A comparison between managerial economics and Traditional Economics

Sudhangshu Kashyap Saikia

Priya Jaiswal

Nikita Prasad

Supratim Dasgupta

Managerial economics refers to the branch of economics that isderived from the subject matter of microeconomics thatconsiders the households and firms in an economy, andmacroeconomics that is concerned with the employment rates,interest rates, inflation rates and other macroeconomic variablesthat concerns a country as a whole. Managerial economics makesthe use of mathematics, statistics, management theories,economic data and modelling techniques in order to helpbusiness managers to carry out their operations with maximumefficiency. Managerial economics helps managers make theright decisions in the allocation of scarce resources such as land,labour, capital to achieve the highest profitability whileminimizing costs. Managerial economics also helps managersdecide which products to produce, how much to produce, pricesto be set, and channels to use in the sales and distribution. Itcoordinates the theoretical and practical aspects of macro andmicro divisions of study

Joel Dean declares:"The purpose of managerial economics is to show how economicanalysis can be used in formulating business policies”

FeaturesThe analysis of various definition brings before us the followingfeatures of Managerial Economics1. It generally falls in Microeconomics

2. Economics of firms

3. It involves application of both Micro and Macro economic analysis in accordance to the profitability of the firm

4. Managerial economics is pragmatic and quantitative in drawing conclusions

5.Managerial economics is normative.

6 Its main objective and functions to help the management in In formulating suitable business policies

Economics is a social science that studies the production,distribution, trade and consumption of goods and services. It isalso the science of making decisions in the presence of scareresources.

Economics is concerned with how society sets aboutmeeting people's demands for things they want toconsume. It looks at the production, consumption and saleof goods and services, both at the level of individualproducts, firms and consumers and at the level of the totalproduction and consumption by countries.

It also compares alternative ways of using the limitedresources that countries and individuals possess andconsiders how efficient and/or fair such alternatives are.

Meaning and Definition :

General Economics :

Economics is the social science that studies economic activities

to gain an understanding of the processes that governs the

production, distribution and consumptions of goods and

services in an economy. It is the science that analyses choice

making economic behavior. Choices are made both at

individual level and national level. The economic theory

establishes general laws governing the activities of an

economy

The term Economic is derived from the ancient Greek word

“Oikonomia” (oikos means house and nomos means custom or

law)the meaning of the word is rule of the household for good

management.

According to J.M. Keynes “Economics studies how the levels

of income and employment in a community are determined”

1. It is of both micro and macro character

2. It studies both individual units of the economy (i.e firms) and aggregates of the economy as a whole( i.e Aggregate Supply , National Income , etc)

3. It studies both micro and macro analysis and theories separately

4. It is both positive as well as normative

5. It only involves theoretical analysis and deals with theoretical aspects only

Managerial Economics has been described as economics applied to decision-making. It may be viewed as a special branch of Economics. However, the main points of differences are the following: 1. The traditional Economics has both micro and macro aspects whereas

Managerial Economics is essentially micro in character although in application both micro and macro analysis is applied in managerial economics

2. Economics is both positive and normative science but the Managerial Economics is essentially normative in nature.

3. Economics deals mainly with the theoretical aspect only whereas Managerial Economics deals with the practical aspect.

4. Managerial Economics studies the activities of an individual firm or unit. Its analysis of problems is generally micro in nature, whereas Economics analyzes problems both from micro and macro point of views.

5. Economics studies human behaviour on the basis of certain assumptions but these assumptions sometimes do not hold good in Managerial Economics as it concerns mainly with practical problems.

Under Economics we study only the economic aspect of the problems but under Managerial Economics we have to study both the economic and non-economic aspects of the problems.

Economics studies principles underlying rent, wages, interest and profits but in Managerial Economics we study mainly the principles of profit only.

Sound decision-making in Managerial Economics is considered to be the most important task for the improvement of efficiency of the business firm; but in Economics it is not so.

The scope of Managerial Economics is limited and not so wide as that of Economics.

Thus, it is obvious that Managerial Economics is very closely related to Economics but its scope is narrow as compared to Economics.

A trained managerial economist integrates concepts and methods from all these disciplines bringing them to bear on business problems of a firm.

Basis Economics Managerial Economics

Character The traditional economics has both Micro and Macro aspects.

It is essentially Micro incharacter

Positive and NormativeAnalysis

This is both positive and normative science

This is essentially normative setting in nature.

Aspect This deals with theoretical aspects only

While it deals with practical aspects

Basis of Operation It involve a generalised and theoretical study of the economic theories

It involves practical application of the economic theories

Problem Solving Here problems are analysed both from macro and micro point of view

It studies the activities of the individual firm of unit

Basis Economics Managerial Economics

Principles Here we study principles underlying rent, wages, interest and profits.

Here, we studied only the principles of profits only.

Efficiency Here efficiency of the firm is not studied.

Here , most important task is to study how to improve the efficiency of the firm.

Scope Traditional economics scope is wide and it covers various areas.

While the scope of managerial economics is limited and its scope is not so wide as that of traditional economics.

Basis Managerial Economics Economics

Practical Application Managerial Economics covers the practical application of economic analysis in the management of a business or enterprise

Economics does not cover the application of the knowledge other than through some case studies or examples from time to time. It's more concerned with theory and models and methods of analysis.

Basis Economics Managerial Economics

Basis Of Study It studies human behaviour on the basis of the certain assumptions, but these assumptions do not hold good in managerial economics.

It deals mainly with practical problems.Managerial Economics study only practical application of the Economic principle to the problem of firm

Summary of the Analysis: Managerial Economics is micro in character Pure

Economics is both micro and macro in character

Managerial Economics study only practical application of the Economic principle to the problem of firmPure Economics deals with the study of principles itself

Managerial Economics deals with the Economic problems of the firmwhile Pure Economics deals with Economic problems of both firm and individuals

Managerial Economics deals with profit theory onlyPure Economics deals with all distribution theories like rent, wages, interests, and profits

Managerial Economics covers the practical application of economic analysis in the management of a business or enterprise. Economics does not cover the application of the knowledge other than through some case studies or examples from time to time. It's more concerned with theory and models and methods of analysis.

If we use research as a parallel, managerial economics is to applied research, as economic is to basic research.

General economics involves economic generalisations of the theories whereas managerial economics studies the application of economic theory in practical business problems

Both managerial economics and general economics involve the production, distribution, and consumption of goods and services, and are both reflected from the basic economic principle of using the factors of production in an efficient manner for the production of output of goods and services.

Managerial economics helps the manager or the group/ groups of people making the decisions to increase their problem analytics skills as well as formulation solution to probabilistic problems. The main differences between managerial economics and the other branches of economics such as macro and micro economics is that. Micro economics involves the allocation of scarce resources on household level. Macro economics involve the study of economics as a whole. While managerial economics applies the tools learnt in these branches to come up with viable business ideas. Managerial economics is very broad and is not only used in decisions making for profit making organization but also useful to non-profit making organizations in the proper utilization of their scarce resources. The concept of management economics is also very useful in price determination, long term capital budgeting, and insights into the demands of a commodity.

Different schools of thought have suggested that managerial economics use the concepts of economics theory that differ from the fact that managerial economics is a combination of both economics theory and econometrics in making decisions. Econometrics is the use of statistical tools such as statistical packages and theories to experimentally measure the relationship that exist between economics variables. Its main advantage is that it uses factual data to model different scenarios

The areas where Managerial Economics is employed are:

Capital Budgeting

Determination of Demand

Price Analysis

Production Analysis

Risk Analysis

Profit and Capital management

Sales and promotional strategies

Cost Analysis

Managerial economics is concerned with modeling systems and complex managerial decision making, whereas General economics is concerned with the production of food and other necessities to meet daily requirements of individuals.

Managerial economics represents the development that a traditional economy has been through with globalization, development in technology and modernization of economic theories to suit managerial decision making.

Managerial Economics is micro in character Pure Economics isboth micro and macro in character

Managerial Economics study only practical application of the Economic principle to the problem of firm Pure Economics deals with the study of principles itself

Managerial Economics deals with the Economic problems of the firmwhile Pure Economics deals with Economic problems of both firm andindividuals

Managerial Economics deals with profit theory onlyPure Economics deals with all distribution theories like rent,wages, interests, and profits.