Unit-I Business Economics

.NATURE AND SCOPE OF BUSINESS ECONOMICS

1.Nature of Economics
(i)Economics is a social science that studies man’s activities concerning with the maximum
satisfaction of wants or with the promotion of welfare and economic growth by the
efficient consumption, production and exchange of scarce means having alternative uses.
(ii)Economics is regarded as both science and art at the same time since science requires
art , art requires science each being complementary to each other.
LIMITATIONS:
(I)Study of human activities only
(II)Study of economic activities
(III)Study of social man
(IV)Study of average or normal man
(V)Measuring rod of money
SIGNIFICANCE :
THEORETICAL IMPORTANCE PRACTICAL IMPORTANCE

1 It inculcates the logical faculty Advantage to consumer

2 Increase in knowledge Advantage to the producer

3 Development of reasoning power Advantage to the labor

4 Advantage to the society

BUSINESS ECONOMICS: MEANING

(i)Business or managerial economics is that part of economic theory which deals with the
application of economic tools and concepts to the solution of business problem or the
problem of resource allocation among the competing ends.
(ii)Business economics refer to the application of economic theory and decision science
tools to find the optimal solution of business decision problems.
(iii)Business economics is concerned with decision making of economic nature.
(iv)Business economics is goal oriented and prescriptive. It deals with how decisions should
bemade by the managers to achieve the organisational goals.
(v)Business economics is both conceptual and metrical.
(vi)It is pragmatic. It is concerned with those analytical tools which are useful in decision
making.
(vii)Business economics is both science and art. Since business economics is used as a
systematic knowledge , therefore it is a science. As it studies factual situations so it is a real
science, and at the same time , as it determines ideals for the future success and therefore,
it is a normative science too. As it provides methods to reach the ideal situation ,therefore
it is an art too.
NATURE OF BUSINESS ECONOMICS
ECONOMIC THEORY –(Micro Economic Theory/Macro Economic Theory))
(i)Macro Economics:
(a)The business economics operates mainly in a free resource market.The economy uses
prices and markets for resource allocation.
(b)The modern economies are characterized by rapid technological and economic changes.
(c)The monetary decisions and fiscal policies of government affect business.
(ii)Micro Economic analysis:
The micro economic analysis deals with the problem of individual firm,industry, consumer
etc. The chief source of concepts and analytical tools for business economics is micro
economic theory also known as price theory. Some of the concepts are elasticity of
demand, marginal cost, dis-economies of scale, opportunity cost etc.
POSITIVE V/S NORMATIVE APPROACH –Positive approach is concerned with what is , was or
will be while normative approach concerns with what ought to be. Positive economics both
micro and macro is of two types : (a)Descriptive , (b)Theoretical.
The former describes the stage of operation of the firm or economy at a point of
time while the latter explains why it happened. The normative economics is
concerned with problems like what the objectives and policies of business ought to
be and how about them.
INTEGRATION OF ECONOMIC THEORY AND BUSINESS PRACTICE -
(I)With the help of economic theory we can understand the actual behaviour of business
Actually firms takes decision under condition of uncertainty. To the extent a firm deviates
from the assumption of profit maximization and to the extent its decisions are taken under
conditions of various degree of uncertainty about market environment and technical
conditions of production.
(II)Business economics attempts to estimate and predict the economic quantities and
relationships
The estimation of elasticities of demand , production , relations etc. are all necessary for
the purpose of forecasting by the firm. Similarly predicting about the demand , cost , pricing
etc. is needed for decision- making.
(III)Decision making and forward planning is done with the help of estimated quantities and
relationships
Economic forecasting suggest the various outcomes with their respective probabilities for
the managers to choose from.
(IV)The managers cannot ignore the environment within they operate
(a)They must understand and adjust to the external factors, like government intervention in
business, business cycle fluctuations, etc.
(b)Modern business has to keep itself well informed of changes in the environment and
adjust its decisions accordingly from time to time.

2.SCOPE OF BUINESS ECONOMICS:

The scope of business economics is very wide as it involves the application of economic
concepts. It covers the following area:
(i)THEORY OF DEMAND ANALYSIS AND FORECASTING - Demand analysis covers demand
determinants, demand distinctions and demand forecasting. Demand theory explains the
consumer’s behaviour. It answers the questions: how the consumers decide whether or not
to buy a commodity? The quantity of the commodity to be bought? The knowledge of
demand theory can therefore be helpful in the choice of commodities for production.
(ii)THEORY OF PRODUCTION AND PRODUCTION DECISIONS- Production theory also called
“theory of firm” explains the relationship between input and outputs. It explains under
which conditions costs increase or decrease, how total output increases when units of one
factor input are increased, how output can be maximised from optimum use of given
resources. It thus helps in determining the size of the firm , size of the total output and the
amount of capital and labour to be employed.
(iii)ANALYSIS OF MARKET STRUCTURE AND PRICING THEORY- Price theory explains how
prices are determined under different market condition, when price discrimination is
desirable, feasible and profitable ; to what extent advertising can help in expanding sales in
competitive market. Thus it will be helpful in determining the price policy of the firm.
(iv)COST ANALYSIS – Cost analysis is yet another function of business economics. For
instance the determination of costs the methods or estimating costs the relationship
between cost and output , the forecast of cost and profit – these are vital to the firm.
(v)PROFIT ANALYSIS AND PROFIT MANAGEMENT-Profit making is the most common
objective of all business undertakings. But making a satisfactory profit is not always
guaranteed because a firm has out its activities under condition regard to uncertainty (i)
demand of the product (ii) input prices in the factor market (iii) nature and degree of
competition the product market (iv) price behaviour under changing conditions in the
product market etc. Therefore an element of risk are always there even if the most
effective techniques are used.
(vi)THEORY OF CAPITAL AND INVESTMENT DECISIONS-Capital like all the others inputs, is a
scarce and expensive factor. Capital is the foundation of a business. Its efficient utilisation is
the most important tasks of managers. The major issues related to capital are (i) choice of
investment project (ii) assessing the efficiency of capital(iii) most efficient allocation of
capital.
(vii)INVENTORY MANAGEMENT – It refers to the stock of raw materials or finished goods
which a firm keeps. If it is high capital is unproductively used. On the other hand , if the
level of inventory is low production will be hampered.Thus business economics will use the
method which is helpful inminimising the inventory cost.
Thus, business economics tries to find out whatever is likely to be the best for the
firm under a given set of conditions. It enables to take decisions about appropriate
production and inventory policies for the future. It is a branch of economics applied
to analyse almost all business decisions.

3.Difference Between Business Economics and Economics.

(A)Business Economics
(I)Business Economics is a field of applied Economics that studies the financial,
organizational, market-related and environmental issues faced by corporations.
Assessments are made using economic theory and quantitative methods.
(II)Business economics is the discipline which deals with the application of economic theory
to business management
(III)Business Economics analyses subjects such as business organization, management,
expansionandstrategy.
( Studies might include how and why corporations expand, the impact of entrepreneurs,
the interactions among corporations and the role of governments in regulation.)
(B) Economics
(I)Economics is a social science concerned with production and distribution and
consumption of goods and services. It studies how individuals, businesses,
governments and nations make choices on allocating resources to satisfy their wants
and needs, and tries to determine how these groups should organize and coordinate
efforts to achieve maximum output.
(II)The social science Economics concerns the use of scarce resources to maximize
satisfaction of unlimited wants.
(C)Difference between Business Economics and Economics
(i)Whereas business Economics involves application of Economics principles
(ii)Whereas Business Economics is Micro-Economics in character, Economics is both Macro
and Micro-Economics
(iii)Business Economics, through micro in character, deals only with the firm and has
nothing to do with an individual’s economic problems. But Micro-Economics as a branch of
Economics deals with both Economics of the individual as well as Economics of the firm.
(iv)Under Micro-Economics as a branch of Economics, distribution theories, wages, interest
and profit are also dealt with but in Business Economies mainly Profit Theory is used other
distribution have not much use in Business Economics. Thus, the scope of Economics is
wider than of Business Economics.
(v)Economics theory Hypothesizes economic relationships and builds economic model but
managerial economics adopts, modifies and reformulates economic models to suit the
specific conditions and to serves the specific problem-solving process. Thus, Economics
gives the simplified model, whereas Business Economics modifies and enlarges it.
(vi)Economic Theory makes certain assumptions whereas Business Economics introduces
certain feedbacks such as objectives of the firm, multi-product nature of manufacture,
behavioural constraints, environment aspects. Legal constraints, constraints on resource
availability, etc.

DIFFERENCE BETWEEN ECONOMICS AND BUSINESS ECONOMICS

Area of Difference Economics Business Economics

Nature Economics deals with the body It deals with application of

of the principle itself economic principles to the
problem’ to the problems of
business firms.
Nature of Economics deals with both It basically deals with
Economic micro and macro-economic application of normative
Principles Studied principles-normative as well as micro-economic principles
positive and involves value
judgements.
It is concerned with what
decisions ought to be made.
Scope of Study Micro economics as a multi- Though business economics is
facet branch of economics. It micro in character, it deals
deals not only with economic with problems of the business
problems and business firms but firms
also individual’s economic
problems.
Thus, Economics has a wider
scope of study
Focus of Study Under micro economics as a The main focus of study pf
branch of Economics, business economics is profit
distribution theories like rent, theory. Other distribution
wage and interest are dealt theories have not much
along with theory of profit. relevance here.

Approach to Study Economics theory takes Business economics adopts,

assumptions, hypothesizes modifies or reformulates
economic relationships and already existing economic
generates economic models models to suit the specific
conditions and serves the
specific problems of the
business firms.

Methodology Economic theory avoids many Business economics is

complexities and makes pragmatic in the sense that it
simplified assumptions to solve introduces some realistic
complicated theoretical issues. aspects such as objectives of
the firm, resource, legal and
behavioural constraints etc.
And attempts to solve
somereal-life complex
business problems.

4,5 Application and Contribution Business Economics

(4)Application of Business economics

Business economics involves the application of various economic tools, theories, and
methodologies for analysing and solving different business problems. These business
problems can be related to demand and supply prospects of an organisation, level of
production, pricing, market structure, and degree of competition.
(i)Demand analysis and forecasting:
Demand refers to the willingness or capability of individuals to buy a product at a specific
price. Demand analysis is a process of identifying potential consumers, the amount of
goods they want to purchase, and the price they are willing to pay for it. This process is
important for an organisation to analyse the demand for its products and produce
accordingly. In business economics, demand forecasting occupies an important place by
helping organisations in business planning and deciding on strategic issues.
(ii)Cost and benefit analysis:
By analysing costs, management can estimate costs required for running the organisation
successfully. Cost analysis helps firms in determining hidden and uncontrollable costs and
taking measures for effective cost control. It further enables the organisation to determine
the return on investment (ROI). In a nutshell, CBA is a process of comparing the costs and
benefits of a particular project or activity. Business economics involves various aspects of
cost and benefit analysis, such as cost-output relationships and cost control.
(iii)Analysis of market-structure and pricing theory:
Pricing is one of the key areas of business economics. It is a process of finding the value of
a product or service that an organisation receives in exchange for its product/service. The
profit of an organisation depends a great deal on its pricing strategies and policies. Business
economics includes various pricing-related concepts, such as pricing methods, product-line
pricing, and price forecasting.
(iv)Profit analysis and profit management:
Profit making and maximisation is the main aim of every organisation (except for non-profit
organisations). In order to maximise profit, organisations need to have complete knowledge
about various economic concepts, such as profit policies and techniques, and break-even
analysis.
(v)Capital and investment decisions:
Organisations often find it difficult to make decisions related to capital investment. These
decisions require sound knowledge and expertise on various economic aspects. To make
sound capital investment decisions, an organisation needs to determine various aspects,
such as cost of capital and rate of return.
(vi)Production and Production Decisions:
production theory also called “Theory of Firm” explains the relationship between inputs
and outputs. It also explains under what conditions cost increase or decrease, how total
output increases when units of one factor (input) are increased keeping other factors
constant or when all factors are simultaneously increased , how canoutput be maximised
from a given quantity of resources and how can optimum size of output be determined?
Production theory thus helps in determining the size of the firm, size of the total output and
the amount of capital and labour to be employed.
(vii)Inventory Management:
An inventory refers to a stock of raw materials or finished goods which a firm keeps. If it is
high, capital is unproductively tied up, which might, if the stock of the inventory is reduced,
be useful for other productive purposes.
on the other hand, the inventory is low production will be hampered. Thus, business
economics will use such methods which are helpful in minimising the inventory cost.
(5)Contribution of Business economics
Business economics plays an important role in decision making in an organisation. Decision
making is a process of selecting the best course of action from the available alternatives.
The following points explain the importance of business economics:
(i) Business economics covers various important concepts, such as demand and
supply analysis; short and long-run costs; and marginal utility. These concepts
support managers in identifying and analysing problems and finding solutions.
(ii) It helps managers to identify and analyse various internal and external business
factors and their impact on the functioning of the organisation.
(iii) economics helps managers in framing various policies, such as pricing policies and
cost policies, on the basis of economic study and findings.
(iv) By studying various economic variables, such as cost production and business
capital, organisations can predict the future.
(iv) Business economics helps in establishing relationships between different
economic factors, such as income, profits, losses, and market structure. This helps
in guiding managers in effective decision making and running the organisation.