Simplynotes - Traditional Economics and Managerial Economics- Simplynotes
Traditional Economics and Managerial Economics Relationship between Traditional Economics and Managerial Economics Micro economics is the main source. Article shared by. Managerial Economics has been described as economics applied to decision-making. It may be viewed as a special branch of Economics. Ans. The differences between managerial economics and traditional. economics are as follows –. (i) Managerial economics studies the.
What is the relevance of the above to the study of managerial economics? It is often claimed, for example by those protesting against global capitalism, that economics is of no use in answering the fundamental questions involving value judgments, like reducing pollution. Indeed, economists themselves often admit that their science can only make positive not normative statements. However, this can give a misleading impression of the limitations of economics; it can indeed be helpful in making normative statements.
First, consider the following statement: This might sound like a normative statement but it is actually a conditional use of the word should as Page 5 described in the previous paragraph. Provided that the term efficiency is carefully defined, the statement is a positive one, since the concept of efficiency does not involve any value judgement. Of course the example above only shows that economists can make positive statements that might appear to be normative statements.
Now consider this statement: This is a genuine normative statement. Economists might estimate the costs and benefits of such a policy and show the costs to vastly exceed the benefits. This in itself cannot determine policy because it ignores the distribution of these costs and benefits, both over space and time.
However, it might in principle be possible to show empirically that both Nature, scope and methods 9 rich and poor countries would suffer overall from a policy of reducing pollution by 90 per cent and that future generations might not benefit either.
A realization of this might then cause the maker of the statement to change their mind. The reason for this is that they are forced to revalue their values in the context of other values that they have, in the light of economic analysis. Thus the application of economic principles can help to make normative statements on which policies are based and action taken.
Managerial Economics and Decision Sciences Managerial economics depends on economic theory for theoretical framework for analyzing the problems of business decision-making.
On the other hand, decision sciences provide tools and techniques for constructing decision models and for evaluating the effect and results of alternative courses of action i. Business economics uses optimization techniques including differential calculus, linear and other types of mathematical programming for deriving decision rules which assist managers for achieving the objectives of business firms.
Page 6 Further statistical tools of the decision sciences are used to estimate the relationship between important variables which help in decision making.
Besides, forecasting techniques of decision sciences are also widely used in business economics. Since most of business decisions require forecasting of future demand, and yield from capital investment, forecasting techniques play an important role in managerial decision-making. Thus, business economics draws heavily on decision sciences. Optimization techniques, statistical estimation, and forecasting methods have now become an integral part of modern economic theory.
The decision sciences provide the tools and techniques of analysis used in managerial economics. The most important aspects are as follows: Managerial decision making uses both economic concepts and tools, and techniques of analysis provided by decision sciences. The major categories of these tools and techniques are: While most of these methodologies are fairly technical, the first three are briefly explained below to illustrate how tools of decision sciences are used in managerial decision making.
9 Main Differences between Managerial Economics and Traditional Economics
Given that alternative courses of action are available, the manager attempts to produce the most optimal decision, consistent with stated managerial objectives. Thus, an optimization problem can be stated as maximizing an objective called the objective function by mathematicians subject to specified constraints.
In determining the output level consistent with the maximum profit, the firm maximizes profits, constrained by cost and capacity considerations.
While a manager does not solve the optimization problem, he or she may use the results of mathematical analysis. In the profit maximization example, the profit maximizing condition requires that the firm choose the production level at which marginal revenue equals marginal cost. This condition is obtained from an optimization exercise.
Depending on the problem a manager is trying to solve, the conditions for the optimal decision may be different. In some cases, statistical estimation techniques employed are simple. In other cases, they are much more advanced. Thus, a manager may want to know the average price received by his competitors in the industry, as well as the standard deviation a measure of variation across units of the product price under consideration.
In this case, the simple statistical concepts of mean average and standard deviation are used. Estimating a relationship among variables requires a more advanced statistical technique. For example, a firm may want to estimate its cost function, the relationship between a cost concept and the level of output.
A firm may also want to know the demand function of its product, that is, the relationship between the demands for its product and different factors that influence it. The estimates of costs and demand are usually based on data supplied by the firm. The statistical Page 8 estimation technique employed is called regression analysis, and is used to develop a mathematical model showing how a set of variables are related.
This mathematical relationship can also be used to generate forecasts. An automobile industry example can be used for the purpose of illustrating the forecasting method that employs simple regression analysis. Suppose a statistician has data on sales of American-made automobiles in the United States for the last 25 years.
Difference between Traditional and Managerial Economics
He or she has also determined that the sale of automobiles is related to the real disposable income of individuals. The statistician also has available the time series for the last 25 years on real disposable income.
Assume that the relationship between the time series on sales of American-made automobiles and the real disposable income of consumers is actually linear and it can thus be represented by a straight line. A fairly rigorous mathematical technique is used to find the straight line that most accurately represents the relationship between the time series on auto sales and disposable income. For example, a retailing firm that has been in business for the last 25 years may be interested in forecasting the likely sales volume for the coming year.
There are numerous forecasting techniques that can be used to accomplish this goal. A forecasting technique, for example, can provide such a projection based on the experience of the firm during the last 25 years; that is, this forecasting technique bases the future forecast on the past data.
While the term "forecasting" may appear to be rather technical, planning for the future is a critical aspect of managing any organization—business, nonprofit, or otherwise. In fact, the long- term success of any organization is closely tied to how well the management of the organization Page 9 is able to foresee its future and develop appropriate strategies to deal with the likely future scenarios.
Intuition, good judgment, and an awareness of how well the economy is doing may give the manager of a business firm a rough idea or "feeling" of what is likely to happen in the future. It is not easy, however, to convert a feeling about the future outcome into a precise number that can be used, for instance, as a projection for next year's sales volume.
Forecasting methods can help predict many future aspects of a business operation, such as forthcoming years' sales volume projections. Suppose that a forecast expert has been asked to provide quarterly estimates of the sales volume for a particular product for the next four quarters.
What are the differences between managerial economics and traditional economics ?
How should one go about preparing the quarterly sales volume forecasts? One will certainly want to review the actual sales data for the product in question for past periods.
- Managerial Economics and Traditional Economics
- Traditional Economics and Managerial Economics
- 9 Main Differences between Managerial Economics and Traditional Economics
Suppose that the forecaster has access to actual sales data for each quarter during the year period the firm has been in business. Using these historical data, the forecaster can identify the general level of sales.
Project Management: Relationship of Managerial Economics with Traditional Economics
He or she can also determine whether there is a pattern or trend, such as an increase or decrease in sales volume over time. A further review of the data may reveal some type of seasonal pattern, such as, peak sales occurring around the holiday season. Thus by reviewing historical data, the forecaster can often develop a good understanding of the pattern of sales in the past periods.
Understanding such a pattern can often lead to better forecasts of future sales of the product. In addition, if the forecaster is able to identify the factors that influence sales, historical data on these factors variables can also be used to generate forecasts of future sales. There are many forecasting techniques available to the person assisting the business in planning its sales. For illustration, consider a forecasting method in which a statistician forecasting future values of a variable of business interest—sales, for example—examines the cause-and-effect Page 10 relationships of this variable with other relevant variables, such as the level of consumer confidence, changes in consumers' disposable incomes, the interest rate at which consumers can finance their excess spending through borrowing, and the state of the economy represented by the percentage of the labor force unemployed.
Thus, this category of forecasting techniques uses past time series on many relevant variables to forecast the volume of sales in the future. Under this forecasting technique, a regression equation is estimated to generate future forecasts based on the past relationship among variables.
Managerial economics is a link as it's basis is in "traditional" economics but it can rarely be perfectly applied to contemporary "real life" decision making. What is the difference between Economics and Managerial Economics? Economics is the social science that analyzes the production, distribution, and consumption of goods and services.
According to Lionel Robbins, Economics is a science which st…udies human behaviour as a relationship between ends and scarce means which have alternative uses.
Managerial economics, used synonymously with business economics, is a branch of economics that deals with the application of microeconomic analysis to decision-making techniques of businesses and management units.
According to McGutgan and Moyer, "Managerial economics is the application of economic theory and methodology to decision-making problems faced by both public and private institutions". Distinguish between managerial economics and microeconomics? Managerial Economics Managerial economics, also called business economics, is a subset of macroeconomics.
Managerial or "business economics" applies the ideas, mostly fr…om micro-theory, but some from macro-theory as well, specifically to the business world.
Many ideas are similar to microeconomics.