Business economics is a branch of applied economics. It studies organizational, financial, market related and environmental issues faced by corporations. Thus, the scope of business economics is vast. It is known that a firm can face internal as well as external issues. Due to this, various economic theories are applicable to each business. Microeconomics help a firm with operational or internal issues, while macroeconomics helps with environmental or external issues. As business economics is such an important aspect of the business, knowing the meaning and nature of it is also very important. In this article, you will find the detailed scope of business economics along with the meaning and nature.
Business economics addresses various economic principles, strategies, the acquisition of necessary capital, profit generation, standard business practices, the efficiency of production, and overall management strategy. It also includes the study of external economic factors and their influence on business decisions. Some of these factors are, change in industry regulation or a sudden price shift in raw materials. Business economics is defined as the intention of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. In simpler terms, we can say that business economics is the integration of economic theory with business practice.
Nature of Business Economics
It is very important to understand the nature of business economics to understand its scope. So let us quickly have a look at nature.
- Business economics is a science
- Based on microeconomics
- Incorporates elements of macro analysis
- Business economics is an art
- Use of the theory of markets and private enterprises
- Pragmatic in approach
- Interdisciplinary in nature
- Normative in nature
Scope of Business Economics
The scope of business economics can be divided into two. These are two categories of business issues to which economic theories can be applied. They are:
- Microeconomics applied to internal or operational issues
- Macroeconomics applied to external or environmental issues
So now let discuss the scope of business economics under these heads
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1. Microeconomics applied to internal or operational issues
As the name suggests, it is within the scope of business economics to analyze the issues that arise within a firm and within the control of the management. There are various factors involved in this like choice of business, size of the business, product designs, pricing, promotion for sales, technology choice. Most issues can be solved by applying the following microeconomics theories.
i. Analyzing demand and forecasting
To analyze demand is to understand buyer behaviour. Business economists study the preferences of consumers with respect to changes in determinants of demand. These determinants include the cost of the product, consumer income, taste, preference, etc. Forecasting demand is a process used to determine the future demand of a good or service. This prediction is based on past behaviour of factors that affect demand. This is important for firms as the prediction helps them produce enough quantities of the goods at the right them. It also gives them time to allocate resources and arrange for various factors of production in advance like labour, raw materials, equipment, etc.
ii. Production and cost analysis
A business economist has responsibilities towards production. They are
- Decide on the optimum size of output based on the objectives of the firm
- Ensure that the firm does not incur any undue costs
Production analysis helps the firm choose the right technology that offers a technically efficient way of producing output. Cost analysis enables the firm to identify the behaviour of costs when factors like time period, output, and size of plant change. By using both these analyses, an organization can maximize profits by producing optimum output at the least cost possible.
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iii. Inventory management
Firms can reduce costs that are associated with maintaining inventory in the form of raw materials, work in process and finished goods. It is important to understand that inventory policies affect the profit of a firm. For this reason, economists use various methods like mathematical models and ABC analysis to aid the firm to maintain optimum stock.
iv. Market structure and pricing policies
Knowing and understanding the extent of competition in the market falls under the scope of business economics. It involves the study of the market structure. This helps the firms determine prices for various products and services. This information also aids the organization to form strategies to sustain in any given competitive condition. Price theories help the firm understand how prices are determined under various market conditions. This helps them create pricing policies for the firm.
v. Resource allocation
The scope of business economics includes using advanced tools like linear programming to create the best course of action for optimal utilization of available resources.
vi. Theory of capital and investment decisions
As important as every decision in an organization is, so is an investment decision. Careful assessment and evaluation of investment should be done to allocate its capital sensibly. There are various theories relating to capital and investment that offer scientific criteria for choosing investment projects. They also help the firm to assess the efficiency of capital. A decision-making process for investment is put into use when the firm has to decide between competing uses of fund.
vii. Profit analysis
Profit depends on a lot of factors like changing prices, market conditions, etc. Theories pertaining to profit helps firms to measure and manage profit under uncertain conditions. They also help to plan future profits.
viii. Risk and uncertainty analysis
Most businesses operate under a lot of risk and uncertainty. Also, analyzing these risks and uncertainties can help organizations in making efficient decisions and formulating plans.
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2. Microeconomics applied to environmental issues
It is within the scope of business economics to analyze external factors that affect businesses. These external or environmental factors have a great impact on the performance of a business. Some of the major macroeconomic factors are
- Type of economic system
- Stage of the business cycle
- General trends in national income, employment, prices, saving, and investment.
- Government’s economic policies
- Performance of the financial sector and capital market
- Socio-economic organizations
- The social and political environment
A business and its management have no control over these factors. Therefore it is important that an organization forms its policies in a flexible manner to minimize the adverse effects of these external factors.
Hope the scope of business economics is clear to you now. To know the scope of other subjects and fields of study, comment in the section below. If you like this content, make sure to visit our page regularly and also subscribe to our youtube channel.