Characteristics of Managerial Economics

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In the entirety of its breadth and width, the subject of managerial economics isn't something you're going to learn in a day. That's why colleges and business schools teach entire classes on the topic and why you can take comprehensive online courses on it, or even read thick tomes dedicated solely to these principles.

As a small business owner swimming in your new POS software and social media marketing campaign, there's a good chance you don't have the time to go back to business school. Though it's never a bad idea to continue your education with a podcast while you cook or to read an economic theory e-book on your Kindle before bed, you can get a basic feel for the key characteristics of managerial economics by boiling it down to a few basic principles. Think of it as a springboard into greater learning.

Core Features of Managerial Economics

The concept of managerial economics is basically an offshoot from microeconomic theory, which focuses on the individual behaviors of consumers and businesses. Managerial economics expands on microeconomic theory with the addition of statistical data and metrics that help project future demand for products and services, aiming to maximize profit and minimize cost. It relies on game theory (the mathematic analysis of competitive strategy) and decision-making science to help business people assess investment opportunities even under flexible conditions. Basically, managerial economics lays out rules for improving managerial decisions based on the knowledge of human behavior combined with real-world, data-based economic consequences or projections.

Of course, that's all theory; the real importance of managerial economics is in its application to decision-making in your real-life, day-to-day business operations.

Goals of Managerial Economics

Among the most basic features of managerial economics are its goals. Its most central goal is to help your business maximize economic profit, which it defines as total revenue minus total cost. Basic stuff, right?

Well, not exactly. The key defining feature here is that, in managerial economics, "total cost" includes both explicit and implicit costs. Explicit costs (also known as accounting costs) are the types of expenses you might expect – out-of-pocket expenses for materials, labor and other essential business operations.

Implicit cost, however, is unpaid. This type of cost is equal to the loss of potential gains when compared to alternatives. By including implicit cost as part of the equation for reaching your profit goals, managerial economic theory encourages you to consider a variety of different strategies and settle on the most effective route for your business. Ideally, a decision based on concrete historical data and projections, from which you can estimate implicit cost.

Focus on Decision-Making

Another big focus among the many features of managerial economics is decision-making. This facet of managerial economics is known as the "Theory of the Firm."

Imagine you have a managerial decision to make, like whether to manufacture a part or buy it, how to advertise your new service or what sort of price model to choose. Managerial economics encourages you to approach each decision with two tools in hand: Economic concepts and decision silences.

For economic concepts, you'll look back into microeconomics to glean answers about consumer behavior and behavioral reactions to market structures and pricing data, asking yourself how this type of repeated behavior factors into your decision. Decision silences tools are of the more concrete, statistical variety; here, you'll consider any numerical or statistical analysis relating to the decision that you can get your hands on, as well as data such as related forecasts.

With these two complementary toolsets in mind, managerial economics hopes to lead you to an optimal decision that maximizes your firm's long-term value. Unlike other theories, the factor of implicit cost helps account for the time value of money while considering economic concepts and decision silences bolsters the strength of your decision-making skills even under uncertain or fluctuating conditions.

References

About the Author

Dan is a co-owner, founder and partner at two small businesses, both active in multimedia production in Los Angeles and Cincinnati. He's contributed what he's learned about small business over the past decade to publications such as Chron Careers, Fortune, AZ Central Small Business Tech, GlobalPost Careers, GoBankingRates.com, Motley Fool, MSN Money and others.

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