A close interrelationship between management and economics has led to the development of managerial economics. Management is the guidance, leadership and control of the efforts of a group of people towards some common objective. It does tell us about the purpose or function of management but it tells us precious little about the nature of the management process. Koontz and O’Donell define management as the creation and maintenance of an internal environment in an enterprise where individuals, working together in groups, can perform efficiently and effectively towards the attainment of group goals. Thus, management is:
An activity or an ongoing process
A purposive process
An art of getting things done by other people.
On the other hand, economics, in its broadest sense, is what economists do. Economists are primarily engaged in analysing and providing answers to manifestations of the most fundamental problem, scarcity. Scarcity of resources results from two fundamental facts of life:
Human wants are virtually unlimited and insatiable, and
Economic resources to satisfy these human demands are limited.
Thus, we cannot have everything we want; we must make choices broadly between three areas:
What to produce,
How to produce, and
For whom to produce.
These three choice problems have become the three central problems of an economy as shown in Figure 1.1 Science of economics has developed several concepts and analytical tools to deal with the problem of allocation of scarce resources among competing ends.
Managerial economics, when viewed in this way, may be taken as economics applied to “problems of choice” or alternatives and allocation of scarce resources by the firms. Thus managerial economics is the study of allocation of resources available to a firm or a unit of management among the activities of that unit.