Managerial economics is a branch of economics involving the application of economic methods in the organizational decision-making process. This field combines economic theory with business practice to facilitate management's forward-looking planning and decision-making.
Supply and demand form the bedrock of this discipline, describing how price set by producers relates inversely to quantity demanded by consumers. Price theory uses supply and demand conjectures to allocate accurate prices where supply meets equal demand without creating excess inventory or shortages.
Mathematical programming and regression analysis allow managers to quantify decisions using data analysis techniques derived from econometrics and differential calculus. By taking the derivative of a function and setting it equal to zero, firms determine maximum and minimum values to find profit-maximizing production quantities.
First-degree price discrimination occurs when firms accurately determine what each buyer is willing to pay while second-degree pricing adjusts costs based on units purchased through quantity discounts. Third-degree pricing targets unique demographics like students or seniors for discounted travel tickets.
A field experiment analyzing performance-based monetary incentives showed productivity improved alongside employee ability but increased neglect of non-incentivized tasks. A famous childcare center introduced a fee of three dollars for parents picking up children late causing the number of late pick-ups to increase in the short run.