WHAT IS BUSINESS ECONOMICS??
Business
Economics, also called Managerial Economics, is the
application of
economic theory and methodology to business. Business involves
decision-making.
Decision making means the process of selecting one out of two or more
alternative courses of action. The question of choice arises because the basic
resources such as capital, land, labour and management are limited and can be
employed in alternative uses. The decision-making function thus becomes one of
making choice and taking decisions that will provide the most efficient means
of attaining a desired end, say, profit maximation.
Different
aspects of business need attention of the chief executive. He
may be called
upon to choose a single option among the many that may be Available to him. It would he in the interest of the
business to reach an optimal
Decision- the one that promotes the goal of the
business firm. A scientific Formulation of the business problem and finding its
optimals solution requires that the business firm is he equipped with a
rational methodology and appropriate tools.
Business
economic meets these needs of the business firm. This is
Illustrated in
the following presentation.
Economic Decision
Theory and
problems in
Methodology Business
Business Economic
Application
of Economic
Theory
and Methodology
to
solving Business problems
Optimal
Solution to Business Problems
it may be that
business economics serves as a bridge between economic
theory and
decision-making in the context of business.
According to Mc
Nair and Meriam, “Business economic consists of the
use of economic
modes of thought to analyze business situations.”
Siegel man has
defined managerial economic (or business economic) as
“the integration
of economic theory with business practice for the purpose of facilitating
decision-making and forward planning by management.”
We may,
therefore, define business economic as that discipline which
deals with the
application of economic theory to business management.
Business
economic thus lies on the borderline between economic and business management
and serves as a bridge between the two disciplines.
Nature of Business Economics:
Traditional
economic theory has developed along two lines; viz.,
normative and
positive. Normative focuses on prescriptive statements, and help establish
rules aimed at attaining the specified goals of business. Positive, on the
other hand, focuses on description it aims at describing the manner in which the
economic system operates without staffing how they should operate.
The emphasis in
business economics is on normative theory. Business
Economic seeks
to establish rules which help business firms attain their goals, which indeed
is also the essence of the word normative. However, if the firms are to
establish valid decision rules, they must thoroughly understand their environment.
This requires the study of positive or descriptive theory. Thus,
Business
economics combines the essentials of the normative and positive economic
theory, the emphasis being more on the former than the latter.
Scope of Business Economics :
As regards the scope
of business economics, no uniformity of views
exists among
various authors. However, the following aspects are said to
generally fall
under business economics.
1. Demand
Analysis and Forecasting
2. Cost and
production Analysis.
3. Pricing
Decisions, policies and practices.
4. Profit
Management.
5. Capital
Management.
These various
aspects are also considered to be comprising the subject
matter of
business economic.
1. Demand Analysis and Forecasting
:
A business firm
is an economic organisation which transform productive resources into goods to
be sold in the market. A major part of business decision making depends on
accurate estimates of demand. A demand forecast can serve as a guide to
management for maintaining and strengthening market position and enlarging
profits. Demands analysis helps identify the various factors influencing the
product demand and thus provides guidelines for manipulating demand.
Demand analysis
and forecasting provided the essential basis for
Business
planning and occupies a strategic place in managerial economic. The main topics
covered are: Demand Determinants, Demand Distinctions and Demand Forecast.
2. Cost and Production Analysis:
A study of
economic costs, combined with the data drawn from the
firm’s
accounting records, can yield significant cost estimates which are useful for
management decisions. An element of cost uncertainty exists because all the factors
determining costs are not known and controllable. Discovering economic costs
and the ability to measure them are the necessary steps for more effective
profit planning, cost control and sound pricing practices.
Production
analysis is narrower, in scope than cost analysis. Production analysis
frequently proceeds in physical terms while cost analysis proceeds in monetary
terms. The main topics covered under cost and production analysis are: Cost
concepts and classification, Cost-output Relationships, Economics and Diseconomies
of scale, Production function and Cost control.
3. Pricing Decisions, Policies and
Practices:
Pricing is an
important area of business economic. In fact, price is the genesis of a firms
revenue and as such its success largely depends on how correctly the pricing
decisions are taken. The important aspects dealt with under pricing include.
Price Determination in Various Market Forms, Pricing Method, Differential
Pricing, Product-line Pricing and Price Forecasting.
4. Profit Management:
Business firms
are generally organised for purpose of making profits and in the long run
profits earned are taken as an important measure of the firms success. If
knowledge about the future were perfect, profit analysis would have been a very
easy task. However, in a world of uncertainty, expectations are not always
realised so that profit planning and measurement constitute a difficult area of
business economic. The important aspects covered under this area are :
Nature and
Measurement of profit, Profit policies and Technique of Profit
Planning like
Break-Even Analysis.
5. Capital Management:
Among the
various types business problems, the most complex and troublesome for the
business manager are those relating to a firm’s capital investments. Relatively
large sums are involved and the problems are so complex that their solution
requires considerable time and labour. Often the decision involving capital
management are taken by the top management.
Briefly Capital
management implies planning and control of capital expenditure. The main topics
dealt with are: Cost of capital Rate of Return and Selection of Projects.
Conclusion:
The various
aspects outlined above represent major uncertainties which a business firm has
to reckon with viz., demand uncertainty, cost uncertainty, price uncertainty,
profit uncertainty and capital uncertainty. We can therefore, conclude that the
subject matter of business economic consists of applying economic principles
and concepts to dea1 with various uncertainties faced by a business firm.
Significance of Business Economics
:
1. Business economic is concerned
with those aspects of traditional economics which are relevant for business
decision making in real life.
These are
adapted or modified with a view to enable the manager take better decisions.
Thus, business economic accomplishes the objective of building a suitable tool
kit from traditional economics.
2. It also
incorporates useful ideas from other disciplines such as psychology, sociology,
etc.. In fact, business economics takes the help of other disciplines having a bearing
on the business decisions in relation various explicit and implicit constraints
subject to which resource allocation is to be optimized.
3. Business
economics helps in reaching a variety of business decisions in a complicated
environment. Certain examples are :
(i) What
products and services should be produced?
(ii) What input
and production technique should be used?
(iii) How much
output should be produced and at what prices it should be sold?
(iv) What are the best sizes and locations of new
plants?
(v) When should
equipment be replaced?
(vi) How should the available capital be allocated?
4. Business
economics makes a manager a more competent model builder.
It helps him
appreciate the essential relationship Characterizing a given situation.
5. At the level
of the firm. Where its operations are conducted though known focus functional
areas, such as finance, marketing, personnel and production, business economics
serves as an integrating agent by coordinating the activities in these
different areas.
6. Business
economics takes cognizance of the interaction between the firm and society, and
accomplishes the key role of an agent in achieving the its social and economic
welfare goals. It has come to be realised that a business, apart from its
obligations to shareholders, has certain social obligations. Business economics
focuses attention on these social obligations as constraints subject to which
business decisions are taken.
It serves as an
instrument in furthering the economic welfare of the society through socially
oriented business decisions.
Conclusion:
The usefulness
of business economics lies in borrowing and adopting the toolkit from economic
theory, incorporating relevant ideas from other disciplines to take better
business decisions, serving as a catalytic agent in the process of decision
making by different functional departments at the firm’s level, and finally
accomplishing a social purpose by orienting business decisions towards social
obligations.
