The firm is to choose a course of action out of alternative course of actions because resources of the firm are limited.
The management has to take a number of decisions such as financial decision, production decisions, marketing decision, decision to purchase raw material, inventory control, etc.
These decisions should not contradict each other, but should be in consonance with the overall objectives of the firm. Therefore, the management has to co-ordinate its different decisions.
The function of decision-making and forward planning is very complex because the modern business world is full of risks and uncertainties.
Risk is involved because future is uncertain and no one can predict the future accurately. Before taking any decision management has to consider past records, current information’s and future predictions.
As plans are implemented overtime, more facts come into light and decisions or plans are revised in the light of such new facts and a different course of action may be adopted. Management, thus, is engaged in a continuous process of decision-making.
The above discussion reveals that all managerial decisions involve same degree of choice and they are, therefore, essentially economic in nature.
Different economic theory and logic aided by certain other disciplines like, accountancy, statistics and mathematics may solve or at least throw some light on the problems confronted by business management.
Thus management economics applies economic theory and logic to help the management in deciding business policies.