What is Business Economics?
Business economics is considered to be applied microeconomics. It is concerned with applications of microeconomic principles to decision making by firms.
Business economics is a comparatively new discipline. It is a special branch of economics, applied in business decision making. Economic theories and techniques of economic analysis are applied to analyze business problems, evaluate business options and opportunities to arrive at an appropriate business decision.
The emphasis of business economics is on managerial economics, rather than on predicting the equilibrium of an industry. Thus, it is situated on the borderline of economics and business management and serves as a bridge between economies and business management. Business economics is the application of economic theory and methodology to business administration and practice.
Business economics helps managers recognize how economic forces affect organizations and describes the economic consequences of managerial behavior. It also links economic concepts, data, and quantitative methods to develop vital tools for managerial decision-making.
Business economics is applied microeconomics to a significant extent, though it draws extensively from macroeconomic theory as well. For example, it draws 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.
Business economics has a normative bias stating what firms should do, to reach certain objectives. Positive economics exposes us to what is, while normative economics gives value judgments on outcomes or phenomena, i.e., what should be, or what ought to be.
Business Economics is often prescriptive, stating what firms should do to reach certain objectives.
Business economics deals with partial equilibrium analysis, with a focus on the equilibrium of a firm or an industry, not the economy.
Definition
Business Economics applies the principles and methods of economics to analyze problems faced by the management of a business or other types of organizations and to help find solutions that advance the best interests of such organizations - Davis and Chang
Features of Business Economics
- Decision-making - Business Economics is an applied subject that helps make managerial decisions to formulate business policies. It helps in decision making to maximize output with minimum cost.
- Based on microeconomics - The nature of business economics is based on microeconomics. It deals with the problem of an individual firm and its activities.
- Based on macroeconomics - Macroeconomics is also important and useful in business economics. The study of macroeconomics enables the producer to adjust his business into the best possible environment with the help of outside forces like monetary, fiscal, industrial, and labor policy.
- Applied nature of economics theory - In economic theory, different laws are formulated, but the applied part of economics is used in business economics. The nature of business economics is applied, not theoretical.
- Problems and solutions - Business economics help in studying the complicated and different types of problems related to business and also suggests policy implications so that the problems can be easily solved.
- Economics of a firm - A firm aims to get maximum profit, which is possible only by effective policy adoption and decision making to minimize the cost of production.
- Coordinating nature - Business economics coordinate between the theoretical and practical aspects necessary for running a firm. It uses microeconomic as well as macroeconomic models.
- Prescriptive - In economics, the theoretical aspects of the different laws of economics are studied. It is not studied whether these theories are good or bad effects of an operation. It deals with how business economists should take decisions to achieve organizational goals.
- Science, as well as arts - Science, is a systematic knowledge and business economics, is also used as a systemic knowledge. Therefore it is a science. At the same time, it is also an art as the manager chooses among the economic solutions, which he thinks fits the most regarding a particular problem.
- It is pragmatic - It deals with those analytical tools which help in improving decisions.
How does Economics help in Business?
Economics has had a major impact on the development of other intellectual disciplines such as business strategy, organizational behavior, human resource management, and marketing.
- Economic theories can contribute to the business by building analytical models that help recognizing the structure of managerial problems and eliminating the minor details which might block decision making, and help to concentrate on the main issue. Theories are important as they are useful to explain how to solve similar problems that occur at different times and in different circumstances.
- Economic theory also contributes to the business analysis 'a set of analytical methods,' which may be applied directly to specific business problems. Thus, they enhance the analytical capabilities of the business analyst.
- Economic theories clarify concepts used in the business analysis, enabling the managers to avoid conceptual pitfalls.
- Application of economics theories to explaining and analyzing the technical conditions and the business environment contributes very much to the rational decision-making process.
Importance of Business Objectives
Business economics helps the decision-making process in the following ways:
- It provides tools and techniques- Business economics provides many tools and techniques to managers with the help of which, manager can establish essential relationships that represent the real situation. Therefore managers can save time by eliminating not so important details.
- It provides concepts- Besides, tools and techniques, it also facilitates economic concepts and theories that are needed for the analysis of business problems. Concepts like: elasticity of demand and supply, fixed and variable costs, short and long-run costs, etc.
- Business decisions- Business economic helps to make decisions such as the following:
- What should be the product mix?
- What should the level of output?
- What should be the price of the product?
- How to make an investment decision? Etc.
Application of Business Economics
Business Economics is applied while taking the following ways:
- For making specific decisions, such as market research, economic analysis of the country.
- It is applied while taking investment appraisal decisions, foreign exchange management of business.
- Business economics is used while taking internal decisions; for example, what the firm's pricing and profit policies should be.
- Production, sales, and inventory schedules are also internal decisions.
- Business works in an economic environment. Hence, business economists have to consider the environment as well; say, the country's general economic conditions, level of growth of national income, and phase of the business cycle.
- Decisions in response to the change in the demand of the product in the market.
- Decisions concerning the input cost of the firm and the availability of the inputs.
- Business economists also study the government's economic policies, monetary policies, and the government's annual budget, etc.
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