Business Economics Meaning and Scope
Business Economics Meaning and Scope: Business economics is a branch of applied economics that looks at the financial, organisational, market-related, and environmental concerns that businesses confront. Assessments of variables impacting organisations, such as corporate organisation, management, growth, and strategy, are based on economic theory and quantitative methodology. How and why firms grow, the effect of entrepreneurs, corporate contacts, and the role of governments in regulation are all possible topics for research.
As a result, business economics is a kind of applied economics. The study of human beings (e.g., customers, corporations) creating and consuming products and services in the face of resource scarcity is known as economics. Managerial or business economics is an applied discipline of economics concerned with structuring and distributing a company’s limited resources in order to accomplish its objectives.
Managerial economics, often known as business economics, is the application of economics to decision-making. As a result, business economics combines economic ideas with business practises. When presenting company challenges and answers, business managers use economic rules and concepts. As a result, business economics may be described as the application of economic analysis to a company’s business challenges. In the examination of management decision-making, it offers a connection between economic theory and decision sciences. Traditional economics and decision sciences are widely used.
Business managers make judgments and prepare for the future based on their previous knowledge and expertise. Decision-makers, on the other hand, are bound by the ‘uncertainty’ of the actual world, where changes occur in both hidden and open ways. Even if top-notch business economists are engaged, reliable decision-making is difficult in this evolving yet unpredictable environment.
Because of this uncertainty, predictions or estimates about a product’s volume of sales, cost of manufacture, profit, and so on are more likely to be inaccurate. To put it another way, company managers will have to anticipate changes in the face of uncertainty and a changing environment so that the effect of bad conditions is minimised. As a result, making business decisions is an art.
Business Economics as an Example
The discipline of business economics is home to a number of organisations. The National Organization for Business Economics (NABE) is the professional association for business economists in the United States. “To give leadership in the application and knowledge of economics,” the organization’s purpose states. The Society of Business Economists is the analogous organisation in the United Kingdom.
Business Economics’ Purpose
Business economics is a kind of applied microeconomics that is used to make decisions and plan for a company. Business economics has a broader scope since it applies the logic of several disciplines such as mathematics, statistics, marketing, and finance to address decision-making difficulties.
Demand analysis, estimate, and forecasting
The study of customer behaviour is fundamental to demand analysis. It entails comprehending how changes in other demand variables, including as the price of products, tastes and preferences, and income, affect consumer behaviour and preferences. Based on this demand research, every company concern determines its degree of output. They undertake market research and surveys to learn about customer preferences. Consumer behaviour in the market is forecasted by business economics, while the amount requested by customers is forecasted by the manufacturing department. It also entails making efficient resource allocations in order to satisfy customer needs.
As an example,
Assume that ABC Ltd. sold 500, 600, and 700 units of ‘X’ product in April, May, and June, respectively. So, assuming market circumstances stay same, we can readily predict demand for ‘X’ product for the month of July to be about 600 units.
Analysis of costs and output
Business economics is concerned with the numerous sorts of expenses connected with a company’s operations as well as the best level of production to fulfil the company’s objectives. The costs analysis helps the company to determine the behaviour of all expenses incurred in the organisation, resulting in cost minimization, while the output analysis enables the firm to enhance production by securing economies of scale, resulting in increased output. As a result, business economics is focused with cost reduction and production maximisation.
The following are some of the expenses that are defined in business economics:
- Costs of missed opportunities
- Costs, both implicit and explicit
- Expenses of replacement and historical costs
- Costs in the short and long term
- Costs are both fixed and variable.
- Costs that are both controlled and unpredictable
- Sunk expenses and incremental costs
- Costs such as total, average, and marginal costs, and so on.
Capital budgeting and capital management are two terms that are often used interchangeably.
Business economics aids the firm’s long-term choices, such as capital planning and fund management. Managers must make investment choices, such as where to invest and how much to invest, among other things. Various business economics theories provide guidance on how to assess these choices and distribute money. These theories also assist the company in evaluating its capital structure and efficiency. As a result, when a company has to make judgments about cash or financing, business economics may help.
The following are some of the approaches used in capital budgeting:
- Payback time with a discount
- the present worth of the future
- Index of profitability
- Internal rate of return, and so on.
Pricing policy and market structure
Through the research of market structure, business economics aids in determining the amount of market competition. It also allows the company to develop market strategies for market management in a variety of competitive conditions. This market study, on the other hand, aids corporations in developing price plans. It contains rules for determining price levels in various market scenarios.
Consider the following scenario:
Price skimming involves charging a high price at the start of a product to maximise profits before competition emerges and prices begin to rise, while penetration pricing involves charging a cheap price at the start of a product to undercut the competition and win market share.
Inventory control is important.
When it comes to inventory rules, business economics may assist. Inventory management is critical to the firm’s success. The business theories establish principles for reducing inventory expenses such as raw materials, work-in-progress, and completed items. As a result, corporate economics provides many approaches for maintaining an optimal inventory stock, such as ABC Analysis and economic order quantity models.
Consider the following scenario:
Keeping inventory in stock may be expensive for businesses that deal in perishable commodities with short-term demand, such as fashion items or calendars.
Profitability analysis
Every corporate entity’s primary goal is to maximise profits. However, it is also exposed to dangers and unpredictability. To meet the goals, it must be creative in its product development and marketing. Business economics is concerned with all aspects of profitability analysis, such as the break-even point. Profit theories allow a company to assess and manage profits in a variety of situations. It also aids in the forecasting of future earnings.
Analysis of risk and uncertainty
The business climate, as we all know, is unpredictable and dangerous. When the results of actions can’t be anticipated properly, uncertainty occurs, and risk is the possibility of loss when all potential outcomes and probabilities of events are unknown. Business economics provides expertise, insight, and caution to managers, allowing them to devise methods to reduce the likelihood of failing to accomplish organisational objectives.
Consider the following scenario:
Government bonds and securities are less risky investments since the returns are guaranteed, but new company or growth investments are riskier because the returns are unclear.
Resource distribution
In business economics, resource allocation refers to the scientific management of resources in the areas of production, distribution, exchange, and consumption. Economic theories describe the many techniques of resource distribution under various contexts.
Consider the following scenario:
The market mechanism governs the capitalist economy, while the forces of demand and supply govern the free economy. Furthermore, sophisticated methods such as linear programming and solver are used in business economics to determine the optimal allocation for the most efficient use of resources.
As a result, there is a relatively limited scope of Business Economics, which includes all of the issues that a management must deal with. Because these issues might be internal or external, business economics offers a variety of solutions.