Managerial economics
[3] Managers use economic frameworks in order to optimize profits, resource allocation and the overall output of the firm, whilst improving efficiency and minimizing unproductive activities.
[4] These frameworks assist organizations to make rational, progressive decisions, by analyzing practical problems at both micro and macroeconomic levels.
The theory of Managerial Economics includes a focus on; incentives, business organization, biases, advertising, innovation, uncertainty, pricing, analytics, and competition.
[15] Microeconomics is the dominant focus behind managerial economics, some of the key aspects include: The law of supply and demand describes the relationship between producers and consumers of a product.
[17] This decision is informed by a variety of factors, including raw material inputs, labor, and capital costs like machinery.
[17] The production theory states that a business will strive to employ the cheapest combination of inputs to produce the quantity demanded.
[26] Managers can make business decisions on the output level based on this analysis in order to maximize the profit of the firm.
Managerial economics uses explanatory variables such as output, price, product quality, advertising, and research and development to maximise net benefits.
The use of econometric analysis has grown with the development of economics and management, as has the use of differential calculus to determine profit maximisation.
[4] Managerial economics aims to provide the tools and techniques to make informed decisions to maximize the profits and minimize the losses of a firm.
[4] Managerial economics has use in many different business applications, although the most common focus areas are related to the risk, pricing, production and capital decisions a manager makes.
[3] Managerial economics as a science It is important to understand what pricing decisions should be made regarding the products and services of the firm.
[30] In order to set a price that drives sales and firm performance, managers must understand the economic environment in which they are operating.
[47] However, often consumers fail to switch to the optimal choice because of loss aversion, information deficiencies, procrastination, status-quo bias or endowment effects.
[53] Instead, understanding bounded rationality, a concept explored in behavioural economics, can assist firms and managers in decision making.
[61] In a field experiment analyzing the effects of performance-based monetary incentives, it was shown that productivity improved in line with employees' ability, however, there was an increase in neglect of non-incentivised tasks.
The standard direct price effect makes incentivised behavior more attractive; and the indirect psychological effect makes incentivised behavior less appealing by relaying important information from principals (manager) to agents (worker) surrounding quality expectations, which can provoke unexpected behavioural outcomes.
[65] Where workers are paid at a substantially lower rate to their peers, outputs and attendance can fall out of alignment with organisational objectives.
Pay disparity can cause harm to an organisations social culture, cohesion and cooperation, and alter the workplace dynamic significantly.
Potentially due to self-serving bias, workers are often unwilling to believe they perform at a lower standard than their peers unless shown undeniable evidence.
The idea of tournament theory is that agents who put in effort to achieve promotions are rewarded with a higher, non-incremental, pay rate.
[70][71] The prevalence of tournament structured competitions for career progression provides an explanation for why women are often underrepresented in high positions.
Managers ability to identify the role of biases in perpetuating inequalities within the workplace can be instrumental in improving firm outcomes.
[88] Effective demand management considers factors which are both within and beyond the firm's control, such as disposable income, competition, price, advertising and customer service.
Profit management is technology enabled, as firms must be quick to respond to rapid changing market and to know the true economic cost of its products and services.
Management needs to drive cooperation between different functions of the firm such as sales, marketing, and finance, to ensure the teams recognize the importance of coordinated effort.
With regard to macroeconomic trends, the forecasting and analysis of areas such as output, unemployment, inflation and societal issues are essential in managerial economics.
[95] An example of managerial economics using macroeconomic principles is a manager choosing to hire new staff rather than training old ones in a time where the rate of unemployment is high, as the possible talent pool would be very large.
[5] An example of managerial economics using microeconomic principles is the decision of a manager to increase the price of the goods being sold.
[5] From a management perspective, managerial economics techniques are useful in many areas regarding business decision-making, most commonly including:
