Q.1 What is the nature and scope of Business Economics?

Ans. Business Economics is comparatively a new discipline. It is a special branch of Economics applied in business
decision making. Business Economics means the application of economic theory to the problem of management. It
is primarily concerned with the applicability of economic concepts and analysis to decision making in business

The perspective of business economics is quite different from that of conventional microeconomics, in studying
decisions.

Business economics or what is also known as managerial economics is concerned with the application of economic
theory and methods to the analysis of decision making problem faced by business firms. The first and most
important problem faced by a business firm is the selection of a product to be produced or service to be provided.
The second important problem dealt with in business economics is to decide about price and output of the product
so as to maximize profits or to attain some other desired goal. The decision regarding price and output requires
careful analysis of the demand for a product and costs of its production. The other important decision-making
problem that business firms face relate to what methods or techniques of production are to be used in the
production of commodities, and how much advertisement expenditure is to be incurred for promoting the sales of
a product.

Nature and characteristics of Managerial Economics:

1) Microeconomics: It studies the problems and principles of an individual business firm or an individual industry. It
aids the management in forecasting and evaluating the trends of the market.

2) Normative economics: It is concerned with varied corrective measures that a management undertakes under
various circumstances. It deals with goal determination, goal development and achievement of these goals. Future
planning, policy-making, decision-making and optimal utilization of available resources, come under the banner of
managerial economics.

3) Pragmatic: Managerial economics is pragmatic. In pure micro-economic theory, analysis is performed, based on
certain exceptions, which are far from reality.

4) Uses theory of firm: Managerial economics employs economic concepts and principles, which are known as the
theory of Firm or 'Economics of the Firm'. Thus, its scope is narrower than that of pure economic theory.

5) Takes the help of macroeconomics: Managerial economics incorporates certain aspects of macroeconomic
theory. Knowledge of macroeconomic issues such as business cycles, taxation policies, industrial policy of the
government, price and distribution policies, wage policies and antimonopoly policies and so on, is integral to the
successful functioning of a business enterprise.

6) Aims at helping the management: Managerial economics aims at supporting the management in taking
corrective decisions and charting plans and policies for future.

7) A scientific art: Science is a system of rules and principles engendered for attaining given ends. Scientific
methods have been credited as the optimal path to achieving one's goals. Managerial economics has been also
called a scientific art because it helps the management in the best and efficient utilization of scarce economic
resources.

8) Prescriptive rather than descriptive: Managerial economics is a normative and applied discipline. It suggests the
application of economic principles with regard to policy formulation, decision-making and future planning. It not
only describes the goals of an organization but also prescribes the means of achieving these goals.
Scope of Managerial Economics

The scope of Managerial Economics is so wide that it embraces almost all the problems and areas of the manager
and the firm. It deals with demand analysis and forecasting, resource allocation, production function, cost analysis,
inventory management, advertising, price system, capital budgeting etc. However, the scope of managerial
economics may be discussed under following points:

a) Demand analysis and forecasting: Demand forecasting is the process of finding the values for demand in future
time period. The current values are needed to make optimal current pricing and promotional policies, while future
values are necessary for planning future production inventories, new product development etc. Correct estimates of
demand are essential for decision making, strengthening market position and enlarging profits.

b) Cost and Production Analysis: Production deals with the physical aspects of the business investment. It is the
process whereby inputs are transformed into outputs. Efficiency of production depends on ratio in which various
inputs are employed absolute level of each input and productivity of each input. A production function is the
relation which gives us the technically efficient way of producing the output given the inputs. The firm must
undertake cost estimation and forecasting to judge the optimality of present output levels and assess the optimal
level of production in future.

c) Inventory Management: It refers to stock of raw materials which a firm keep. If it is high, capital is
unproductively tide up which might, if stock of inventory is reduced, be used for other productive purpose. On the
other hand, if the level of inventory is low, production will be hampered. Hence, managerial economics with
methods such as ABC analysis a simple simulation exercise and some mathematical models with a view to minimize
inventory cost.

d) Advertising: Managerial economics helps in determining the total advertising cost and budget, the measuring of
economic effects of advertising and form an integral part of decision making and forward planning.

e) Market Structure and Pricing Policies: Managerial economics helps to clear surplus and excess demand to bring
market equilibrium as there is continuous changes in market. Success of business firm depends on correctness of
price decisions. Price theory works according to the nature of the market depending on the number of sellers,
demand conditions etc.

f) Resource Allocation: Managerial economics with the help of advanced tools such as linear programming is
used to arrive at the best course of action for the maximum use of the available resources and its substitutes.

g) Capital Budgeting: Capital is scarce and it costs something. Hence, managerial economics helps in decision
making and forward planning on allocation of capital to various factors of productions, marketing and management.

h) Investment Analysis: It involves planning and control capital expenditure. Whether or not to invest funds in
purchase of assets or other resources in an attempt to make profit and how to choose among completing uses of
funds. Managerial economics help in analysis and decision making on the investment of funds.

i) Risk and Uncertainty Analysis: As business firm have to operate under conditions of risk and uncertainty both
decision making and forward planning becomes difficult. Hence managerial economics helps the business firm in
decision making and formulating plans on the basis of past data, current information and future prediction.
Q2. Discuss the importance or relevancies of Managerial economics in business decision?
Decision making in Business
An enlightened business management will take scientific decisions after through study of Pros and Cons of a
particular decision. The quality of the decision made by the management determines the successes or failure of the
business venture. Decision making is the process of selecting particular course of action from among various
alternatives. Every business manager has to work on uncertainties and the future cannot be precisely predicted by
anyone.

Each type of decision of primary concern to business economics has many manifestations.

1. Selection of Products
The product decision may range from the launching of a major innovation following a long period of research. It
may be a decision that is rare made such as the changing of the formula of an established soft drink. It may be made
by a new firm or any established firm through a merger, or by building a new plant.

2. The choice of Production Methods

When highly generalized, the choice is the selection of the cost minimizing combination of labour and capital,
necessary to produce a particular output and is dependent on the state of technology and the relative prices of the
factors.

3. Promotional Strategy
As long as the assumption of given tastes and preferences of consumers made, economic analysis has no place for a
consideration of promotional expenditure.
With the relaxation of this assumption, promotion, defined as expenditure by the firms to shift demand curves, may
become important Advertising expenditures involving such media as television, radio, magazines, newspapers and
signboards, have run in the range of three percent to four percent of total consumption expenditures.

4. The Determination of Prices and Quantities

Price and quantity can be viewed as two aspects of the same decision. For firms with sufficient market power to
have some discretion over price, the quantity that can be sold will be determined by the price charged. When firms
have to formulate price policies, a close relationship is likely to exist with product and promotional decisions

5. The Place or Location Decisions

The importance of the decision and the applicability of economic analysis with the spatial dimension added as it has
been in location transpiration, regional and international economics, justify treating the place decision as the fifth
type of decision with which business economics is primarily concerned.
All these decisions are closely inter-related.