The best business strategies are built on a solid foundation of business expertise, market analysis and proven economic principles rather than a “gut feeling” or intuition alone.
Whether you’re a business owner, manager or aspiring executive, learning to apply managerial economics can transform how your business operates.
In this article, you’ll discover the meaning of managerial economics, why it’s critical for business success and how to apply its principles to boost performance and gain a competitive edge.
What is the meaning of managerial economics? Managerial economics (also referred to as business economics) is the application of economic principles to business decisions.
To understand managerial economics, it’s essential to define economics first.
Economics studies how people produce, distribute and use different goods and services. It covers various concepts, from international trade to how individual policies can impact customers and businesses.
For example, microeconomic theory covers internal business components like sales pricing, costs and customer behavior. Macroeconomics looks at broader external economic factors like industrial organization, inflation and market growth.
Together, these perspectives provide a comprehensive view of the business environment.
By combining ideas from economists with real-world business practices, managerial economics provides the tools to analyze data, assess the viability of different decisions and predict how they’ll affect your bottom line.
Why is managerial economics important?
Managerial economics is all about applying economic theories to everyday business problems. You can improve your operations when you understand how economics affects your company.
Here are some key ways that business managerial economics can drive success:
Improved decision-making
Decision-making in any business often involves strategic (long-term) and tactical (short-term) thinking. Managerial economics helps guide both types of decisions with sound economic analysis.
Every day, managers must make decisions that could impact the business for months or even years. Whether approving a new email marketing campaign, dealing with supply chain delays or any other countless scenarios, these managerial decisions require careful thought.
According to McKinsey, companies using data-driven growth strategies report higher levels of growth and a 15% to 25% increase in EBITDA.
A knowledge of econometrics (using math, statistics and data to study and predict economic trends) helps you evaluate market trends, analyze historical data and apply relevant predictive models to make informed decisions that align with your company’s long-term goals.
Example: A SaaS company could use predictive analytics to forecast customer churn rates and then proactively implement appropriate customer retention strategies.
Different departments, from sales and marketing to finance and operations, can use the same frameworks and concepts to improve decision-making and collaboration across your organization.
Better resource management
No business has unlimited resources. Managerial economics provides frameworks to guide managers in allocating their time, money and labor in a way that improves productivity while minimizing waste.
Example: A construction company could conduct a cost-benefit analysis to evaluate a project’s potential profitability.
Plus, different production management optimization models, such as just-in-time (JIT) management or linear programming, help verify that your manufacturing processes are running efficiently with minimal waste.
In one study, researchers used linear programming to determine the optimum product mix in cement production, increasing the company’s profits from 25.3% to 48% of overall revenue.
Similarly, resource economics can help businesses meet their environmental, social and governance (ESG) goals.
Example: A manufacturing company might use a cost-benefit analysis to justify investing in energy-efficient equipment, which would reduce emissions while lowering operational costs.
By applying economic principles, companies can ensure they’re using every resource where it adds the most value.
Improved business performance
Managerial economics and business strategy help improve your overall performance to give you a competitive edge. By applying economic models and forecasting techniques, you can streamline operations, optimize pricing strategies and grow customer satisfaction.
Example: A retail company might use demand forecasting models to adjust inventory levels ahead of seasonal peaks, reducing storage costs while ensuring products remain in stock.
In one case, a consumer goods company used predictive analytics and advanced planning systems to lower supply chain costs by 19% and excess inventory by 11%.
Additionally, businesses can improve performance by evaluating different product lines and their profitability. When you calculate the contribution margin for each product (the sales revenue minus any variable costs), you can focus on your high-margin products while scaling back on less profitable ones.
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5 key concepts in managerial economics
You can study economics for years without covering every aspect, but understanding some core principles can help you take practical steps to improve your business. Here are five of the concepts most applicable to business management.
1. Demand analysis and forecasting
Demand analysis involves studying customer demand for a product or service. In turn, you can forecast future demand and make informed decisions about sales, marketing and other business strategies.
To accurately analyze and forecast demand, you need to understand supply and demand, where the quantity of goods produced and desired by consumers determines market prices.
Similar concepts, like elasticity of demand (i.e., how sensitive customer demand is to price changes), help you set prices that maximize revenue while retaining customers.
Example: A drinks company might analyze its historical sales data and seasonal trends. As a result, it forecasts increased demand for cold drinks during the summer months and adjusts its production schedule accordingly.
2. Pricing theory
Price theory refers to how supply and demand affect a solution’s price. When you set the right price, you can satisfy customer demand while maximizing profitability.
Managerial economics provides a systematic process for determining optimal pricing strategies by analyzing several key factors:
Conduct a break-even analysis. Your break-even point (BEP) is where your revenue matches your costs and you start to make a profit. Calculating your BEP gives you a baseline for your pricing strategy.
Establish your solution’s perceived value. What are your solution’s main benefits? How valuable are they? Talk to your prospects and customers to determine how much they’ll pay for a solution like yours.
Carry out a competitor analysis. How much are competitors charging for similar products and services? What pricing strategies do they use? How does your solution compare? Use this information to adjust your pricing to remain competitive while reflecting your product’s unique strengths.
Example: A software company could implement a tiered pricing model catering to customer segments who want different features. Individuals and small businesses might get the most value from the entry-level package with basic features, while enterprise clients requiring advanced tools may be willing to pay higher rates.
3. Cost and production analysis
Controlling production costs while maximizing output is crucial for long-term profitability. Managers can use production theory (how production inputs relate to outputs) to best use labor, materials and other resource allocations.
Managing production costs effectively helps businesses stay competitive while still making a profit.
Opportunity cost also comes into play here. Whenever you assign resources to one project, you choose not to use them for something else. Thinking about opportunity costs helps you focus on options that yield the highest return and long-term benefits.
Example: A car manufacturer interested in increasing production might consider investing in automation technology or hiring more workers. Using production theory and looking at the opportunity cost, the company can evaluate the trade-off between the two (such as upfront costs and ongoing payroll) and choose the most cost-effective solution.
4. Profit maximization
Profit maximization is finding the ideal balance between revenue and costs to achieve the highest possible profit. A company can maximize profits when marginal revenue (MR) equals marginal cost (MC).
A marginal analysis helps you evaluate whether producing an additional product unit will generate enough revenue to outweigh its production costs. A cost-benefit analysis complements this by comparing the overall expenses and potential gains from various projects or business decisions.
Example: A retail chain might want to assess the profitability of its stores by analyzing factors like sales volume variance and customer traffic. It can conduct a cost-benefit analysis for underperforming locations, comparing the potential savings from closing a store against the expected benefits of reinvesting those resources elsewhere. The company could close those stores and direct the savings into expanding successful locations or launching in more promising markets.
5. Market structure and competition
Businesses that understand market dynamics can craft strategies that capitalize on competitive advantages while reducing market risks.
Some of the more common market structures include:
Market structure | Description |
Monopoly |
|
Oligopoly |
|
Perfect competition |
|
Your optimal approach will vary depending on your market structure.
Example: A company operating as a monopoly would likely focus on maximizing profits. On the other hand, a business attempting to compete with a monopoly would benefit more by working on product differentiation and competitive pricing to carve out a niche in the market.
How to apply managerial economics in your business
All the economic theories and principles in the world will only prove helpful if you have a way to put them into action. Follow these six comprehensive steps to turn theoretical concepts into practical strategies that yield positive results.
1. Define the problem
Start by assessing your business’s current situation. What specific business challenges (or opportunities) are you facing? Maybe you’re dealing with declining sales, shifting market trends or issues with inefficient operations.
Get as specific as possible about the issue, its scope and its potential impact on your business. Conduct a root cause analysis, gathering relevant data to better understand the issue and identify potential causes.
Example: Imagine a software company where sales are down for its flagship product. By looking at customer relationship management (CRM) data, the manager can identify when sales began declining and which customer segments are most affected.
Pipedrive’s Insights feature gives you a quick visual overview of your sales performance, enabling your sales team to spot any patterns and conduct a demand analysis.
2. Set clear objectives
Now that you have your starting point, work out where you’re going. Define what success looks like with SMART goals.
Consider both short-term and long-term targets, with performance benchmarks for tracking progress.
Example: The software company’s managers could set a short-term goal to increase product sales by 20% over the next quarter while maintaining profitability, using existing sales figures as a benchmark. A long-term goal might be to expand the customer base by 10% over the next 12 months by entering a new market (based on current customer acquisition rate).
In this video, Pipedrive partner Paul Minors walks you through creating sales goals and tracking performance in the CRM.
3. Identify potential solutions
With a clear understanding of the problem and your business goals, it’s time to develop a strategy that bridges the gap between the two. Explore all possible solutions, from tried-and-true strategies to creative, outside-the-box ideas.
Brainstorm with your different teams and see what ideas you come up with. Carry out a competitor analysis as part of your pricing theory. What’s working for them? Is there a gap in the market you could exploit?
To narrow your options, create a weighted decision matrix comparing your possible solutions based on your key criteria.
Example: After careful data analysis, the software company decides its best options for increasing sales are: launching a marketing campaign, lowering prices, improving customer loyalty programs and diversifying its product offerings.
4. Forecast outcomes
With potential solutions in hand, it’s time to evaluate how each might perform. Use data-driven models to predict costs and potential returns.
You can anticipate future sales under different business scenarios by analyzing historical data, market trends and consumer behavior.
Pipedrive’s sales forecasting software lets you see how different activities have affected your results so you can predict how they’ll impact future performance.
You can accurately estimate future demand by applying different quantitative methods to the data, such as time-series analysis (i.e., how data points change over regular intervals) or regression models (i.e., the relationship between two variables, such as price and sales).
Carry out a cost-benefit analysis by listing all expected costs (such as marketing or production expenses) and benefits (like increased revenue or customer growth) of a proposed solution. Assign monetary values to each factor and compare the totals to see if the project is worth pursuing.
Example: The software company’s managers analyze their CRM database to see how previous marketing campaigns and discounts have affected sales. They forecast that a marketing campaign could boost sales by 25%. Using price theory, the managers conclude that lowering prices could increase volume but reduce profit margins.
5. Implement the best solution
Select the most promising solution and create a detailed, step-by-step action plan, including timelines, assigned responsibilities and key performance indicators (KPIs). Use project management tools to monitor your progress.
Example: The software company decides to go ahead with a digital advertising campaign targeting specific customer segments. As the project starts, the team uses its CRM to monitor sales performance and measure the campaign’s effectiveness in real time.
6. Iterate and optimize
Markets and other factors affecting your business can change overnight, so you should always be ready to adapt your approach to reflect those changes.
Use your CRM dashboard to continuously monitor the relevant performance metrics, such as sales progress, customer engagement and campaign ROI.
Here’s how you can track your deals’ performance and win rate, as well as forecast revenue, in Pipedrive:
In addition, schedule regular review meetings to assess performance and compare it with your original objectives. Frequent reviews allow you to allocate resources where they’re most effective, contributing to more sustainable growth.
Example: The software company decides to formally review sales data and customer feedback six weeks after the campaign launch. If results fall short of projections, it can make adjustments such as tweaking ad content or reallocating the marketing budget.
Resources for learning more about managerial economics
Managerial economics is a vast field encompassing various concepts, methods and analytical frameworks that multiple industries can apply.
Plenty of resources are available for those interested in deepening their understanding of managerial economics.
Books
“Managerial Economics: A Problem Solving Approach” is one of the more popular texts. It focuses on practical decision-making and implementation without overwhelming the reader with technical models and intricate math.
“Managerial Economics For Dummies” uses the familiar “For Dummies” style to explain complex economic terms in plain English, with numerous understandable examples. As an added benefit, the book complements ECON courses, making it ideal for first-year students who want to supplement their learning.
Courses
Platforms like Coursera, LinkedIn Learning and Udemy offer comprehensive courses on managerial economics to help you better grasp the topic with no prerequisite knowledge required.
For example, Coursera has a free “Managerial economics and business analysis specialization” course from the University of Illinois Urbana-Champaign.
The course covers practical areas like statistical modeling and predictive analysis, giving managers the tools to evaluate market dynamics, government policies and financial trends for better business decision-making.
To take your learning to the next level, many universities offer a master’s degree program in business and managerial economics. US News has a searchable database of all the top universities worldwide offering ECON degrees.
A managerial economics major provides in-depth knowledge of economics and its relation to business administration. Economics students and company managers can enroll to learn new concepts like game theory, improve their skills and potentially open up new career opportunities.
Final thoughts
Managerial economics goes beyond classroom theories. It offers managers practical tools and frameworks they can directly apply to real-world business challenges, enabling smarter and more strategic problem-solving.
Start by integrating economic principles and concepts like demand analysis, pricing strategies and cost management into your decision-making process. If you use a CRM system like Pipedrive, it already has all the data you need to assess current performance and forecast future results.
With a consistent, data-driven approach, you’ll be ready to solve complex business challenges, identify new opportunities and improve performance.
