# What Is Managerial Economics?

Management economics is a branch of economics. Management economics provides a systematic and logical analysis method for operating decisions. These operating decisions affect both the daily decisions and the economic power of long-term planning decisions. They are microeconomics. The application in management practice is a bridge between economics theory and corporate management decision-making. It provides analytical tools and methods for corporate decision-making and management. The theory is mainly based on several factors such as demand, production, cost, and market. A course in "Management Decision Economics" ^{[1] has been} developed from management economics. This course is offered by business schools and management schools at well-known universities at home and abroad.

# Management economics

## (Economics branch)

### Management Equilibrium Analysis Method

- Equilibrium refers to the combination of resources and behavioral choices that maximize the benefits. Enterprise behavior is bound to be bound by many factors, and these factors are often mutually restricted. The equilibrium analysis method is to determine the proportional relationship of various factors under the conditions of considering these constraints, so that it is most conducive to the development of the enterprise. Pricing.

- Formula: Sales revenue = price × sales volume

- The price directly affects sales revenue. If the price is too high, it will inevitably reduce the sales volume, and the sales revenue may not necessarily be high. Similarly, in order to achieve more sales volume, the company must stimulate the purchasing power at a lower price. If it is too low, it cannot reach a high total sales. Therefore, when pricing enterprises, they always have to face the contradiction: Increasing prices may reduce sales, and expanding sales will necessarily reduce prices. How to maintain a certain market share while making the company profitable? This involves the issue of "equilibrium." There must be a price level that will maximize total sales revenue. Above or below this price, the profit of the enterprise will be reduced. Management economics provides a balanced analysis method for enterprises to help them set the right price.

- Production (scale) decision. The size of an enterprise affects its production, sales, and various costs, which in turn affects the relationship between input and output. Small-scale production companies may be committed to the quality of their products and earn profits at higher prices. Large-scale enterprises win with lower costs and lower prices. How to choose a scale suitable for its own development requires an equilibrium analysis method.

- Combination of elements. Enterprises need to invest in various factors in production and operation. Some of these elements can be substituted for each other. Because the prices of various elements are not the same, the cost of the combined elements is different. Which one to choose also requires the method of equilibrium analysis.

- The main application directions of the equilibrium analysis method are: setting prices, determining output, and determining factor combinations.

### Marginal Analysis Method of Management Economics

- In economics, the margin is the change in output caused by each unit of input. Marginal analysis has more applications in management economics. It mainly analyzes the impact of each additional unit of product on total profit at a certain output level. It can be explained by the following formula. Formula: Marginal value = f (x) / X, where X represents input, f (x) represents output, and is expressed as a function of X; represents a variable. Assume that the base X is changing. Then, with each additional unit of input, the increase in output caused by this unit changes.

- Two important concepts of the marginal analysis method: marginal cost: the incremental cost caused by each additional unit of product; marginal revenue: the incremental increase of revenue per additional unit of product. When judging the advantages and disadvantages of an economic activity to an enterprise, an enterprise does not rely on its full cost, but on the comparison of its marginal benefits and its marginal costs. If the former is greater than the latter, this activity is good for the company, and vice versa.

- The main directions of applying the marginal analysis method:

- Determine the size. As mentioned above, the size directly affects the production efficiency of the enterprise. When an enterprise wants to expand its scale, it must analyze the increase in output that can be brought by each increase in the size of the unit. This is marginal analysis. Scientific marginal analysis method can make the size of the enterprise within a most reasonable range. Formula: = MR-MC where stands for marginal profit, MR stands for marginal income, and MC stands for marginal cost.

- When > 0, add one unit of product, and the gain increase is greater than the cost increase, which indicates that the enterprise has not reached the output scale that can obtain the maximum benefit. At this time, the enterprise should expand the output.

- When <0, adding one unit of product will result in a cost increase greater than the gain that can be obtained, indicating that the enterprise should reduce its output.

- When = 0, the enterprise reaches the optimal output scale.

- Price decision. What kind of impact each increase (or decrease) in the price of a unit will have on total revenue, this actually requires the use of a marginal analysis method, which can help companies formulate a competitive price strategy.

- Determine reasonable factor inputs. In determining the amount of each element that needs to be invested in production, we need to analyze what effect each additional unit of a certain element will have on total revenue. This is also marginal analysis.

- Product structure analysis. Most companies do not produce only one product, and the proportion of each product produced is the product structure. To determine the proportion of how much each product is produced, a marginal analysis method can be used to analyze the marginal benefits of each product. The so-called marginal benefit is the amount of change in the income caused by adding one unit of capital investment to the production of a product. If the incremental capital invested in each product produces equal marginal benefits, then the product structure of this enterprise is reasonable; otherwise, there must be a certain product worth expanding in order to bring more revenue. A marginal analysis of the product structure can clarify which products require increased input and which products need to be scaled down.

- The main application directions of the marginal analysis method: determine the size of the enterprise, formulate a price strategy, determine the amount of factor inputs, and analyze the product structure

### Management Economics Mathematical Model Analysis

- In the development of economics and management, more and more methods are applied to econometric analysis. Mathematical models are a kind of econometric tools, which are widely used in management economics. Mathematical models are essentially an abstraction of complex reality, making problems simple and intuitive, in order to accurately grasp the connection between things, understand the nature of things, and effectively solve problems. In practice, mathematical models are an extremely effective method for management decision-making and economic analysis. In addition, it is worth noting that mathematics is a very limited quantity relationship. In the real economy, there are many complex problems that cannot be represented by purely mathematical models. It also needs the help of qualitative analysis methods.

- The main application directions of mathematical models:

- Demand forecast. Before the enterprise determines the production scale of a certain product, it needs to predict the market development potential. It can create relevant mathematical models to represent the quantitative changes of various factors that affect market development, and then analyze the changes in demand caused by these changes The size of the effect.

- Production analysis. The input of production factors, the choice of production organization form, and the determination of product structure can be analyzed and decided by creating mathematical models.

- Cost decisions. Cost is a factor that directly affects profits, and it is a focus of enterprise development. When an enterprise changes its production or operation direction or expands its scale, under its goal of maximizing profits, it should determine what kind of cost level. A mathematical model can be used for scientific analysis.

- Market analysis. The market is a basic concept of economics, which manifests itself in various forms in practice. Create a mathematical model to analyze the scale, price, and competitive strategy that companies may choose under different market conditions.

- Risk analysis. Risk analysis is a prediction of the future state. The mathematical model can be used to represent the magnitude of various related factors in an investment, and the impact of changes in the amount on the benefits.

- The main application directions of mathematical models: demand forecasting, production analysis, cost decision, market analysis, and risk analysis.