Scope and importance of Business Economics: Business Economics-I

Scope and Importance of Business Economics

Introduction and Meaning of Business Economics

• Business Economics is also known as Managerial Economics. It involves the applying of economic theory and practice into the business. In business, decision-making is essential. Decision-making is a process of choosing the best course of action out of available alternatives.
• Business economics is a branch of economics that deals with business firms, management, expansion, and strategy. The primary objective of business economics is a business enterprise or a firm to produce goods and services for the market to earn profits.
• Thus business economics is a link between economic theory and decision-making in the context of business. Following are few definitions of Business Economics

Henry and Hayne:
“Business Economics is economics applied in decision making. It is a special branch of economics. That bridges the gap between abstract theory and managerial practice.”

Salvatore:
“Business Economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organization can achieve its objectives most effectively.”

What is the scope of business economics?

1. Market demand and supply: The study of market demand and supply help the procedure to determine the price of goods and services because the existence, growth, and future of a business or firm depend on what price the market determines for its product. Thus a business firm must study business economics. In economics, both demand and supply are the key factors by which the market economy functions.
2. Production and Cost Analysis:  Production analysis helps to understand the process of production and to make optimum utilization of available resources. Cost analysis helps the firm to identify various costs and plan the budget accordingly. Both production and cost analysis will help the firm to maximize profit. So a business organization tries to make optimum use of available resources to maximize production that is Output and minimize the cost.
3. Cost and profit analysis: The cost function helps the business firm used to decide the optimum utilization of available resources. Business economics used concepts of opportunity cost and absolute cost to determine economic profits.
4. Market Structure and Pricing Techniques: The study of markets like perfect completion, monopoly, oligopoly, monopolistic market, etc. is very significant for producers. It is very crucial for managers or producers to identify the type of market for their products. Knowledge of markets and competition will help the producer or managers to make a better decision about the pricing of the product, marketing strategies, etc. that help the firm to make a profit.
5. Forecasting and coverage of risk and uncertainty: Knowledge of business economics helps the manager or producer to forecast the future. Demand forecasting means the estimation of demand for the product for a future period. Demand forecasting allows the organization to take several decisions in business, like planning about the production process, purchasing raw materials, managing funds in the business, and determining the price of the commodity. Moreover forecasting the future helps the firm to take important decisions and cover risk and uncertainty correlated with those decisions.
6. Inventory Management: The theory of business economics will help the producer to reduce costs correlated with maintenance of inventory like raw materials, finished goods, etc.
7. Capital Budgeting: Capital budgeting or investment appraisal is used by firms or businesses for estimating and evaluating possible expenses or investments. It is a process of planning expenditure that involves current expenditure on fixed/durable assets in return for the estimated flow of benefits in the long run. Investment appraisal is the procedure that involves planning for determining whether a firm’s long-term investments like heavy machinery, new plant, research, and development projects are worth the funding or not. Knowledge of business economics helps the producer to take appropriate investment decisions with the help of capital budgeting.

IMPORTANCE OF BUSINESS ECONOMICS

1. Knowledge of business economics helps business organizations to take important decisions as it deals with the use of economics in a real-life situation.
2. It helps managers or owners of the firm to outline policies fitting for their firm or business.
3. Business economics is useful in planning the future course of action.
4. It helps to control cost and monitor profit by doing a cost-benefit analysis.
5. It helps in forecasting the future for taking vital decisions in present.
6. It helps to set suited prices for different products by using available pricing techniques.
7. It helps to examine the effects of different government policies on business and take a proper decision.
8. It helps to the measured efficiency of firms by using various economic tools

BASIC TOOLS IN BUSINESS ECONOMICS

Opportunity cost:

1. Opportunity loss is nothing but opportunity cost. If you decide to attend the lecture, then you have to sacrifice time that you could have spent otherwise.
2. Opportunity cost is an economic term that refers to the value of what you have to give up to choose something else.
3. Individuals face Trade-offs (two opposing situations) in day-to-day life. It is a different situation where people have to make a decision or make choices among available alternatives. The moment selection takes place, the counterpart becomes opportunity cost.
4. If you plant potatoes in your field, you must forego the chance of planting another crop because your resources are limited. Opportunity cost plays a very important role in decision-making.

Marginalism:

1. Rational decision-makers will always think in terms of marginal quantities. One should compare the cost of additional chocolate with the benefits of extra chocolate to decide whether to have it or not.
2. If the additional revenue that the producer is going to get by producing one more car is greater than the cost of producing the extra car, only then the seller will produce an extra car.
3. For example, an additional car sells for Rs. 10 lacks while it costs only Rs. 8 lakhs to produce the additional car. A rational producer will decide to produce the car because he will make a profit of Rs. 2 lakhs per car.
4. On the other hand, if the price of a car falls to Rs.7 lakhs while the cost of producing it remains Rs. 8 lakh, it will not make sense to produce the additional car since the cost surpasses the revenue to be earned from it.
5. The cost of producing the extra car is called marginal cost while the revenue obtained from selling an extra car is called marginal revenue. If marginal revenue exceeds marginal cost, it makes sense to produce the extra car. If the marginal revenue is less than the marginal cost, it not advisable to produce the extra car.

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Reference infoendless, Mumbai University books (IDOL)