Scope of Business Economics | 8 topics under Scope of Business Economics

Scope of Business Economics
            Scope of Business Economics

The scope of business economics is vast. It includes economic theory (microeconomics as well as macroeconomics), operations research, statistics, mathematics, and the theory of decision - making. Business economics draws from functional areas of management like production, marketing, finance, accounting, project management, etc. A professional business economist has to integrate concepts and methods from all these disciplines and functional areas to understand and analyze practical business problems.

Microeconomic theories including the theory of demand, the theory of production, theory of price determination, theory of profit and capital budgeting, Macroeconomic theories including theory of national income, theory of growth and fluctuations, international trade and monetary mechanisms and the study of state policies and their repercussions on the firm's activities, constitute the scope of managerial economics.

"The scope of business economics comprises all those economic concepts, theories, and tools of analysis, that are used to analyze the business environment and to find solutions to business problems."

Business economics is applied microeconomics to a significant extent, though it draws extensively from macroeconomic theory as well. For example, it brings demand analysis, cost and production analysis, pricing and output decisions from microeconomics, whereas it also derives market intelligence from the knowledge of national income, inflation and stages of recession and expansion, which are the subject matter of macroeconomics. Hence, it focuses on areas of both microeconomics and macroeconomics that are of the greatest importance and concern to the managers in any business organization. 

The business issues to which economic theories are applied can be broadly divided into two categories: 

1. Operational or Internal issues 
Microeconomics theories apply to internal issues.
Some of the internal issues are what to produce, what to produce, how to produce, price, technology, etc.

2. Environment or external issues
Macroeconomics theories apply to external issues.
Some external issues are national income, inflation, and stages of recession and expansion, trend in foreign trade, labor, and capital markets, economic policies, etc. They are related to the overall social and political atmosphere of the country.

Scope of Business economics
Scope of Business Economics

The following topics fall under the scope of business economics:

1. Demand Analysis Forecasting 

Business decisions making depends on accurate estimates of demand. Demand analysis is necessary for two reasons for the forecasting of demand and the manipulation of demand. Managers need to study demand determinants, demand distinctions, and demand forecasting. The macroeconomics theory of demand helps managers in studying consumer's behavior. It answers the questions: how do the consumers whether or not to buy a commodity? How do they decide on the quantity of a commodity to be purchased? When do they stop consuming a commodity? etc. 
An instance of demand forecasting:
Barclays raises...oil demand forecast...economic growth-CNBC

2. Production and Cost Analysis 

It is essential for project planning. Cost analysis is required for cost control. Cost estimate help in the expansion of the production process. Production theory also the theory of the firm explains the relationship between inputs and outputs. Production theory helps determine the size of the firm, the size of the total output, and the amount of capital and labor to be employed.

3. Pricing decisions, Policies, and Practices

Price is the basis for the revenue of a firm. Some aspects of the pricing problem are price determination in various market forms, pricing methods, differential pricing, product line pricing, and price forecasting. Price theory explains how prices are determined under different market conditions; when price discrimination is desirable, feasible, and profitable, to what extend advertising can be useful in expanding sales in a competitive market. Price theory can help determine the price policy of the firm. Price and production theories together, in fact, help in determining the optimum size of the firm.

4. Profit management

The main purpose of a business firm is to earn profit. But there is uncertainty about profits due to variation in costs and revenue. Under profit management, we study the nature and management of profit, planning, and techniques of profit planning.

5. Capital management 

It is the most troublesome problem. Capital management deals with planning and control of capital expenditure, cost of capital, etc. Capital is a scarce and expensive factor and foundation of the business. Its efficient allocation and management are among the most important tests for the managers and a determinant of the firm's success level. Knowledge of capital theory can contribute a great deal in investment-decision making, choice of projects, maintain capital intact, capital budgeting, etc.

6. Product policy, Sales promotion, and Market strategy 

In modern days, the consumer wants new products and new services. A business should have a policy for the promotion of its product. Therefore product policy sales promotion and market strategy are important aspects of business economics. Within its marketing strategy, a business can influence its marketing mix.

7. Competition in Market 

In all market structures, much business strategy is concerned with gaining a competitive advantage over rivals. Firms collaborate to extend market share and for the erection of entry barriers, making it costly or difficult for new businesses to enter existing markets. Competition is fundamental to lower prices for consumers and normal profits for businesses. The more competition is inhibited, the more the firms in a market can exercise their power to the detriment of rivals and consumers.

Competitive intensity Pernod's...price cut in Royal Stag...- Price Competition, CNBC

8. Linear programming and Theory of games

Recently, there is a trend towards the integration of business economics and operation research. Hence, techniques such as linear programming inventory models, etc. are regarded as part of business economics. Game theory is a method of analyzing strategic interaction. It analyses how two or more interacting parties choose strategies that jointly affect each participant in some way. Linear programming is a method for analyzing and solving certain types of managerial decision problems.

Business economics identifies ways to achieve goals efficiently. Business economics can be used to quickly and effectively identify pricing and production strategies to help meet this short-run objective. Similarly, business economics provides production and marketing rules that allow the firms to maximize net profits once they have achieved growth or market share objectives. In short, business economics helps managers providing a set of operating rules that help in using scarce human and capital resources efficiently. By following these set of rules, businesses, nonprofit organizations, and government agencies can meet objectives efficiently.

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