Managerial Economics Is the Integration of Economic Theory with Business Practice for the Purpose of Facilitating Decision Making and Forward Planning by Manager

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1. Reconciling Traditional Theoretical Concepts to the Actual Business Behaviour and Conditions. Managerial Economics reconciles the tools, techniques, models, and theories of traditional economics with actual business practices and with the environment in which a firm has to operate. In the words of Edwin Mansfield, “Managerial Economics attempts to bridge the gap between purely analytical problems that intrigue many economic theories and the problems of policies that management must face. 2. Estimating Economic Relationships. Managerial Economics estimates economic relationships between different business factors such as income, elasticity of demand and cost volume profit analysis etc. 3. Predicting Relevant Economic Quantities. Managerial Economics helps the management in predicting various economic quantities such as – cost, profit, demand, capital, production, price etc. As a business manager has to work in an environment of uncertainty, the future should be well predicted in the light of these quantities. 4. Understanding Significant External Forces. The management has to identify all the important factors that influence a firm. These factors can broadly be divided into two categories. Managerial Economics plays an important role by assisting management in understanding these factors. a. External Factors. These are the factors over which a firm cannot have any control. The plans, policies, and programmes of the Firm should be adjusted in the light of these factors. Important external factors affecting decision making process of a firm are – economic system of the country, business cycles, fluctuations in national income and national production, industrial policy of the Government, trade and fiscal policy of the Government, taxation policy, licensing policy, trends in foreign trade of the country, general industrial relation in the country, etc.

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