BUSINESS ECONOMICS

What is Economics???
 Economics as a subject deals with how people earn and spend their income
to maximize their economic gains. It is concerned with the study of
economic activities of various individuals and the society.

 “Economics is the science of making decisions in the presence of scarce

resources”

 Economics deals with economic problems of the individuals business units,

society and that of the globe. An economic problem arises on account of the
following reasons:
1.Unlimited wants
2.Limited resources
3.Alternative use of resources
4.Problem of choices
Economics is a logic of choice. It teaches
the art of rational decision making in
economizing behavior to deal with the
problem of scarcity.
 Economics & Managerial/Business Economics

Economics may be defined as a branch of knowledge dealing with

allocation of scarce resources among competing ends.

Managerial Economics also referred to as Business Economics may be

defined as application of economics for problem solving at the corporate
level.

The problems relate to choices & allocation of resources which are

basically economic in nature & are faced by managers all the time.

The focus on managerial economics lies in identifying & solving

problems faced by a manager in a given enterprise situation & not merely
on explaining his behavior or the arising about firm level phenomena.
 What is Business Economics all about???

 Economics as a discipline provides a set of concepts and precepts.

 This furnish us the tools and techniques of analysis.

 Economic analysis is used as an aid to understand business practices

and business environment.

 Such understanding facilitates rational business decision making.

 Business Economics/ Managerial Economics

Business Economics (Managerial Economics) is the integration

of economic theory with business practice.

It is a science deals with the application of economics concepts

to business problems in order to solve business and managerial
problems and take sound business decisions.

The need to make such decisions leads to the development of

alternative "strategies" (methods).
Application of economic theory and methodology to business
for optimality (optimum use of scarce resource to have optimum
output or profit)

The question of choice arises because the basic resources such

as capital, land, labor and management are limited and can be
employed in alternative uses.

The decision- making function thus becomes one of making

choice and taking decisions that will provide the most efficient
means of attaining a desired end, say, profit maximization.
The primary task of managerial economics is to fit relevant
data into the framework of logical analysis for enabling
decision.

Eg.A decision based on a linear programming approach or a

pricing decision based on a model approach
 Definitions of Managerial/Business Economics
Managerial economics is concerned with the application of economic concepts
and economics to the problems of formulating rational decision making.
-Mansfield

Managerial economics is concerned with the application of economic

principles and methodologies to the decision-making process within the firm or
organization. It seeks to establish rules and principles to facilitate the
attainment of the desired economic goals of management.
-Douglas

Managerial economics applies the principles and methods of economics to

analyze problems faced by the management of a business, or other types of
organizations and to help find solutions that advance the best interests of such
organization.
-Davis and Chang
 Difference Between Economics and Business Economics

ECONOMICS BUSINESS ECONOMICS

Economics is a traditional subject that has prevailed Business economics is a modern concept and is still
from a long time. developing.

Economics mainly covers theoretical aspects. Business economics covers practical aspects.

In economics, the problems of individuals and In Business economics, the main area of study is the
societies are studied. problems of organizations.

In economics, only economic factors are In business economic, both economic and non-
considered. economic factors are considered.

Both microeconomics and macroeconomics fall Only microeconomics falls under the scope of
under the scope of economics. business economics.

Economics has a wider scope and covers the Business economics is a part of economics and is
economic issues of nations. limited to the economic problems of organisations
 Characteristics/ Features Of Business Economics

• New discipline and of recent origin

• It is a highly specialized and separate branch of economics.

• Art and science- It is both an art and science.

 Multidisciplinary -Makes use of mathematics, statistics, operations

research

 Micro in nature: Unit of study is individual firm and not the

problems of the entire economy.
 Normative science and Prescriptive science: It tells what aim and
goal firm should have and How to achieve it best possible way.

 Pragmatic/ Applies/ Business Economics: Economic theory more

of application oriented.

 Uses macroeconomics: Macroeconomics provides an intelligent

understanding of the environment in which the business operates.

 Management oriented: The main aim of managerial economics is

to help the management in taking correct decisions and preparing
plans and policies for the future.
 Objectives Of Business Economics
1.To integrate economic theory with business practice and solve
business problems.

2.To employ most modern instruments and tools to find solutions to

business problems.

3.To make optimum use of scarce resources of a firm.

4.To help in making overall development of a firm.

5.To help the manager to understand the intricacies of business

problems and to make right decision at the right time
 Scope of Business Economics

The scope of business economics is quite wide. Business economics

involves the application of various economic tools, theories, and
methodologies for analyzing solving different business problems.

There are two categories of business issues to which economic theories

can be directly applied, namely:
1. Microeconomics applied to internal or operational issues
2. Macroeconomics applied to external or environmental issues
 Micro and Macro Economics
 Prof. Ragnar Frisch coined these two terms in economics These two terms
are derived from Greek words MIKROS meaning small and MAKROS
means large.

 Micro Economics- Micro economics is that branch of economics that deals

with the study of the behavior and action and operational issues of only
individual economic unit in detail that fall within the purview and control of
the management.

 A few examples of business decisions can include the type of business, size,
prototype design, cost determination, promotional techniques, infrastructure,
etc. A lot of these decisions require the decision-makers to use the following
theories of Business Economics to come to a unified understanding.
Few Operational Issues ( Application of Micro Economics)
Choice of business and nature of product, i.e., what to
produce
Choice of the size of the firm, i.e., how much to produce
Choice of technology, i.e., choosing the factor
combination
Choice of price, i.e., how to price the commodity
How to promote sales, i.e., sales promotion measures
How to face price competition
How to decide on new investment
How to manage profit and capital
How to manage inventory, i.e., stock of both finished
goods and raw material
 Scope of Business Economics (Micro Economics)

1. Demand Analysis and Forecasting

2. Cost Analysis
3. Production and Supply Analysis
4. Pricing Decisions, Policies and Practices
5. Profit Management, and
6. Capital Management
Macro Economics: applied to external issues
Macro economics is that branch of economics which deals with the
study of aggregate or average behavior of the entire economy .

As environmental factors have significant influence upon the

functioning and performance of the business. Since these factors are
beyond the control of the firm's management, they must understand
their impact to reduce losses.

Eg:- Total employment, unemployment, national input, national output,

total consumption, aggregate supply, demand, general price level etc.

It is also known as the theory of income and employment.

 Concerned with problem of unemployment, economic fluctuation,

inflation, instability, stagnation, international trade, economic growth.
 Scope of Business Economics (Macro Economics)

1. Understanding of working of the economy

2.Economic policies
3.General unemployment
4.National Income
5.Economic growth
6.Monetary problem
7. Business cycles
 Importance of Business Economics

Business economics plays an important role in decision making in

an organization. Decision making is a process of selecting the best
course of action from the available alternatives.
 Business economics covers various important concepts such as
Demand and Supply analysis; Short run cost and Long run costs; and Law of
Diminishing Marginal Utility.

 It support managers in identifying and analyzing problems and finding solutions.

 These concepts helps managers to identify and analyze various internal and
external business factors and their impact on the functioning of the organization.

 Business economics helps managers in framing various policies, such as pricing

policies and cost policies, on the basis of economic study and findings.

 By studying various economic variables, organizations' can predict the future.

 It helps in establishing relationships between different economic factors, such as

income, profits, losses, and market structure. This helps in guiding managers in
effective decision making and running the organization.
 Role of Business Economist

1. To act as a thinker and act as economic advisor to the firm.

2. To identify various business problems; their causes and suggest
remedial measures.
3. To provide a quantitative base for decision making and forward
planning.
4. To carry out cost benefit analysis.
5. To synthesize various policies and conduct statistical analysis.
6. To have complete information about the environment factors.
7. To conduct research on industrial market and respond to the dynamic
changes taking place in market situation.
8. To take decision related to – price ,investments, goods
9. To transforms business into a profitable one.
 Functions of a Business Economist

Two important functions of a business economist are:

 Decision making
 Forward Planning

1. Decision making is essentially a process of selecting the best

out of many alternative opportunities that are open to
management. It is a management function and part of business
activity.

2. Forward planning refers to planning in advance for the future

that is deciding future course of action of a firm.