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Business Economics

Business Economics is referred with those aspects of economics and its tools of analysis which are used in process of decision making of business enterprise. The term Business Economics has been defined as under-

According to Spencer and Biegelman, “Business Economics is the integration of economics theory with business practice for the purpose of facilities decision-making and forward planning of management.”

According to Me Nair and Meriam, “Business Economics consists of the use of economic modes of thought to analysis Business situations.”

Joel Dean, Use of economic analysis is formulating policies is known as business economics.”

Business Decisions

Business decisions are simply the process of application of the principles, techniques and concepts of economics to solve the managerial problems of a business enterprise. In fact, business decisions have to be taken for management, capital requirement and about consumer behaviour.

Nature of Business Economics

Business Economics as a Science-

  • In it facts are collected, tabulated and interpreted systematically
  • Laws are universal.
  • Facts are measured in terms of: money.
  • It uses mathematics and statistics.

According to Bernard Shaw, “If the economists of this world were laid end to end, they wouldn’t reach a conclusion.”

According to Wootton, “Whenever six economists are gathered” He says there are seven points.

According to Durbin, “Certainly will always escape us and production misses the mark just because men can learn from experience they can learn from economics itself and so the subject destroys its own conclusion by its own discoveries.”

Business Economics as an Art –

Economics is an Art, because practical techniques are employed in it to achieve economic ends. Business economics studies economic facts and events in a real way as a positive science. It explores the positives that ought to be the state of economics matters a normative science, and finally it finds out solutions to fulfill desirable economic ends as an Art: Business Economics is a Positive and Normative science as well as art.

According to Keynes, “An Art is a system of rules of the attainment of a given and.”

According to Boulding, “It is not, for instance, the business of the economist as such to decide whether large attainments are necessary, whether a marriage is successful, a religion efficacious, or even whether a law is wise.”

Scope of Business Economics

The scope of Business economics explains all those economic concepts, theories and tools of analysis which can be used to analyse business environment and to find out solution to practical business problems. Business economics is economics applied to the analysis of business problems and decision-making. Broadly speaking, it is applied economics. The area of business problems to which economic theories can be directly applied may be briefly described as follows. Business problems involving decision making may be broadly divided into two categories:

  • operational or internal problems; and
  • environmental or external problems.

(A) Operational problems are basically of internal nature. They include all those problems which arise within the business organisation, and lie within the purview and control of the management. Some of the basic internal issues are:

  • choice of commodity, i.e., what to produce;
  • choice of size of the firm, i.e. how much to produce;
  • choice of technology, i.e. choosing the factor combination;
  • choice of price, i.e. how to price the commodity;
  • how to promote sales;
  • how to face the price competition;
  • how to expand the investment;
  • how to manage the profit and capital;
  • how to manage the inventory, stock of both finished goods and raw materials.

All these questions and alike confronted by the managers of a business enterprise are related to various economic theories. The branches of economic theories which deal with most of these questions are the following:

  1. Theory of Demand:

    Demand theory explains the consumer’s behaviour. It answers questions: Why do consumers buy a commodity? How do they decide on the quantity of a commodity to be purchased? When do they stop consuming a commodity? How do the consumers behave when the price of the commodity, consumer income, and taste and fashions etc. change? The knowledge of demand theory can, therefore, be helpful in choice of commodities for production.

  2. Theory of Production:

    Production theory, also called as ‘Theory of Firm’ explains how average and marginal costs vary when production is increased; under what conditions costs increase or decrease; how total output increase when units of one factor (input) are increased keeping other factors constant, or when all factors are simultaneously increased; to what extent one factor (say, labour) can substitute another (say, capital); how optimum size of output is achieved. Production theory thus helps in determining the size of the firm, size of the total output and the factor proportion.

  3. Theory of Exchange or Price Theory:

    Price theory explains how prices are determined under different types of market conditions; how price discrimination is made; to what extent advertisement can be helpful in expanding the sale in a competitive market. Price theory, thus, can be helpful in determining price policy of the firm. Price and production theories together, in fact, help in determining optimum size of the firm.

  4. Theory of Profit:

    Profit making is the most common objective of the business undertakings. But, making a satisfactory profit is not always guaranteed because a firm has to carry out its activities under conditions of uncertainty in regard to:

  • demand for the product,
  • input prices in the factor market,
  • nature and degree of competition in the product market, and
  • price behaviour under changing conditions in the product market, etc.

Therefore, an element of risk is always there even if the most efficient techniques are used for predicting the future, and even if business activities are meticulously planned. The firms are therefore supposed to safeguard their interest and avert, as far as possible, the possibilities of risk or minimise it. Profit theory guides in the measurement and management of profit, in making allowances for risk premium in calculating the pure return on capital and pure profit and also in future profit planning.

  1. Theory of Capital and Investment:

    Capital like all other inputs, is a scarce and an expensive factor. Capital is the foundation of a business. Its efficient allocation and management is one of the most important tasks of the managers. The major issues related to capital are:

  • choice of investment project,
  • assessing the efficiency of capital, and
  • Most efficient allocation of capital.

Knowledge of capital theory can contribute a great deal in investment decisions, choice of projects, maintaining capital intact capital budgeting etc.

(B) External Problems related to Government policies, international environment, geographical, and Political, social environment.

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