MANAGERIAL economics, also called business economics, an important postgraduate subject I taught is a branch of economics that applies microeconomic analysis to specific business decisions. As such, it bridges economic theory and economics in practice.
For instance, economic forces in the marketplace determine the demand for products, the prices of resources, costs of production, the number of rival firms, the nature of pricing strategies and ultimately the profitability of business investments.
Managerial economics addresses the larger economic forces that shape day-to-day operations, long-run planning decisions and focus on the application of microeconomics theory business problems. It applies microeconomics theory, the study of behavior of individual economic agents, to business problems in order to teach business decision-makers how to use economic analysis to make decisions that will achieve the firm’s goal: the maximization of profit.
Scope and relationship in economic theory
Microeconomics is the study and analysis of the behavior of individual segments of the economy: individual consumers, workers and owners of resources, individual firms, industries, and markets for goods and services. It is concerned with topics such as how consumers choose the goods and services they purchase and how firms make hiring, pricing, production, advertising, research and development, and investment decisions.
Theory allows people to gain insights into complicated problems by using simplifying assumptions to make sense out of confusion, to turn complexity into relative simplicity. Like a road map, economic theory ignores everything irrelevant to the problem and reduces business problems to their most essential components.
Economic approach to understanding business decision-making reduces business problems to their most essential components. Understanding the fundamentals of business decision-making provides a way of thinking and analyzing problems that can be applied in a wide range of situations.
Functional areas
Functional areas of business administration include Finance and Accounting, Operations and Production, Research and Development, Marketing and Human Resource Management. They provide the background for managerial decision-making. Given the economic goals of a firm to maximize profit, market share, revenue growth, return on investment, technology, customer satisfaction and shareholder value, managerial economics integrates the economic theory, decision sciences and the functional areas of business on how these functional areas should interact to one another as the firm attempts to achieve its goal most efficiently.
Management revolution
Today’s revolution has four components: the globalization of markets, the spread of information technology and computer networks, the dismantling of traditional managerial hierarchies, and the creation of a new information economy. These four components are all occurring quickly and simultaneously, and they affect one another. With globalization, more managerial decisions must consider the world as a whole.
Because of tremendous improvement in communications and transportation, many more products are now imported.
WTO
World Trade Organization is an international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows smoothly, predictably and freely as possible. The WTO administers the agreements, handles trade disputes, monitors national trade policies, provides technical assistance and training for developing countries, and cooperates with other international organizations.
The purpose of the WTO is to ensure that global trade commences smoothly, freely and predictably. The WTO creates and embodies the legal ground rules for global trade among member-nations and thus offers a system for international commerce. The WTO aims to create economic peace and stability in the world through a multilateral system based on consenting member-states (currently there are more than 140 members) that have ratified the rules of the WTO in their individual countries, as well.
This means that WTO rules become a part of a country’s domestic legal system. The rules, therefore, apply to local companies and nationals in the conduct of business in the international arena. If a company decides to invest in a foreign country, by, for example, setting up an office in that country, the rules of the WTO (and hence, a country’s local laws) will govern how that can be done. Theoretically, if a country is a member to the WTO, its local laws cannot contradict WTO rules and regulations, which currently govern approximately 97 percent of all world trade.
Decisions are made by
consensus; though a majority vote may also rule (this is very rare). Based in
Geneva, Switzerland, the Ministerial Committee, which holds meetings at least
every two years, makes the top decisions. There is also a General Council, a
Goods Council, Services Council, and an Intellectual Property Rights Council,
which all report to the
General Council.
Finally, there are a number of working groups and committees. If a trade dispute occurs, the WTO works to resolve it. If, for example, a country erects a trade barrier in the form of a customs duty against a particular country or a particular good, the WTO may issue trade sanctions against the violating country. The WTO will also work to resolve the conflict through negotiations.
Value of the country and its policy-makers
Policy reforms pursued by the Philippines over an extended period have resulted in a more open, competitive economy, able to withstand relatively unscathed the Asian financial crisis.
The Philippines is not a party to the WTO Agreement on Government Procurement. In its procurement, the Philippine government generally favors the purchase of domestically produced goods and services, and applies certain foreign ownership limitations to suppliers.
References include: Cambridge University Press by Dominick Salvatore, Managerial Economics in a Global Perspective, fifth edition.
Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:
- Risk analysis—various uncertainty models, decision rules, and risk quantification techniques are used to assess the riskiness of a decision.
- Production analysis—microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm’s cost function.
- Pricing analysis—microeconomic techniques are used to analyse various pricing decisions, including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.
- Capital budgeting—Investment theory is used to examine a firm’s capital purchasing decisions.
Other text references:
- Keith Weigelt (2006). Managerial Economics;
- Elmer G. Wiens The Public Firm with Managerial Incentives; and
- NA, (2007). Managerial economics, Encyclopedia Britannica online Concise Encyclopedia entry.
To reach the writer, e-mail cecilio.arillo@gmail.com.