It might be useful to think of managerial economics historically

1. From about 1950 to 1990 Managerial economics was largely a fairly mathematical application of microeconomics to business problems that overlapped at times with Operations Research. I think

Mansfield, E. (1996). Managerial Economics: Theory, Applications, and Cases: W. W. Norton, Incorporated.

is a pretty good example of this work.

2. From the 1990s Managerial Economics began to be very influenced by economics approaches to organization and strategy and more generally drew from the more public purposed industrial economics and industrial organization work. Two texts that are good on this are

Beshanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2004). Economics of Strategy (3rd ed.). New York: John Wiley & Sons.

Milgrom, P., & Roberts, J. (1992). Economics, organization and management. London: Prentice-Hall.

3, More recently I think managerial economics is now being used to refer to any economics, even principles that is specially designed for learners in the area of management or business.

I hope that helps.

I think both courses emphasise the "imperfect competition" part of microeconomics. Managerial economics covers this from a manager's point of view: how a company can take advantage of this imperfection to be more profitable. Industrial organisation, in my opinion, covers this from a public policy's point of view: what are the ramifications to the society of this imperfection, and policy implications. When I was teaching managerial economics a long long time ago, I used "Managerial Economics" by Howard Davies. I thought it covered the right topics at the right level. I don't necessarily recommend this book now as it is old, but perhaps a similar book covering similar topics may be useful.

Thank you, Elton!

Thank you, Ahmad! I suppose you mean Perloff, J. Microeconomics.

It might be useful to think of managerial economics historically

1. From about 1950 to 1990 Managerial economics was largely a fairly mathematical application of microeconomics to business problems that overlapped at times with Operations Research. I think

Mansfield, E. (1996). Managerial Economics: Theory, Applications, and Cases: W. W. Norton, Incorporated.

is a pretty good example of this work.

2. From the 1990s Managerial Economics began to be very influenced by economics approaches to organization and strategy and more generally drew from the more public purposed industrial economics and industrial organization work. Two texts that are good on this are

Beshanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2004). Economics of Strategy (3rd ed.). New York: John Wiley & Sons.

Milgrom, P., & Roberts, J. (1992). Economics, organization and management. London: Prentice-Hall.

3, More recently I think managerial economics is now being used to refer to any economics, even principles that is specially designed for learners in the area of management or business.

I hope that helps.

Thank you, Brendan! The latest approach to Managerial Economics which you mention seems to be too general, so, the teachers are free to choose the topics to be covered as long as they refer to microeconomics or industrial organization. I'll try to find Beshanko at al - it seems interesting.

Industrial Organization (or Industrial Economics) is an established subfield within economics with its own dedicated textbooks, didactical habits, etc.

Managerial economics - I agree with Brendan - can be viewed as "any economics, even principles that is specially designed for learners in the area of management or business". As a consequence, in preparing a course in managerial economics it is important to take into consideration how much economics the perspective student should (or should not) know from courses she previously attended..

Thank you, Andrea! I share the same view.

Brendan, thank you once again! I found the textbook of Besanko et al. In my opinion it is very well written, structured and helpful. I will definitely use as well as recommend it!

Though both field adopted blended approach currently, I believe Managerial Economics is broader than industrial organization. later on is intensively taught in Business schools in its various form.

It is astonishing that nobody talks about Joel Dean, the founder or at least the initiator of Managerial Economics. He published a book tilted Managerial Economics in 1951.

I know the reason why recent microeconomics oriented (or trained in that tradition) economists do not mention him as much as he deserves. Joel Dean made a tremendously important and unique research: the statistical cost analysis. The research was made from 1930's through 1940's. His result is published as Statistical Cost Estimation by Indiana University Press in 1976. Much earlier than his book in 1976, the major part of his research was reported in Cost Behavior and Price Policy 1943 A Study Prepared by the Committee on Price Determination for the Conference on Price Determination. New York: NBER. However, his research was not received a good acceptance, because his findings were contradictory to the mainstream economics.

At that time a big controversy called Full-cost Controversy or Marginalist vs. anti-marginalist Controversy was in full bloom. For a short account, see Philippe Mongin (1992) The "Full-Cost" Controversy of the 1940's and 1950's: A Methodological Assessment, History of Political Economy, 24(2): 312-356.

Dean did not intervene explicitly in the controversy but his results were bad news for marginalists. His study revealed that the unit cost remains constant for a wide range of operation rates. When the marginal cost remains constant, according to a marginalist principle, it is not possible for a firm to determine its production volume, because the rate of production should be determined at the point where 

      the marginal cost = the product price.

As a result all the impacts of Joel Dean were wiped out from the mainstream economics. Young researchers of managerial economics do not know this history and now simply translating micro economics into managerial economics.

Management administration (as a science taught in Business Schools) and Microeconomics are contradictory in the very core of their theories. In the perfect competitive economy model, the firms can sell as much as they want at the market price. Now managers in the firms do not believe this. Sales promotion is one of their most important functions.  

 If Mariya Neycheva is preparing a course in Managerial Economics, please do not forget to study Joel Dean and think why the present day oblivion occurred. You will have a good chance to reconstruct Managerial Economics in a different direction. It had a totally different opportunity and possibility at the beginning.

Dear Yoshinori Shiozawa, thank you for this informative answer! Probably, you are right that some economists/teachers strongly follow the mainstream microeconomics yet I definitely agree with your view that the constant marginal costs proposition should not be discussed even in the basic microeconomics course since it is the reality particularly in the e-business era; I do that myself in my courses in both micro and managerial economics.

To answer the question what is the difference between managerial economics and industrial organization also known as industrial economics the answer is as follows:

Economics is the study of the production, consumption, and distribution of wealth. It is subdivided into two areas these being micro-economics and macro-economics.

Micro-economics is the theory of the firm. It is abstract and theoretical. Macro-economics is the theory of the economy for a society or nation. Macro-economics is both theoretical and empirical in nature.

Engineering economics is the application of economic evaluation techniques and methods to engineering projects in decision making from the stand point of engineering. Production economics is the application of micro-economic theory to the physical design and operation of a production system from the stand point of engineering.

Both engineering economics and production economics are employed by industrial engineers in the design and operation of industrial processes. They are dependent on industrial engineering methods and approaches to empirically define the physical production system.

Managerial economics is the application of economic evaluation techniques and methods derived from micro-economics and operations research to management decisions in the operation of the firm.

Industrial organization or industrial economics is the study of the firm within the economy and draws upon micro-economic theory, macro-economic theory, engineering economy and production.

Thank you, John! I completely agree with you. 

You are welcome Mariya. You deserved a straight answer from some one.

Dear  John Roesch,

you should know why "Micro-economics is the theory of the firm. It is abstract and theoretical."

Microeconomics (of the mainstream economics) is designed so as to fit their equilibrium framework. There are two versions for microeconomics theory of firm: (1) perfect competition and (2) imperfect or monopolistic competition.  If I explain only perfect competition version,  one normally assumes

     the marginal cost = the product price.             (1)

At the background of this equation, the cost functions are assumed to be in decreasing returns to scale (at the point of operation). In this case only, the above formula (1) gives you maximum profit and in this case, the firms do not want to sell more than the actual production per day (or week, or month), because  if they do it they will loose.

This is a pure false, because most of firms face constant or decreasing returns to scale.

You will find, I believe, that most of engineering economics does not assume such a ridiculous situation. There are many discrepancies between microeconomics textbook explanations and other fields of applied economics or neighboring disciplines such as management  science. This must be a kind of overt secrets that many people know but does not dare to speak out.   

Hello Yoshinori Shiozawa, you are absolutely right that in micro-economics it assumes decreasing returns to scale for cost up to the point of Marginal Cost = Marginal Revenue, yet as you correctly pointed out many companies experience constant or even increasing costs with increased levels of production. Some times costs increase in a step wise function upwards with capital investment resulting in increased operating costs.

A good example of this are hospitals. As hospitals deploy more capital intensive medical equipment for diagnostic purposes and medical treatment, their costs escalate rapidly despite an increase in the number of patients treated. Take for example the MRI machine, when the medical system acquires one of these machines to diagnose patients, the hospital must incorporate the machine into its facility requiring building expansion leading to higher operating costs in terms of interest payments and depreciation on capital, energy to run the machine and the expanded facility, labour in the form of technicians to run the MRI, increased maintenance  and service support to the MRI, etc...

Engineering economics does not make assumptions about decreasing costs with increased production and is very dependent on empirical measurement of the production system to properly anticipate future costs. Micro-economic theory is only used where it is deemed appropriate in the eyes of the industrial engineers designing the system.

People are actually aware of the discrepancies in the abstract theory of micro-economics and other applied economic approaches which is why they use several different methods to analyze, design, and operate any production system.

Dear John,

I am afraid if we have a confusion in the understanding in terminology. It is really confusing but we should know these three definitions:

increasing returns to scale = costs per unit decreases = decreasing cost

constant  returns to scale = cost per unit stay constant = constant cost 

decreasing returns to scale = costs per unit increases = increasing cost

NB: Decreasing returns is often expressed diminishing returns. Do not confuse with returns to scale with returns by substitution (of inputs). Returns to substitution is always decreasing. Returns to scale are totally different concept and independent of this law of diminishing returns to substitution.  

If we make clear our ideas, most of cost engineers agree that the firm are normally operating at the increasing returns to scale or at least constant returns to scale. It is also important to note that  in the decision making of the volume of production,  firms are rare to consider substitution of inputs. They only decide the volume of production with the assumption to use the minimal cost production process. Thus, in the normal decisions,   returns to scale are relevant and input substitutions are not considered. 

When you talk about  increase of number of machines (for example, MRI), you are taking about the total cost. The unit cost is obtained when you divide the total costs (including fixed costs and variable costs ) by the number of patients. The total cost increases but if you divide by the number of patients, the unit cost decreases except at the point when you decide to install (buy) a new unit of MRI. At that point, the unit cost jump up at this moment, but except this moment the unit cost decreases if the number of patients increases (and the number of machines stay constant).  

Now we have to ask how marginal cost and unit cost are related. This is a simple question of calculus.

Let  f(x) be the total cost if the volume of production is x. By definition we have

the total cost 　　c(x) = f(x),

the unit cost　　  a(x) =f(x)/x,    (i.e. average cost)

the marginal cost  m(x) = f''(x).

The original definition of marginal cost is  f(x+1) － f(x), but we normally assume that this can be replaced by f'(x).

If we differentiate the unit cost a(x), by a simple calculus we have

   {a(x)}'  = { f(x)/x }'  = {f'(x) x - f(x)} / x^2  = {f'(x)  - f(x)/x } / x

                = {m(x) - a(x)} / x .  　　(1)

If we assume, in a perfect competitive case, that

    p = m(x),                      　　　　(2)

the equation (1) means that 

   {a(x)}'   = {m(x) - a(x)} / x  = {p - a(x) } x =  (the total profit)・x^2     (3)

because the total profit is 

     p・x - f(x) = {p - a(x)} ・ x.

The equation (3)  means that when the firm is running with positive (or non-negative) profit,  the average cost (or the unit cost) is increasing (or non-decreasing)

This is totally inconsistent with the reality, where firms get positive (or at least non-negative profit) and operating at the increasing returns to scale.

Why did this inconsistency occur? I hope you were not confused. We have argued in reductio ad absurdum (reduction to the absurd or proof by contradiction). There must  be something wrong in our assumptions. If we examine the whole logic of deduction, we have two options:

(A) The assumption (2) is right and the firm is operating at the decreasing returns to scale

(B) The assumption (2) is wrong and the firm is operating at the increasing or constant returns to scale.

The neoclassical economics (what you are most probably taught as microeconomics) adopted option (A). The reality is more near to option (B). You should reflect why this kind of things happen. Option (A) is chosen not by the relevance to the reality but to preserve its more fundamental equilibrium framework intact.

Dear Yoshinori, thank you for your clarification of increasing, constant, and decreasing returns to scale. I find your refutation of micro-economic assumption of an equilibrium to be very interesting. I always attributed the disparity between micro-economic theory and reality to there being very few cases of pure competition.

Dear John,

do you understand  that I am criticizing the logic of microeconomics? If you assume monopolistic (or incomplete) competition,  the problem does not change much. Explanation becomes longer. So, I have illustrated by the assumption of perfect competition (or pure competition, if you like). You may not be interested in the logical structure of a theory, but you cannot mix up contradicting theories. It may increase information but increase confusion at the same time.

Hello Yoshinori, yes I did understand your point. That the logic of microeconomics is flawed as illustrated in the assumption of pure competition the marginal cost would equal the price of the product produced, which it never actually does. You illustrate that you can not have profit and rising unit costs as the level of production increases. This makes no sense. You can only have profit with decreasing unit costs as the level of production increases which is what happens with most physical production processes.

I have studied both managerial economics and engineering economics. I have always relied more on engineering economics than managerial due to my suspicions on some of the micro-economic theory we were taught in these courses.

In my spare time while working up north in my current position, I have developed an economic model that interrelates the technical productivity, inventory level, and efficiency of an industrial enterprise to its Internal Rate of Return, Net Profit, Economic Profit, and Solvency (liquidity) as defined by economist Verne Atrill in his book How All Economies Work, Dimensionless Science Publications Ltd., Calgary, 1979.

This model is a unique set of ratio analysis that objectively defines the economics of any enterprise or government operation and can be used for bench-marking the performance of industrial sectors, companies, and governmental operations. From this model I can calculate the production value or price for any given level of productivity, efficiency, and profitability as well as extrapolate the consumption value or price from the production price and an estimated market price using complementary methods of analysis.

The model can also be used to determine appropriate debit-equity ratios for various stages of industrial enterprise development and corresponding levels of solvency. Near optimal debt-equity ratios can be calculated to minimise capital costs. I have copy righted this model under Objective Economic Measurement of Industrial Performance (OEM-IP). ©

I developed this because my father had sent sent me articles of the golden ratio (1.618...). I had known that some engineers had used the golden ratio to model systems that are near optimal, so I thought about how to apply this to the Theory of Constraints by Eliyahu M. Goldratt. I did this as an intellectual puzzle for fun since I work in the Canadian Arctic and have allot of spare time on my hands.

The model is basic ratio multiplication combined with elementary algebraic calculations. I experimented with various inputs to see what the outputs would be on Microsoft Excel. Then expanded the core model to incorporate Dr. Verne Atrill's Objective Economics to calculate financial solvency.

I created a Facebook page on Dr. Verne Atrill and had Ross Healy contribute some material that I have posted on the web site. Ross Healy is a Canadian Financial Ad-visor had worked with Dr. Atrill at his Institute of Objective Economics in Toronto, Canada. When Verne Atrill died, Ross Healy took over the institute and renamed it Strategic Analysis Corporation, which is now one of Canada's top financial investment firms. Ross Healy is the Chairman of SAC and appears frequently on the Business News Network (BNN) on Canadian television. Chris Healy (no relation to Ross) is the CEO of SAC and obtained his Ph.D. in data analysis under Dr. Verne Atrill's tutelage.  The analysis of corporate performance and the value of stock is the first and only application of Vern Atrill's work.

I had sent both of them a power point presentation on some my personal notes from on my models I had constructed. I spoke on the phone for about an hour and a half with Ross Healy, who said my work had allot of value in it and encouraged me to continue to work on it. They are the few people who understand what I have done and I understand what they are doing at SAC in analyzing and evaluating corporate financial performance.

I had shown my models to some other people but they told me it was getting out of their area of expertise. My friend Kevin Mulcair, who is a Chartered Accountant, looked at my models and told me I had the basis of a doctoral thesis and asked me what I was going to do with it. I told him, I don't know what I will do with it.

If you would like to see it, please send my a message through research gate or linked in with an e-mail address and I will send you the same power point presentation I sent Ross and Chris Healy. If you are interested in what you see in the presentation, I could later send some of my spread sheets and experiments and my personal notes. You can tell me what you think is the potential in all this.

John

Dear John,

I now understand your situation. I will send you a personal message later. For the moment, I am very busy and I will not be able to respond promptly but I may send you a comment within 2 weeks. 

If you want to write a PhD thesis, the first things to do is to find a good supervisor. If you choose an economist who thinks only within the framework of neoclassical economics, you will not be understood rightly and will be obliged to change your thesis project. Although I do no know personal names, I think you can find a good supervisor in  Canada.

It will be a great  achievement for economics and management science if you succeed to combine and integrate engineering and managerial economics that are based (1) on real life experience and (2) well reflected and constructed outside of the neoclassical framework. As I have emphasized above, the present microeconomics is so irrelevant and it is necessary to build a theory based on a new framework. I will not be astonished if a new framework emerges from managerial and engineering economics.  

A course work in microeconomics for the preparation of PhD will be useful to you. It is important that a person like you who know the irrelevance of the microeconomics relearn and unlearn it. In the course of that unlearning, you will find what you should do. It will also help you much when you write your dissertation. You should explain deeply why you could not adopt the neoclassical framework.  To do so, it is necessary to understand the logic of the neoclassical  microeconomics thoroughly. This is a dangerous way, because normal students will be absorbed in the logic of neoclassical economic, but in your case your experiences will guide you in the right direction.   

It is also important to know heterodox price theory. Frederic Lee's Post Keynesian Price Theory would be one of books you must read. My recent paper The Revival of Classical Theory of Values

https://www.researchgate.net/publication/269393496_The_Revival_of_Classical_Theory_of_Values

may also help you.

I could not find Verne Atrill (1978) How All Economies Work. So I cannot make any comment on it. 

Conference Paper The Revival of Classical Theory of Values

Thank you Yoshinori