How is managerial economics related to different disciplines ?
How is managerial economics related to different disciplines ?
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Economics in relation to other social sciences
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Economics is a social science which deals with human wants and their satisfaction. It is related to other social sciences like sociology, politics, history, ethics, jurisprudence and psychology. For example, the economic development of a nation depends not only on economic factors but also on historical, political and sociological factors. Our country did not have much of economic progress during the British rule owing to historical reasons. Again, we had slow but steady economic growth in our country because of political stability. But in many other countries, there was no steady growth because of political instability. If there is one government today and another government tomorrow, there will not be economic development in that country.
We shall discuss, in some detail, economics in its relation to other social sciences.
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1. Economics and Sociology
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Sociology is the science of society. Social sciences like politics and economics may be considered as the branches of sociology. Sociology is a general social science. It attempts to discover the facts and laws of society as a whole. Sociology deals with all aspects of society. But economics deals only with the economic aspects of a society. It studies human behaviour in relation to scarce means and unlimited wants. For a student of sociology, social institutions like marriage, religion, political institutions and economic conditions are all important subjects for study. But in economics, we are interested in them only to the extent that they affect the economic life of a society. And we cannot properly understand the economic conditions of a society without considering its sociological aspects. Though economics is a branch of sociology, we must look at it as a separate and distinct branch.
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2. Economics and Politics *************************************************
Both economics and politics are social sciences and there is a close connection between them. Politics is the science of the State or political society. It studies about man in his relation to the State.
The production and distribution of wealth are influenced to a very great extent by the government. We have economic planning in our country. And the main aim of planning is to increase the national income by increasing production and by a proper distribution of income.
The Planning Commission, which is an agency of the government, plays a vital role in it. Some of the important questions like nationalization, privatization and prohibition are all economic as well as political questions. Elections are fought often in many countries on economic issues. Unemployment, labour disputes are all economic issues. But government has to tackle them. The relationship between economics and politics is so great that the early economists described economics as political economy.
Sometimes, political ideas and institutions are influenced by economic conditions. For example, socialism was born of economic inequalities and exploitation in England during the industrial revolution. Karl Marx is considered as the Father of (scientific) socialism.
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3. Economics and History *************************************************
Economics and history are closely related. History is a record of the past events. In history, we survey economic, political and social conditions of the people in the past. To a student of history, love affairs, marriages and even murders of kings are important subjects of study. For example, the murder of Julius Caesar is important for a student of Roman history. In our country, the religious policy of Mughal emperors is important for a student of history. But we are interested in history only to the extent that it will help us in understanding economic problems of the past.
As students of economics, we are interested in things like taxation and other sources of revenue and standard of living in the past.
In economics, we make use of historical data to formulate economic laws. We make use of history in economics to study the material conditions of people in the past. There is a separate branch of economics known as 'Economic History'.
We may say economics is the fruit of history and history in the root of economics:
'Economics without history has no root; History without economics has no fruit'.
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4. Economics and psychology *************************************************
Psychology is the science of mind. It deals with all kinds of human behaviour. For example, we have child psychology, mob psychology, industrial psychology and criminal psychology. But economics studies one aspect of human behaviour. It studies human behaviour with reference to unlimited wants and limited means. Of late, psychology has become important in analyzing economic problems. To deal with labour problems, we must understand industrial psychology. And a good businessman must understand the psychology of buyers whenever he wants to change the price of his good. Many important laws of economics are based on psychology. For example, we have the law of diminishing marginal utility. It tells that the more and more of a thing you have, the less and less you want it.
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5. Managerial Economics, Management theory and accounting
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Managerial economics has been influenced by the developments in management theory and accounting techniques. Accounting refers to the recording of pecuniary transactions of the firm in certain books. A proper knowledge of accounting techniques is very essential for the success of the firm because profit maximization is the major objective of the firm.
Managerial Economics requires a proper knowledge of cost and revenue information and their classification. A student of managerial economics should be familiar with the generation, interpretation and use of accounting data. The focus of accounting within the firm is fast changing from the concepts of store keeping to that if managerial decision making, this has resulted in a new specialized area of study called “Managerial Accounting”.
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6. Managerial Economics and Mathematics
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The use of mathematics is significant for managerial economics in view of its profit maximization goal long with optional use of resources. The major problem of the firm is how to minimize cost, hoe to maximize profit or how to optimize sales. Mathematical concepts and techniques are widely used in economic logic to solve these problems. Also mathematical methods help to estimate and predict the economic factors for decision making and forward planning.
Mathematical symbols are more convenient to handle and understand various concepts like incremental cost, elasticity of demand etc., Geometry, Algebra and calculus are the major branches of mathematics which are of use in managerial economics. The main concepts of mathematics like logarithms, and exponential, vectors and determinants, input-output models etc., are widely used. Besides these usual tools, more advanced techniques designed in the recent years viz. linear programming, inventory models and game theory fine wide application in managerial economics.
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7. Managerial Economics and Operations Research
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Taking effective decisions is the major concern of both managerial economics and operations research. The development of techniques and concepts such as linear programming, inventory models and game theory is due to the development of this new subject of operations research in the postwar years. Operations research is concerned with the complex problems arising out of the management of men, machines, materials and money.
Operation research provides a scientific model of the system and it helps managerial economists in the field of product development, material management, and inventory control, quality control, marketing and demand analysis. The varied tools of operations Research are helpful to managerial economists in decision-making.
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8. Managerial Economics and the theory of Decision- making
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The Theory of decision-making is a new field of knowledge grown in the second half of this century. Most of the economic theories explain a single goal for the consumer i.e., Profit maximization for the firm. But the theory of decision-making is developed to explain multiplicity of goals and lot of uncertainty.
As such this new branch of knowledge is useful to business firms, which have to take quick decision in the case of multiple goals. Viewed this way the theory of decision making is more practical and application oriented than the economic theories.
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9. Managerial Economics and Computer Science
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Computers have changes the way of the world functions and economic or business activity is no exception. Computers are used in data and accounts maintenance, inventory and stock controls and supply and demand predictions. What used to take days and months is done in a few minutes or hours by the computers. In fact computerization of business activities on a large scale has reduced the workload of managerial personnel. In most countries a basic knowledge of computer science, is a compulsory programme for managerial trainees.
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10. Economics and Ethics *************************************************
Ethics is a social science. It deals with moral questions. It discusses the rules that govern right conduct and morality. It deals with questions of right and wrong. It aims at promoting good life.
There is connection between economics and ethics. While economics, according to Marshall, aims at promoting material welfare, ethics aims at promoting moral welfare. When we discuss economic problems, often we consider ethical issues. The government introduced prohibition in many states for ethical reasons, though there was heavy loss of revenue to it.
But Lionel Robbins strongly believes that an economist as an economist should not consider ethical aspects of economic problems. But many economists do not agree with him. They believe that economics cannot be dissociated from ethics. Even Marshall considered economics as a handmaid of ethics. He looked at economics as a study of means to better the conditions of human life.
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11. Economics and Jurisprudence *************************************************
Jurisprudence is the science of law. The economic progress of a nation depends to a great extent on its legal system. Good laws promote economic progress and bad laws act as an impediment to growth. For example, in the past when we welcomed foreigners to invest in our country, they used to say our taxation was complex and not good. Of course, now things have improved. So we must have simple and clear laws in the fields of taxation and labour legislation to promote economic progress.
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12. Economics, mathematics and statistics
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Among other sciences, economics is related to mathematics and statistics. Statistics is the science of averages. It is the science of counting. Many tables and diagrams used in economics are based on statistical analysis. Mathematical methods are largely used in modern economics.
Now we have a new science called econometrics. It makes use of statistics and mathematics in economics. The econometric society was founded in 1930, and the first Nobel prize in economics was awarded to Jan Tinberen and Ragnar Frisch for their contribution to econometrics.
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13. Static and dynamic concepts
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Time element is very useful in studying the working of an economy. There are two main lines of approach. They are 1. static analysis and 2. dynamic analysis. In the case of static analysis, we examine a problem at any given moment of time. Even in static analysis, sometimes we consider a short period rather than a single point. We assume that some changes take place during the short period. The method of approach where we take note of changes in the short period is known as comparative statics. For example, in comparative statics, we compare the state of economy at one moment to the state of the economy at another moment. Marshall's analysis of supply and demand is a good example of comparative statics.
In dynamic analysis, we examine the path or process by which the economy moves from one state of equilibrium to another. Time element is an important factor is dynamic analysis. Change is the key word in dynamic analysis. For example, investment during a period may depend upon the rate of interest in the previous period. The study of the trade cycle may be given as a good example of dynamic analysis.
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14. Stocks and flows
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Stocks and flows are basic concepts in economics. Stocks can be measured at a given point of time. A flow is a quantity that can be measured only in terms of a specified period of time. In other words, it has a time dimension. For example, wealth is a stock and income is a flow.
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15. Micro economics and macro economics
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Economic theory can be broadly divided into micro economics and macroeconomics. The term micro means small and macromeans large.
In microeconomics, we deal with problems such as the output of a single firm or industry, price of a single commodity and spending on goods by a single household.
Macroeconomics studies the economic system as a whole. In it, we get a complete picture of the working of the economy. It is a study of the relations between broad economic aggregates such as total employment, saving and investment. We may also say that macro economics is the theory of income, employment, prices and money. That is why macroeconomics is sometimes studied under the title 'Income and Employment Analysis'.
*************************************************16. Economics as a science
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We no longer ask the question whether economics is a science or an art. Science is a systematized body of knowledge. Just as physics and chemistry are sciences, economics is also a science. We observe facts, conduct experiments and make generalizations in physics and chemistry after testing the results. The same scientific methods are followed in economics also. Economics, like all other sciences, studies the relationship between cause and effect.
Sciences may be broadly divided into physical sciences and social sciences. Physics and chemistry are examples of physical sciences. Economics is a social science. It studies about a particular aspect of human behaviour. And human behaviour is full of complexity. It is not easy to study it. So economic science is not as precise and exact as the physical sciences.
But economics has a greater right to be considered as a science than other social sciences like politics or history because in economics we make use of money as a measuring rod of utility. It is true that it is only a rough measure but still it enables us to give concrete shape to the laws of economics. Sometimes, what we say in economics may not come true in real life. But this is the case with many other sciences. For example, we joke about weather forecasts. The weather report in the newspaper may say that there will be heavy rainfall on a particular day. But there might not be any rain at all on that particular day. On account of that, we cannot say that meteorology (the science of weather) is not a science. Similarly, if some economic laws do not come true, we cannot say that economics is not a science.
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DR. PRAVEEN KUMAR-9760480884
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