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Managerial economics is the use of economic models and theories to guide business strategy, decisions and problem solving. The following are illustrative examples.PricingThe use of supply and demand models to set prices. Pricing strategy may also be based on a wide range of economic theories such as the idea of a price signal, sticky price or price umbrella.
Business ModelBusiness models are the ways that a firm creates and captures value. This is always based on economics such as a theme park that is an example of club theory or a social media company that derives value from the network effect.Capital InvestmentEconomics is key to the timing and sizing of capital investment. For example, an understanding of the business cycle is required to time investments in new capacity.
OperationsUsing supply and demand forecasts to plan operations such as production.DistributionPlanning distribution elements such as warehouses, retail locations and product showrooms based on economies of density.QualitySeeking to defy the tendency for all goods to be quickly commoditized by finding ways to improve quality beyond the commodity level to command a premium price.
PromotionModeling promotional efforts with attention economics. For example, calculating the payback for digital advertising that produces improvements in brand recognition.RiskModeling risk using economics such as an insurance company that factors in adverse selection in their risk estimates.
Customer NeedsFormulating and estimating customer needs based on factors such as diminishing marginal utility.Customer experience related strategy such as using economies of scope to offer customers greater convenience.
TechnologyRecognizing the power of technology to change economics resulting in opportunity and risk in markets. For example, cloud computing turned computers into a utility service. This drove down prices and created opportunities for a vast number of firms who could suddenly command large computing resources on demand at a relatively low cost.EfficiencyCalculating the efficiency of your operations and products as a basic form of management accounting and optimization.
ProductivityMeasuring the productivity of workers, including knowledge workers, and finding ways to boost productivity such as investment in tools and automation.CompetitionDeveloping competitive advantages using foundational economics such as barriers to entry.Small BusinessSmall businesses and startups also commonly use managerial economics. For example, a small business that seeks to avoid the market power of larger firms by creating niche products and services that do not compete directly with greater economies of scale. Small businesses may also seek to benefit from diseconomies of scale such as a large competitor that is slow to change.|
| Type | | | Definition | The use of economic models and theories to guide business strategy, decisions, optimization and problem solving. | | Related Concepts | |
Economics
This is the complete list of articles we have written about economics.
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A reasonably comprehensive guide to marketing economics.
The definition of the law of demand with examples.
The definition of value with marketing examples.
An overview of media economics with examples.
A list of weird concepts that are only used by marketing teams.
A list of what can be considered part of the market environment.
A list of common marketing costs.
A list of the common types of product with examples of each.
A list of price economics principles and theories.
A complete overview of competitive markets with examples.
The primary forces that shape competition in a market.
The definition of price stability including an overview of inflation, deflation, monetary & fiscal policy and economic efficiency.
The key differences between cost and price explained with a comparison table.
A list of the common types of price promotion.
An overview of loss leaders with examples.
An overview of sales promotions with examples.
An overview of cost-plus pricing with detailed examples.
An overview of price floors with examples.
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