Business Economics [B.Com (Hons) I Year ]
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Business
economics :- Business
economics is a discipline which deals with the application of economic theory
to business management. It deals with the use of economic concepts and
principles of business decision making.
Business Economics may be defined
as the study of economic theories, logic and methodology which are generally
applied to seek solution to the practical problems of business. Business
Economics is thus constituted of that part of economic knowledge or economic
theories which is used as a tool of analysing business problems for rational
business decisions. Business Economics is often called as Business Economics or
Economic for Firms.
“Business
Economics is economics applied in decision making. It is a special branch of
economics bridging the gap between abstract theory and Business practice.” – Haynes, Mote and Paul.
“Business
Economics consists of the use of economic modes of thought to analyse business
situations.” - McNair and Meriam
“Business
Economics (Business Economics) is the integration of economic theory with
business practice for the purpose of facilitating decision making and forward
planning by management.” - Spencerand
Seegelman.
“Business
economics is concerned with application of economic concepts and economic
analysis to the problems of formulating rational Business decision.” – Mansfield
Nature
of Business Economics:
a) A) Business
Economics is a Science:- It is simply a systematic body of knowledge which
can establish a relationship between cause and effect. Further, Mathematics,
Statistics, and Econometrics are decision sciences. Business Economics
integrates these decision sciences with Economic Theory to arrive at strategies
to help businesses achieve their goals. Hence, it follows scientific methods
and also tests the validity of the results. This is one aspect of the nature of
business economics.
b) B) It is Based on Micro Economics:- We understand the basic difference between micro and macroeconomics. A business manager is certainly more concerned about achieving the objectives of his own organization. After all, this helps him in ensuring profits and long-term survival of the firm. Business Economics is more concerned with the decision-making situations of individual establishments. Therefore, it depends on the techniques of Microeconomics.
c) C) It Incorporates Elements of Macro Analysis :- Even though all businesses focus on their profitability and survival, a firm cannot operate in a vacuum. The external environment of the economy like income and employment levels in the economy, tax policies, etc., affects the firm. All these external factors are components of Macro economy.
Therefore, a business manager has to take all such factors into consideration which may influence his business environment.
d) D) It is an Art:- Business Economics is an art as it requires the practical application of rules and principle to achieve set objectives.
e) E) Use of Theory of Markets and Private Enterprises:- Business Economics primarily uses the theory of markets and private enterprises. It uses the theory of the firm and resource allocation in a private enterprise economy.
f) F)Pragmatic in Approach:- Microeconomics is purely theoretical and analyzes economic occurrences under unrealistic assumptions. On the other hand, Business Economics is pragmatic in its approach. It tries to solve the problems which the firms face in the real world.
g) G) Interdisciplinary:- Business Economics incorporates tools from many other disciplines like mathematics, statistics, accounting, marketing, etc. Therefore, is in interdisciplinary in nature.
h) H) Normative:- Broadly speaking, Economic Theory has evolved along two lines – Positive and Normative. A positive or pure science analyzes the cause and effect relationship between variables in a scientific manner. However, it does not involve any value judgment. In simpler words, it describes the economic behaviour of individuals or society without focusing on the desirability of such behaviour.
On the other hand, normative science involves value judgments. It suggests a course of action under the given circumstances.
Scope
of Business Economics: The scope of Business economics is
not yet clearly laid out because it is a developing science. Even then the following fields may be
said to generally fall under Business Economics:
- Demand Analysis and Forecasting
- Cost
and Production Analysis
- Pricing
Decisions, Policies and Practices
- Profit
Management
- Capital Management
These divisions of business economics constitute its subject matter. Recently, Business economists have started making increased use of Operation Research methods like Linear programming, inventory models, Games theory, queuing up theory etc., have also come to be regarded as part of Business Economics.
1. Demand Analysis and Forecasting: A business firm is an economic organisation which is engaged in transforming productive resources into goods that are to be sold in the market. A major part of Business decision making depends on accurate estimates of demand. A forecast of future sales serves as a guide to management for preparing production schedules and employing resources. It will help management to maintain or strengthen its market position and profit base. Demand analysis also identifies a number of other factors influencing the demand for a product. Demand analysis and forecasting occupies a strategic place in Business Economics.
2.
Cost and production analysis:- A firm’s profitability depends much on its
cost of production. A wise manager would prepare cost estimates of a range of
output, identify the factors causing are cause variations in cost estimates and
choose the cost minimising output level, taking also into consideration the
degree of uncertainty in production and cost calculations. Production processes
are under the charge of engineers but the business manager is supposed to carry
out the production function analysis in order to avoid wastages of materials
and time. Sound pricing practices depend much on cost control. The main topics
discussed under cost and production analysis are: Cost concepts, cost-output
relationships, Economics and Diseconomies of scale and cost control.
3. Pricing decisions, policies and practices: Pricing is a very important area of Business Economics. In fact, price is the genesis of the revenue of a firm ad as such the success of a business firm largely depends on the correctness of the price decisions taken by it. The important aspects dealt with this area are: Price determination in various market forms, pricing methods, differential pricing, product-line pricing and price forecasting.
4. Profit management: Business firms are generally organized for earning profit and in the long period, it is profit which provides the chief measure of success of a firm. Economics tells us that profits are the reward for uncertainty bearing and risk taking. A successful business manager is one who can form more or less correct estimates of costs and revenues likely to accrue to the firm at different levels of output. The more successful a manager is in reducing uncertainty, the higher are the profits earned by him. In fact, profit-planning and profit measurement constitute the most challenging area of Business Economics.
5. Capital management: The problems
relating to firm’s capital investments are perhaps the most complex and
troublesome. Capital management implies planning and control of capital
expenditure because it involves a large sum and moreover the problems in disposing
the capital assets off are so complex that they require considerable time and labour.
The main topics dealt with under capital management are cost of capital, rate
of return and selection of projects.
Significance of Business Economics : The significance of business economics can be discussed as under :
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. If they are found relevant to decision making. 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 :
- What
products and services should be produced?
- What
input and production technique should be used?
- How
much output should be produced and at what prices it should be sold?
- What
are the best sizes and locations of new plants?
- When
should equipment be replaced?
- 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 characterising 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.
Central Problems of an Economy
An economic problem
generally means the problem of making choices that occurs because of the
scarcity of resources. It arises because people have unlimited desires but the
means to satisfy that desire is limited. Therefore, satisfying all human needs
is difficult with limited means.
Causes of Economic Problem
- Scarcity of resources: Resources like labour, land, and capital are
insufficient as compared to the demand. Therefore, the economy cannot
provide everything that people want.
- Unlimited Human Wants: Human beings’ demands and wants are unlimited which
means they will never be satisfied. If a person’s one want is satisfied,
they will start having new desires. People’s wants are unlimited and keep
multiplying, therefore, cannot be satisfied because of limited resources.
- Alternative Uses: Resources being scarce, the same resources are used for
different purposes. and it is therefore essential to make a choice among
resources. For instance, petrol is used in vehicles and is also used for
generators, running machines, etc. Therefore, the economy should now make
a choice within the alternative uses.
List
of Economic Problems:
- A country cannot produce all
goods because it has limited resources.
- It has to make a choice between
different goods and services.
- Every economy has to decide
what goods and services should be produced.
- Example: If a farmer has a
single piece of agricultural land, then he has to make a choice between
two goods, i.e., whether to grow rice or wheat.
- Similarly, our government has
to decide where to allocate funds, for the production of defence goods or
consumer goods, and if both, then in what proportion.
(B)
How to produce?
- This problem refers to the
choice of technique of production. It arises when there is an availability
of more than one way to produce goods and services.
- There are mainly two techniques
of production. These are:
a)
Labour intensive
technique(greater use of labour)
b)
Capital intensive
technique(greater use of machines)
- Labour intensive technique
promotes employment whereas capital intensive technique promotes
efficiency and growth.
- The society cannot satisfy all the wants of all the people. Therefore, it has to decide who should get how much of the total output of goods and services.
- Society has to make choice of whether luxury goods or normal goods have to be produced. This distribution or proportion directly relates to the purchasing power of the economy
