Managerial Economics and Operations Research
Operations research is a subject field that emerged during the Second World War and the years thereafter. A good deal of interdisciplinary research was done in the USA. as well as other western countries to solve the complex operational problems of planning and resource allocation in defence and basic industries. Several experts like mathematicians, statisticians, engineers and others teamed up together and developed models and analytical tools leading to the emergence of this specialised subject. Much of the development of techniques and concepts, such as linear programming, inventory models, game theory, etc., emerged from the working of the operation researchers. Several problems of managerial economics are solved by the operation research techniques. These highlight the significant relationship between managerial economics and operations research. The problems solved by operation research are as follows:
- Allocation problems: An allocation problem confronts with the issue that men, machines and other resources are scarce, related to the number sand size of the jobs that need to be completed. The examples are production programming and transportation problems.
- Competitive problems: competitive problems deal with situations where managerial decision-making is to be made in the face of competitive action. That is, one of the factors to be considered is: “What will competitors do if certain steps are taken?” Price reduction, for example, will not lead to increased market share if rivals follow suit.
- Waiting line problems : Waiting line problems arise when a firm wants to know how many machines it should install in order to ensure that the amount of ‘work-in-progress’ waiting to be machined is neither too small nor too large. Such situations arise when for example, a post office, or a bank wants to know how many cash desks or counter clerks it should employ in order to balance the business lost through long guesses against the cost of installing more equipment or hiring more labour.
- Inventory problems: Inventory problems deal with the principal question: “What is the optimum level of stocks of raw-materials, components or finished goods for the firm to hold?”
The above discussion explains that the managerial economics is closely related to certain subjects such as economics, statistics, mathematics and accounting. A trained managerial economist combines concepts and methods from all these subjects by bringing them together to solve business problems. In particular, operations research and management accounting are getting very close to managerial economics.
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