The
scope of Managerial Economics is so wide that it embraces almost all the
problems and areas of the manager and the firm.
It deals with demand analysis and forecasting, resource allocation,
production function, cost analysis,inventory management , advertising, price system,
capital budgeting etc. However, the scope of managerial economics may be discussed
under following points:
a) Demand analysis and
forecasting : Demand forecasting is the process of finding the values for
demand in future time period. The current values are needed to make optimal
current pricing and promotional policies, while
future values are necessary for planning future production inventories,
new product development etc. Correct
estimates of demand is essential for decision making , strengthening market
position and enlarging profits.
b) Cost and Production
Analysis: Production deals with the physical aspects of the business
investment. It is the process whereby
inputs are transformed into outputs. Efficiency of production depends on ratio
in which various inputs are employed
absolute level of each input and productivity of each input. A production function is the relation which
gives us the technically efficient way of producing the output given the
inputs. The firm must undertake cost estimation and forecasting to judge the
optimality of present output levels and
assess the optimal level of production
in future.
c) Inventory Management: It refers to stock of raw materials which a
firm keeps. If it is high, capital is
unproductively tide up which might, if stock of inventory is reduced, be used
for other productive purpose . On the
other hand, if the level of inventory is low, production will be hampered. Hence, managerial economics with methods such
as ABC analysis a simple simulation
exercise and some mathematical models with a view to minimize inventory cost.
d) Advertising: Managerial economics helps in determining the total advertising
cost and budget, the measuring of economic effects of advertising and form an
integral part of decision making
and forward planning.
e) Market Structure and
Pricing Policies: Managerial economics
helps to clear surplus and excess demand to bring market equilibrium as there
is continuos changes in market. Success
of business firm depends on correctness of price decisions. Price theory
works according to the nature of the market depending on the number of sellers, demand conditions
etc.
f) Resource Allocation: Managerial economics with the help of
advanced tools such as linear programming are used to arrive at the best course of action for
the maximum use of the available resources and its substitutes.
g) Capital Budgeting: Capital is scarce and it costs something
. Hence, managerial economics helps in decision making and forward planning
on allocation of capital to various factors of productions , marketing and
management.
h) Investment Analysis: It involves planning and control capital expenditure. Whether or not to invest funds in purchase of assets or other
resources in an attempt to make profit
and how to choose among
completing uses of funds.
Managerial economics help in analysis and decision making on the investment of funds.
i)
Risk and Uncertainty Analysis: As business firm have to operate under
conditions of risk and uncertainty both
decision making and forward planning becomes difficult. Hence managerial economics helps the business firm in decision making
and formulating plans on the basis of
past data, current information and future prediction.