Business Economics:

Business economics deals with economic theories and concepts in solving the
business problems. It is also known as Managerial Economics.
It provides tools and techniques to analyse and understand the complicated
business problems. It is useful in business decision making and forward planning
processes.
‘Decision making’ refers to selection one action from several alternatives.
‘Forward planning’ means preparing plans for the future.
According to Spencer and Seligman “Managerial economics is the integration of
economic theory with business practice for the purpose of facilitating decision
making and forward planning by management.
 According to Mc Nair and Meriam “ Business economics consists of the use of
economic modes thought to analyse business situations”.
Nature of Business economics:
1. It is micro economic in character:
Business economics is micro in character. Micro means the study of individual
aspects. It studies the problems of individual firms and the not the entire
economy.
2. It uses mostly the theory of firm:
It studies the various aspects of firm. It includes demand analysis and
forecasting, cost and production analysis etc.
3. It is pragmatic in nature:
It deals with only those economic theories which are useful in business decision
making. It avoids the dogmatic principles and abstract issues of economic theory.
It is interested in practical aspects.
4. It is normative economics:
It is normative economics dealing with decision making problems. It is
interested in practical aspects. That means, it is not descriptive but prescriptive.
5. Use of macro economics:
It uses macro economics in some business decisions. Economic policies of the
government relating to public finance, international trade, labour welfare, trade
cycles and national income are useful to managerial economics.
6. Uses modern tools:
It makes use of modern tools of mathematics, statistics and operation research
accounting, finance etc are used in decision making and forward planning.
7. Non economic consideration:
It gives importance to non economic factors like human and behavioral factors,
environmental forces and technology.
8. Profit Maximization:
It is not the main objective of business activities and they have to stress on
labour welfare activities, antipollution drives and charitable donations.
9. Differences:
It is different from other disciplines in the field of economics. It is mainly related
to business decision making.
10. Realistic in nature:
It is realistic in nature because it solves the problems of the firms in the real
world.
 Scope of Business Economics: ( Subject Matter)
1. Demand analysis and Forecasting:
It is very useful for business planning. A forecasting of demand is useful in the
preparation of demand schedules and employment of resources, prediction of
future sales.
Demand analysis identifies the factors influencing the demand for a firms
product. Hence, It helps to forecast the sales and to manipulate demand.
The main topics covered under this section are demand determinants, demand
distinctions and demand forecasting.
2. Cost and Production analysis:
An accurate cost and production analysis is necessary for profit planning, cost
control and sound pricing practices. Production analysis refers to the physical
quantity of production, whereas cost is expressed in monetary terms.
Cost and production analysis includes cost concepts and classifications, cost
output relationships, economies and diseconomies of scale, production functions
and cost control.
3. Pricing Decisions, Policies and Practices:
Accurate determination of price decides the future of a firm. It includes price
determination under different markets, pricing methods and policies, product line
pricing and price forecasting.
4. Profit management:
All business firms aim at maximum profits. Under the conditions of uncertainty,
profit planning is very necessary.
Important techniques used in profit planning are control of costs , proper
pricing policies, break even point analysis and alternative profit policies.
5. Capital Management:
Capital management means planning and control of capital expenditure. Capital
management involves three problems. They are
a. Accurate calculation of the profitability of capital investment
b. Choice of capital investments
c. Optimal allocation of capital.
Cost of capital, rate of returns and selection of projects are the main aspects
covered under capital management.
6. Linear programming and theory of games.
There is a trend towards integration of managerial economics and operation
research in recent years. Hence, techniques like linear programming, inventory
models, theory of games etc. considered as parts of managerial economics.
Significance of Business Economics:
1. Identifying various business problems:
Various companies face many problems, capital problem, labour problem,
pricing problems and other problems related to government controls and
restrictions. The business economist helps to identify various problems that are
uplifting a company, find out various reasons behind these problems.
2. Provides tools and techniques:
Business economics provides most of the concepts, tools and techniques
required by the businessman to analyse business problems. Business economics
covers various important concepts such as demand and supply analysis, short run
cost and long run cost and law of diminishing marginal utility. These concepts
support managers in identifying and analysing problems and finding solutions.
3. Answers the basic problems:
Business economics answers the five fundamental problems of decision making.
It helps the management in taking important business decisions regarding product
mix, best possible production technique, least cost input mix, the level of output
and price etc.
4. Supplies the data:
In order to solve the complex problems of decision making, business data are to be
collected and analysed in the light of business objectives. Business economics
supplies such data to the business economist.
5. Helps in forecasting:
Preparing a short-term forecast of general business activity is one of the main tasks
of the business executive. It helps in the tasks of production improvement, product
planning, sales promotion, inventory control, utilisation of manpower etc. Business
economics is a guide to the people engaged in business.
6. Guides the business economist:
Business economics makes a manager more competent model builder. It guides in
formulating and choosing alternative policies that may influence the course of
business events for the betterment of society.
Business Environment or Factors Determining Business
It refers to the totality of all factors which are external and beyond the control
of individual business enterprise and its management.
Business environment is the constraints within which the business has to
operate.
Business environment is decided by two factors. They are,
A. Economic factors
B. Non –economic factors
Economic Factors influencing business.
1. Economic system:
The economic system refers to economic relationship which arise in the
community from the organisation or mode of production and distribution. There
are 3 main economic systems. They are capitalist, socialist and mixed economic
system.
 In capitalist economy all the means of production and distribution are owned
and managed by the people or private sector. There is profit motive and complete
economic system.
In a socialist economy, the means of production and distribution are owned by
the society or by the government or public sector.
In mixed economy, the means of production and distribution are owned by both
the public sector and the private sector.
Thus, the economic system influences a great extent in the operation of a
business firm.
2. Economic Structure:
It refers to the various sectors of the economy. An economy is divided into three
sectors. They are, Primary sector which includes agriculture, fishing, forestry, etc.
Secondary sector includes manufacturing industries and small scale industries.
Service sector includes banking, transport, education, health facilities etc. Business
firms carry on transactions with all these sectors.
3. Government Interference:
Govt also influences economic environment through economic planning, fiscal
policy, budget, commercial policy, industrial policy, business laws etc. Generally
the aim of the govt is to encourage and develop business.
4. Monetary Policy:
The policy of the central bank of a country will also influence the level of
economic growth and development. They are useful to avoid business fluctuations
such as inflation, deflation as well as boom and depression conditions in the
economy.
5. Scarcity of Resources:
All the economies face the common problem of scarcity of resources. Optimum
allocation of scarce resources is the greatest problem faced by the economies. This
leads to problems like what to produce, how to produce, for whom to produce.
B. Non-Economic factors Influencing Business:
1. Political Factors:
The form of the government, political stability, foreign policy, legal rules,
image of the country or leaders are the political factors which influence on the
business.
2. Social Factors:
The extent of cooperation among the social groups, the caste structure, the
social beliefs, attitude towards life are the important social factors influencing the
business environment.
3. Educative Factors:
Business flourishes in a set up in which educated are the majority. Illiteracy
combined with ignorance resists any innovations and create unfavourable climate
for business.
4. Legal Environment:
It consists of the framework of various laws, rules and regulations which guide
and control the business operations. Business people must obey the laws, rules
etc, which have been imposed by the govt to protect the interest of workers,
consumers and the public.
5. Physical Environment:
It consists of ecology, natural resources, geographical factors etc. It has
become the responsibility of the business to take adequate measures for
maintenance of ecological balance.
6. Technical Environment:
Science and technology influences business environment rapidly. The advent of
computer, electronic data processing has changed the process of managerial
decision making.
Business Objectives:
A business is an economic institutions functioning within certain social, cultural
and political framework.
Business objectives are the purpose or the reasons for the survival of the
business in the society. Profit is the main objective of a business.
The objectives of business may be broadly classified as,
1. Economic objectives.
2. Non-Economic objectives.
Economic Objectives:
1. Profit Maximisation:
The primary objective of any business enterprise is to earn and maximise profit.
The success of a business firm is measured by the profit it earns. The survival of
business depend upon its ability to earn profit.
In recent years, instead of maximum profit, a firm aims at optimum or most
desirable amount of profits only.
2. Sales maximisation:
This objective has been stressed by Prof. Baumol. He has suggested sales revenue
maximisation as an alternative to the principle of profit maximisation. Sales
maximisation implies obtaining maximum amount of revenue from the increase sales of
the firm.
3. Maximisation of Growth rate:
The success of a firm is generally measured by the rate of growth and potential of
growth. The growth of a firm is financed either from retained earning or from market
borrowings or from both. Growth involves adding more products, diversifying into new
areas, increasing market share.
4. Survival:
A firm has to earn a certain minimum amount of profit for survival. A firm can
survive for a long period only if it earns the goodwill of the people by providing goods
and services of good quality.
5. Creation of Customers:
Creation of customers is an important economic objective of business. It is the
customers who give business to a firm. Customers are created only when an
enterprise supplies what they need.
6. Innovation:
Undertaking innovation as a business objective has been stressed by
J Schumpeter, “Innovation is the application of something new in business”. It
includes-production, creation of new markets etc.
B. Non-economic objectives:
These objectives are classified into Human objectives and Social objectives.
a) Human objectives:
These are the principles guiding relationship of the employer with employees
and customers. They are,
1. Giving equal treatment to the employees
2. Inducing the employees to acquire new knowledge and skills.
3. Developing a sense of commitment among the employees by creating the sense
of belongingness.
4. Developing good will among customers.
b) Social objectives:
Social objectives are related to social responsibilities of a business enterprise.
They are,
1. Creating an atmosphere to spread literacy, education, training facilities.
2. Efforts to maintain the ecological balance.
3. Helping the non-government organisations for the betterment of the human
beings.
4. Decentralising the business activities in order to attain balanced regional
development.
c) National objectives:
These are objectives to be framed by keeping in mind the national policies.
1. Entering into areas of production and distribution which have been assigned
national priorities.
2. Promoting exports and helping in import substitution efforts in order to attain
self sufficiency.
3. Reducing the imports in order to set right the problems in the balance of
payments positions.
4. Patronising small scale and village industries to make the village economy
stronger.
 Economic Laws:
The economic laws are the statements which explain the cause and effect
relationship of economic phenomenon.
In other words, it refers to the statements which shows the casual relationship
between the set of phenomenon related to the problem of formulation of human
choices. Example: law of demand, law of supply, law of diminishing marginal
utility etc.
Nature of economic laws:
1. Economic laws are statement of causes and effect relationship.
Every cause has a tendency to produce some definite results. The law of gravity
in physics says that thing falls to ground as a result of gravitational force.
In economics also the law of demand says that, other things remaining the
same, the price of a commodity raises, its quantity demanded falls, Thus, the
nature of economic law is the same as that any other scientific law.
2. Economic law are relative:
Economics law neither universal nor permanent. They change from time to time
and place to place. But scientific laws universal and permanent. The laws of
economics which are valid in developed countries may not be valid in
underdeveloped countries.
3. Economic law are subjective in nature:
The proper working of the economic laws depends upon the human psychology
because economics deals with man and his behavior in society.
4. Economics laws are hypothecial in nature:
The validity of economics laws depends on the fulfillments of certain conditions.
These conditions are called assumptions like rational behavior, ceteris paribus &
perfect competition.
5. Economics laws are less exact than the laws of physical science:
Physical science are laboratory science. Experiments are possible in laboratories.
They deals with measurable factors. Hence, these laws are exact laws.
Economic laws deals with human behavior, cannot achieve hundred percent
exactness.
6. Economics laws are more exact than the laws of other social sciences:
Economics is more scientific than any other social science. Most of the economic
variables can be measured with the use of money, but such measurement is not
possible in other social sciences.
7. Economics laws are not compulsory:
Economics laws are not compulsory like legal laws. There is no punishment in the
case of violation. For example people are forced to buy larger quantities of
commodity even when the prices raise.