Business Economics, also know as Managerial Economics, is the application of economic theory and methodology to business. Business economics is, thus, apply economics. Economics is the study of human beings (e.g., consumers, firms) in producing and consuming goods and services in the midst of scarcity of resources. Managerial or business economics is an apply branch of organizing and allocating a firm’s scarce resources to achieve its desired goals. Discuss Business Economics – the topic is; Definition, Nature, Scope, and Importance.
Business Economics; Definition, Nature, Scope, and Importance.
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, labor, and management are limiting and can employ 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 the desired end, say, profit maximation. Different aspects of the business need the attention of the chief executive.
He may call upon to choose a single option among the many that may be available to him. It would be 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 optimal solution requires that the business firm is he equipped with a rational methodology and appropriate tools.
Definition of Business Economics:
Different author by different definitions are below;
According to McNair and Meriam,
“Managerial Economics consists of the use of Economic modes of thought to analyze business situations.”
According to M. H. Spencer and L. Siegelman,
“Managerial Economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning.”
According to Hauge,
“Managerial Economics is concerned with using the logic of economics, mathematics & statistics to provide effective ways of thinking about business decision problems.”
Business Economics or Managerial Economics generally refers to the integration of economics theories with business practices. Economics provides various conceptual tools like – Demand, Supply, Price, Competition, etc. They apply these tools to the management of the business. In this sense, business economics also known as applied economics.
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 economics and business management and serves as a bridge between the two disciplines.
Nature of Business Economics:
How to explain the 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 the business.
Positive, on the other hand, focuses on the 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. They seek 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, they combine 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. The scope of business economics (micro and macro variety) is a wider one since it “uses the logic of Economics, Mathematics, and Statistics to provide effective ways of thinking about business decision problems.” In view of this saying of Prof. D. C. Hague, we can argue that there are links between managerial economics and management science. In fact, the boundaries between the two subjects are not clear-cut but overlapping.
However, the following aspects are said to generally fall under business economics.
- Forecasting and Demand Analysis.
- Cost Analysis and Production Analysis.
- Pricing Decisions, policies, and practices.
- Profit Management, and.
- Capital Management.
These different aspects are considered to involve in the subject matter of business economics.
Forecasting and Demand Analysis:
A business firm is an economic organization which transforms productive resources into goods to sell 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 occupy a strategic place in managerial economics. The main topics covered are; Demand Determinants, Demand Distinctions, and Demand Forecasting.
Cost Analysis 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.
Pricing Decisions, Policies, and Practices:
Pricing is an important area of business economics. 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 underpricing include. Price Determination in Various Market Forms, Pricing Method, Differential Pricing, Product-line Pricing, and Price Forecasting.
Pricing is a very important area of managerial economics. In fact, price is the origin of the revenue of a firm. As such the success of a business firm largely depends on the accuracy of price decisions of that firm. The important aspects dealt under the area, are as follows:
- Price determination in various market forms.
- Pricing methods, and.
- Differential pricing product-line pricing and price forecasting.
Business firms are generally organized for the purpose of making profits and in the long run, profits earned are taken as an important measure of the firm’s 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 realized. So, profit planning and measurement constitute a difficult area of business economics. The important aspects covered under this area are; Nature and Measurement of profit, Profit policies and Technique of Profit Planning like Break-Even Analysis.
Among the various types of 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 labor.
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.
Importance of Business Economics:
The significance or importance of business economics can discuss as under:
- It also incorporates useful ideas from other disciplines such as psychology, sociology, etc. If they are found relevant to decision making. In fact, they take the help of other disciplines having a bearing on the business decisions in relation to various explicit and implicit constraints subject to which resource allocation is to optimize.
- They are concerned with those aspects of traditional economics which are relevant for business decision making in real life. These are adapting or modifying with a view to enabling the manager to make better decisions. Thus, business economic accomplishes the objective of building a suitable tool kit from traditional economics.
- It helps in reaching a variety of business decisions in a complicated environment. Certain examples are; (i) What products and services should produce? (ii) What input and production technique should use? (iii) How much output should produce and at what prices it should sell? (iv) What are the best sizes and locations of new plants? (v) When should equipment replace? and (vi) How should the available capital allocate?
- They take cognizance of the interaction between the firm and society and accomplishes the key role of an agent in achieving its social and economic welfare goals. It has come to realize that business, apart from its obligations to shareholders, has certain social obligations. They focussing 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 society through socially oriented business decisions.