How does economic theory contribute to managerial decision ?

Economics through ,variously defined is essentially the study of logic, tools and techniques of making optimum use of the available resources to achieve the given ends. Economics thus provides analytical tool and technique that managers need to achieve the goals of the organization they manage.

Baumaol has pointed out there main contributions of economic theory to business.

First one of the most important! Unexpected End of Formula things which the economic theories can contribute to the management science is building analytical models which help to recognize the structure of managerial problems, eliminate the minor details which might obstruct decision making and help to concentrate on the main issue.

Secondly, Economic theory contributes to the business analysis & set of analytical methods which may not be applied directly to specific business problems, but they do entrance the analytical capabilities of the business analyst.

Thirdly, Economic theories offer clarity to the various concepts used in business analysis, which enables the the managers to avoid conceptual pitfalls.

The areas of business issues to which economics theories can be directly applied may be broadly divided into two categories :-

  1. Operational or internal issues and
  2. Environmental or external issues

Operational problems are of internal nature. They include all those problems which arise within the business organization and fall within the preview and control of the management. Some of the basic internal issues are

  1. choice of business and the nature of product i.e. what to produce;
  2. choice of size of the firm i.e.. how much to produce
  3. choice of technology i.e. choosing the factor contribution ;
  4. choice of price i.e. how to price the common;
  5. how to promote sales;
  6. How to face price competition
  7. How to decide on new investment;
  8. How to manage profit and capital;
  9. How to manage inventory i.e. stock of both finished goods and material.

The Microeconomic Theories which deals most of these questions include:-

  1. Theory of demand.

  2. Theory of production and production decisions.

  3. Analysis of market structure and pricing theory.

  4. Profit analysis and profit management.

  5. Theory of capital and investment decision.

Environmental issues pertain to the general business environment in which a business operates. They are related to the overall economic, social and political atmosphere of the country. The factors which constitute economic environment of a country include the following factors:-

  1. The type of economic system of the country
  2. General trend in production, employment, income, price, savings and investment etc
  3. Structure of the trends in the working of financial institutes e.g. banks, financial co-operations, insurance companies
  4. Magnitudes of trends in foreign trend
  5. Trends in labor and capital markets
  6. Government’s economic policies e.g.. industrial policy, monetary policy, fiscal policy, price policy etc.
  7. Social factors like the value system of the society, property rights, customs and habits
  8. Social organizations like trade unions, customer’s co-operatives and producers union
  9. The degree of openness of the economy and the influence MNCs