How Is Managerial Economics Related to Finance?

by Dwight Chestnut; Updated September 26, 2017
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Managerial economics uses statistical and mathematical modeling to help corporate finance managers make optimal decisions as to how to apply scarce financial resources. Its most common application is capital budgeting where corporate executives need to make informed decisions on how to allocate financial resources to the various departments. To aid in this decision, managerial economics uses statistical mathematical models to analyze past or historical capital budgeting data to predict or forecast future performance.

What Is Managerial Economics?

Managerial economics uses statistics and mathematical modeling to find the most cost-effective solutions to business problems. Business decisions often hinge on the most optimal allocation of limited resources. To this end, managerial economics applies mathematical tools, such as statistical analysis, regression analysis and operations research to predict or forecast outcomes using previous data. Decision makers can then use these forecasts and predictions to make resource allocation decisions.

What Is Corporate Finance?

Corporate finance is a broad area of focus for business. It can involve stockholder and stock issue concerns, capital budgeting matters, employee salary and wage issues, investment in new projects and a range of other financial issues. The bottom line focus of corporate finance managers is to ensure that corporations receive the maximum benefit of the financial resources allocated.

The Relationship

Managerial economics relates to corporate finance when statistical and mathematical modeling can be applied to optimize resource allocation decisions on stockholder/stock issuance decisions, capital budgeting issues, employee salary decisions or any matter related to finance. In these scenarios, managerial economics analysts access applicable financial data, apply the necessary statistical and mathematical models to that data and create optimal decision criteria for decision makers.

The Process

Corporate databases keep financial performance data from previous years. This data shows the historical relationship between a financial decision and the results of that decision. This historical relationship is then analyzed and used to forecast the future performance of similar decisions.

Application

The most common finance application of managerial economics is capital budgeting where corporate executives need to make informed decisions on how to allocate financial resources to the various departments. In a global economy, these decisions need to be made swiftly and effectively. A simple example would be a decision between building a new factory, expanding and upgrading the existing factory or outsourcing manufacturing to another country. Several variables from past performance can be plugged into managerial economics models to help guide this kind of decision.

About the Author

Dwight Chestnut has been a freelance business researcher and article writer for over 18 years. He has published several business articles online and written several business ebooks. Chestnut holds a bachelor's degree in electrical engineering from the University of Mississippi (1980) and a Master of Business Administration from University of Phoenix (2004).

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