Managerial economics helps managers who direct limited resources -- including financial and human resources, time and space -- to do their job more effectively. Managerial economics provides concrete solutions, unlike microeconomics, which merely provides explanations -- for instance, about how markets work.
Managerial Economics in Practice
A business uses managerial economics to make decisions about its various functions. The firm’s production managers, for instance, could use the input to decide how much to produce in the next quarter; marketing managers could use the input to decide how much money to spend on advertising and what price to charge for a product; and finance managers could decide whether to build a factory to expand a business’ output.
Managerial economics can greatly influence market conditions regarding demand. Managers study demand to gauge products' market potential. Demand is the quantity of the product that people will buy at a certain price during a certain period, assuming all factors affecting the product's demand are constant; the condition, for instance, means there is no change in consumer tastes. Often, as a product's price increases, demand for it decreases.
Managerial economics studies market conditions relating to a product's supply; this helps business managers make decisions about production, for instance. Supply is the quantity of a product that businesses will sell at a certain price if all factors affecting supply remain constant. Generally, the price the market offers for a product or service directly influences the quantity supplied. Supply typically increases when demand increases -- and then businesses expand to create more efficient means to handle additional production.
Managerial economics also looks at factors that motivate a firm. Economists generally consider that the firm aims to gain maximum benefit. Firms and individuals are motivated by self-interest in producing and selling goods and services. Their aim is to maximize profit, and so they will produce as long as they meet their goals.