based customer behavior based on the behavior of the consumers that surround them.
- Optimization techniques, or how to make the most of a company’s available resources.
- Forecasting procedures, or attempts to understand future conditions such as sales.
Once leaders understand concepts such as these, they can be practically applied to almost any financial scenario they might face.
Applying Managerial Economics to Business Decisions
Although theoretical in nature, managerial economics is ultimately meant for real-world use, such as in the scenarios below.
A company has been plagued over the past few years by financial scandals involving top management. Devoid of effective board oversight, CEOs and other high-ranking individuals have embezzled large quantities of money from shareholders and engaged in other immoral financial practices. The company is trying to ensure that a new board of directors will have the backbone and impetus required to effectively prevent these incidents from happening in the future. Consultants argue that in order to get the right people, board member compensation — particularly for those on the company’s audit committee — will have to increase. But critics say this will create unrealistic expectations among investors that every act of fraud will be caught. By using the managerial economic concept of the theory of the firm, company leaders can measure the relative value of increasing board member pay in order to stave off potential fraud versus the risk loss from another potential incident.
A country provides free health services for its citizens. However, the government faces the challenge of meeting increasing healthcare demands using finite resources. The government must decide how to best use its money. Using the managerial economics concept of optimal combination of inputs, it can decide what combination of equipment, staff, drugs and facilities will best meet the public need and keep costs at a minimum.
With a thorough understanding of managerial economics, business leaders set themselves up for long-term financial success.
Furthering Your Business Career
Effective leadership comes from understanding the financial realities of the business world. When students earn their online MBA from Concordia University Texas, they are preparing for careers that allow them to influence the companies of tomorrow. Concordia’s program gives students the opportunity to develop the advanced skills they need to thrive as managers in any field of work.