RELATIONSHIP AND 10 DIFFERENCE BETWEEN TRADITIONAL ECONOMICS AND BUSINESS ECONOMICS
Relationship
In the words of
Haynes “The relation of managerial economics to economic theory is much like
that of engineering to physics, or of medicine to biology or bacteriology. It
is the relation of an applied field to the more fundamental but more abstract
basic discipline from which it borrows concepts and analytical tools. The
fundamental theoretical fields will no doubt on the long run make the greater
contribution to the extension of human knowledge. But the applied fields
involve the development of skills that are worthy of respect in themselves and
that require specialized training. The practicing physician may not contribute
much to the advance of biological theory but he plays an essential role in
producing the fruits of progress in theory. The managerial economist stands in
a similar relation to theory with perhaps the difference that the dichotomy
between the pure and the “applied” is less clear in management than it is in
medicine.”
Managerial
economics has been defined as economics applied in decision-making. It is a
special branch of economics bridging the gap between economic theory and
managerial practice. The relationship between
managerial economics and traditional economics is
facilitated by considering the structure of traditional study. The
traditional fields of economic study about theory,
Micro economics focuses on individual consumers firms and
industries. Macro economics focuses on aggregations of economics
units, especially national economics.
The emphasis on normative
economics focuses on prescriptive statements that are established rules on
the specified field. Positive economics focuses on description that
describes that manner in which economics forces operate without
attempting to state how they should operate. The focus of each field of study
is sufficiently well defined to warrant the breakdown suggested.
Since each area
of economics has some bearing on managerial decision making,
managerial economics draws from them all. In practice, some are more
relevant to the business firm that others and hence to
managerial economics. Both microeconomics and macro
economics are important in managerial economics but the micro
economic theory of the firm is especially significant. The theory of firm is
the single most important element in managerial economics. However,
because the individual firm is influenced by the general economy, that is
domain of macro economics. Managerial economics is certainly on
normative theory. We want to establish decision rules that will help managers
attain the goals of their firm, agency or organization; this is the essence of
the word normative. If managers are to establish valid decision rules, however,
they must thoroughly know the environment in which they operate for this reason
positive or descriptive economics is important.
Surveys
conducted in various countries showed that business economists have found
economic concepts such as price elasticity of demand, income elasticity of
demand, opportunity casts, the multiplier, propensity to consume, marginal
revenue products,. Speculative motive, production function, balanced growth,
liquidity preference etc., quite useful and of frequent application. They have
also found the following main areas of economics as useful in their works:
1.
Demand theory
2.
Theory of the firm-price and output
3.
Business financing
4.
Public Finance and Fiscal Policy
5.
Money and banking
6.
National income and Social accounting
7.
Theory of international trade, and
8.
Economics of developing countries.
Difference between Traditional Economics and Managerial Economics
The difference
between managerial economics and economics can be understood with the help of
the following points:
1.
Managerial economics involves application of economic principles to
the problems of a business firm whereas; economics deals with the study of
these principles only. Economics ignores the application of economic principles
to the problems of a business firm.
2.
Managerial economics is micro-economic in character; however,
Economics is both macro-economic and micro-economic.
3.
Managerial economics, though micro in character, deals only with a
firm and has nothing to do with an individual’s economic problems. But
microeconomics as a branch of economics deals with both economics of the
individual as well as economics of a firm.
4.
Economics is both positive and normative science but the Managerial
Economics is essentially normative in nature.
5.
Economics deals mainly with the theoretical aspect only whereas
Managerial Economics deals with the practical aspect.
6.
Managerial Economics studies the activities of an individual firm or
unit. Its analysis of problems is micro in nature, whereas Economics analyzes
problems both from micro and macro point of views.
7.
Under Economics we study only the economic aspect of the problems but
under Managerial Economics we have to study both the economic and non-economic
aspects of the problems.
8.
Economics studies principles underlying rent, wages, interest and
profits but in Managerial Economics we study mainly the principles of profit
only.
9.
Sound decision-making in Managerial Economics is considered to be the
most important task for the improvement of efficiency of the business firm; but
in Economics it is not so.
10.
The scope of Managerial Economics is limited and not as wide as that of
Economics. Thus, it is obvious that Managerial Economics is very closely related to
Economics but its scope is narrow as compared to Economics.
11.
Under microeconomics, the distribution theories, viz., wages, interest
and profit, are also dealt with. Managerial economics on the contrary is mainly
concerned with profit theory and does not consider other distribution theories.
12.
Economics involves the study of certain assumptions like in the law of
proportion where it is assumed that “The variable input as applied, unit by
unit is homogeneous or identical in amount and quality”. Managerial economics
on the other hand, introduces certain feedbacks. These feedbacks are in the
form of objectives of the firm, multi-product nature of manufacture, behavioral
constraints, environmental aspects, legal constraints, constraints on resource
availability, etc.
Thus managerial economics, attempts
to solve the complexities in real life, which are assumed in economics. this is
done with the help of mathematics, statistics, econometrics, accounting,
operations research, etc.
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