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MODULE:1
INTRODUCTION
Meaning:
Business Economics also called Managerial Economics, is the application of
economic theory and methodology to business. Business involves decision-
making. Decision-making means the process of selecting one out of two or more
alternative courses of action.
Definition:
Spencer and Siegelman, “Business economics is the integration of economic
theory with business practice for the purpose of facilitating decision making and
forward planning by management”.
Douglas, “Business 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”.
Characteristics of Business Economics:
Microeconomic in Nature
Business economics is microeconomic in nature: As the unit of study in business
economics is a business firm so the various problems of a business firm, are
studied in it, so we can say that business economics is microeconomic in nature.
Applied Concept
Business economics is not descriptive economics, this is an applied concept. It
bridges the gap between economic principles and practical aspects, various types
of rules are propounded in it and various variables are determined, and the
decision is taken regarding the relationship observed between various variables.
Theory of the Firm
Business economics largely used that body of economic concepts and principles
which is known as the theory of the firm. In addition, it also seeks to apply profit
theory, which forms part of distribution theory in economics.
Normative Science
As discussed in 1.3, economics is a positive as well as a normative science. In
business economics, majorly normative aspects of theories are studied. What
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Department Of Commerce
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ought to be is the basis of various business decisions. The law of demand studies
the inverse relationship between the price of a commodity and its quantity
demanded.
Business economics studies the good or bad effects of the operation of the law of
demand for a business firm.
Helpful in Future Planning
Business economics help business managers in decision-making & future
planning with regard to demand, sales, cost and profit. Like various techniques
of demand forecasting and scale of operations and resources to be employed are
used for future perspective demand.
It represents the quantitative picture before a business manager so that he can
select the best alternative among the various alternatives available.
Coordinating in Nature
Business economics establishes coordination between economic principles and
their practical aspects and it also widens the way of the success of the business,
as it is dependent on theoretical as well as practical aspects. Hence, business
economics is of coordinating in nature.
Science as well Art
Business economics is a science as well as an art. Cause effect relation and
systematic knowledge of the subject make it a science while the practical use of
various theories; principles and laws make it an art.
Multidisciplinary
Business economics is multidisciplinary. Business economics is related to various
subjects like statistics, psychology, sociology, mathematics, functional research,
management, accounting and advance planning etc. In this regard, Prof. D.C.
Hague has said that business economics is related to the application of the logic
of mathematics and statistics.
So that it may provide an effective way for thoughts relating to problems of
business decisions.
Macroeconomics is also useful to Business Economics
As business economics provides an understanding of the environment of the
economy. Business economist has to scientifically analyze various macro
elements (like trade cycles, national income, accounting, foreign trade policy,
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price policy, labour policy, monetary policy, fiscal policy, etc.) and adjust the
decisions of the firm with this element.
Helpful in Managerial Decisions
Business economics helps corporate managers in various types of decision-
making. Managers have to make decisions regarding the combination and
employment of various factors of production and the scale of production in order
to maximize the output at the minimum cost.
Thus, business economics helps corporate managers in making correct and
suitable decisions in order to attain the basic objectives of such corporate bodies.

Scope of Business Economics

1. Demand Analysis and Forecasting
The foremost aspect regarding scope is demand analysis and forecasting. A
business firm is an economic unit that transforms productive resources into
saleable goods. Since all output is meant to be sold, accurate estimates of demand
help a firm in minimizing its costs of production and storage.
A firm must decide its total output before preparing its production schedule and
deciding on the resources (land, labour, capital and technology) to be employed.
Demand forecasts serve as a guide to the management for maintaining its market
share in competition with its rivals, thereby securing its profit.
This process is important for an organisation to analyse the demand for its
products and produce accordingly. In business economics, demand forecasting
occupies an important place by helping organisations in business planning and
deciding on strategic issues.
2. Cost and Production Analysis
A firm’s profitability depends much on its costs of production. A wise manager
would prepare cost estimates for a range of output and identify the factors that
cause deviations in cost (increase or decrease). Once the factors are known, it can
be possible to determine the optimum level of output where the cost of production
would be minimum.
Production processes are under the charge of engineers but the business manager
works to carry out the production function analysis in order to avoid wastage of

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Department Of Commerce
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materials and time. Sound pricing policies(determining selling price) depend

much on cost control.
The main topics discussed under cost and production analysis are Cost concepts,
cost-output relationships, Economies and Diseconomies of scale and cost control.
3. Pricing Decisions, Policies, and Practices
Pricing is one of the key areas of business economics. It is a process of finding
the value of a product or service that an organisation receives in exchange for its
product/service. The profit of an organisation depends a great deal on its pricing
strategies and policies.
Business economics includes various pricing-related concepts, such as pricing
methods, product-line pricing, and price forecasting. Another task before a
business economist is the pricing of a product.
Since a firm’s income and profit depend mainly on the price of the product, the
pricing policies and all such decisions are to be taken after careful analysis of the
nature of the market in which the firm operates. The important topics covered in
this field of study are Market Structure Analysis, Pricing Practices and Price
Forecasting.
4. Profit Maximisation
Profit generation and maximisation is the main aim of every organisation (except
for non-profit organisations). In order to maximise profit, organisations need to
have complete knowledge about various economic concepts, such as profit
policies and techniques, and break-even analysis.
5. Capital Management
Organisations often find it difficult to make decisions related to
capital investment. These decisions require sound knowledge and expertise in
various economic aspects. To make sound capital investment decisions, an
organisation needs to determine various aspects, such as cost of capital and rate
of return.
6. Effective Utilization of Business Resources
It also studies how well resources can be put to the best possible use. Various
tools and techniques are used to determine least-cost- maximum profit
combinations. Methods such as linear programming, and networking analysis are
used in determining the optimal levels of performance.

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Department Of Commerce
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7. Effective Use of Economic Policies for Business Development

Business economics is micro in character but it is always influenced by macro
factors. For example, an individual firm’s idea (microeconomic) of
manufacturing plastic bags may be affected by the ban on plastic by the
government (macroeconomic). Thus economic policies (macro) have to be
carefully studied in order to make proper business decisions.
Sometimes economic policies of government also create a favourable
environment for business units. For instance, the Make In India initiative has
motivated banks to give more loans to fund seeking companies.

Nature of Business Economics

1. Business Economics is a Science
We know that science is a systematic body of knowledge and proof. On the other
hand, business economics is also a science because the Principles and theory of
business economics are proven. This is applicable to all levels of Organization
and the theory of demand, theory of price, theory of profit, and theory of capital
is also proved, So we can say that business economics is science.
2. Business Economic is an Art
Business Economics is an art because art is the application of skills that can use
for the purpose of getting some relevant information and the other, In business
economics theory is implemented in Practice way in business economics
managerial skills is implemented. So Business Economics is an art.
3. Administrations of Organization
Business Economics for the administration of organization because
administration gives the relevant data. They find out the problem and solve the
problem immediately in an organisation and the admin decides the target on the
basis of price, quality of the products, and Demand for the product.
Administration forecast the demand according to the situation of present demand
of the market.
4. Helpful in Optimum Resources Allocation
In the organization are limited resources and these resources can be used in
several places at a time with the tools and techniques of business economics. The
resources will be used to get optimum output. In organisations, our ultimate
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Department Of Commerce
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objective is to earn profit so the limited resources are used in such a way to get
maximum profit resources are limited.
Our resources in human and non-human resources. Human resources mean
labour, employees, and Non-human resources which means land, building,
machine, raw materials Etc.

5. Component of Micro Economic

Business economics has a component of Microeconomics. a. It is related to the
internal factors of the organization. The internal factor of the organisations is the
demand for the products, purchasing the raw materials, and How to use the
resource to get maximum profits. These are related to the micro-component of
business economics.
6. Components of Macroeconomic
Managerial economics has a component of macroeconomics which is related to
the outside of the organisation or an external factor of the organisation.
External factors of the organisation are competition market, nature of business,
Government rules and regulations, industrial law, Industrial Policies, and Taxes
these are the External factor of the organisation and these types of problems are
solved by business economics.
7. Dynamic in Nature
Business economics is dynamic in nature which means business economics has
used all spaces of the organisation and all except the organisation. By the tools
and techniques of managerial economics to give the relevant information and
solve the problem of the organisations So, Managerial economics is dynamic in
nature.

Importance of Business Economics

1. Reducing Uncertainties and Risks
Generally, business managers work in an environment of uncertainties and risks.
Future demand, price, cost, capital and profit are the variables about which future
forecasting are made through business economics and on the basis of such
conclusions business managers minimize their risk and uncertainties.

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Department Of Commerce
Vijayanagar College, Hosapete.
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2. Planning and Decision Making

Business economics helps the business managers in making future plans and
decisions making in respect of increasing the production, reducing the cost,
reducing or increasing the price of the commodities, raising funds from internal
and external sources, etc.
3. Organization
A business manager knows on the basis of the study of business economics what,
how, how much, for whom, when and which type of objective is to be achieved.
On the basis of such knowledge, he prepares and frames an efficient business
organization structure to attain the various objectives.
4. Formulating Business Policies
The foremost objective of every business firm is to maximize value. For doing
that, various alternative policies are formulated in respect of planning
and controlling, communication, wage determination and suitable returns to the
investors, for the purpose of business management. For all these, business
economics is of specific importance.
5. Cost Control
Business economics helps business managers to control organizational processes
like cost control, price control, quality control and inventory control etc. As we
know there is a difference between various concepts of cost in accountancy and
economics. Business economics uses all these concepts for managerial decisions
and future planning by reducing the difference in accountancy and economics.
6. Establishing Proper Coordination
Business economics provides proper coordination for planning forecasting,
decision-making, organizing, communication, control, and formulation of
business policies and their execution. As a result, the organization goes on
functioning smoothly, with minimum costs.
7. Understanding External Forces
Business economist makes several important decisions regarding coordination
between various situations of the firm and external conditions, which helps in the
smooth and systematic operation of the activities of the firm.External conditions
mainly include national income, trade cycles, foreign trade, taxation, labour
laws, insurance, banking, transportation and communication and those national
and international policies, which affect the business in any way.
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Department Of Commerce
Vijayanagar College, Hosapete.
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8. Communication
Communication includes observing and sending information and messages and
taking etc. Proper communication is essential for the success of a business
organization. Business economics helps in establishing and executing an efficient
communication system.
Difference Between Business Economics and Economics

Basis of
Economics Business Economics
Difference

Nature of the Economics is both of micro and macro Whereas, business economics is
Subject nature. Hence, it broadly studies the of micro nature. Hence, it studies
economic activities of the firm, industry the economic activities of the
and the whole economy. particular firm.

Meaning Economics means such a subject in In business economics that part of

which decision is taken regarding the economics is incorporated, which
utilization of time, power and wealth and is known as the principal of the
how wealth is to be spent. firm and which may be helpful in
making business decisions.

Base of Analysis In economics, economic principles have Whereas in business economics

been normally propounded on the basis assumptions are analysed after
of several assumptions and exceptions. testing, these assumptions by
giving practical shape to them.

Area of Scope The scope of economics is wider and Whereas business economics has
more comprehensive, because it studies, a relatively limited scope because
not only the particular firm but the it studies the problems related to
consumption, production, exchange and the production and exchange of
distribution of all economic problems. particular firms.

Approach The approach of economics is Whereas its approach is

descriptive. perspective.

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Department Of Commerce
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Use of In it, abstract economic principles are Whereas in business economics

Principles used to solve the problem of the firm. traditional economic principles
are used.

Analysis It analyses certain economic events and Whereas business economics

System then propounds general policies. studies the practical aspects of
economic events.

Theoretical and Economics studies the Theoretical Whereas business economics

Practical aspects of economic events. studies the practical aspects of
Aspects economic events.

Normative and The form of economics is normative as Whereas the form of business
Positive well as a positive science. economics is only normative
science.

Phase of Since it is from the beginning so the Whereas the development of

Development duration of its development is long. business economics has taken
place after the second world war.
Hence, the duration of its
development is relatively short.

Type of Economics analysis the economic Whereas, In it, only the problems
Problem problems of the firm and the human of the particular firm are analysed
Analysed beings both. and not of human beings

Steps of the Decision-Making Process

1. Identify the decision
The first step in making the right decision is recognizing the problem or
opportunity and deciding to address it. Determine why this decision will benefit
your customers or fellow employees.
2. Gather information
Next, it’s time to gather information so that you can make a decision based on
facts and data. This requires making a value judgment, determining what
information is relevant to the decision, and how you can get it. Ask yourself what

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Department Of Commerce
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you need to know to make the right decision, then actively seek out anyone who
needs to be involved.
“Managers seek out a range of information to clarify their options once they have
identified an issue that requires a decision. Managers may seek to determine
potential causes of a problem, the people and processes involved in the issue, and
any constraints placed on the decision-making process,” according to Chron
Small Business.

3. Identify alternatives
Once you have a clear understanding of the issue, it’s time to identify the various
solutions at your disposal. You likely have many options when deciding, so it is
essential to come up with a range of options. This helps you determine which
course of action is the best way to achieve your objective.
4. Weigh the evidence
In this step, according to management experts Phil Higson and Anthony Sturgess,
you’ll need to “evaluate for feasibility, acceptability and desirability” to know
which alternative is best. Managers need to be able to weigh the pros and cons,
then select the option that has the highest chance of success. It may be helpful to
seek a trusted second opinion to gain a new perspective on the issue.
5. Choose among alternatives
When it’s time to make your decision, be sure you understand the risks involved
with your chosen route. You may also select a combination of alternatives now
that you fully grasp all relevant information and potential risks.
6. Take action
Next, you’ll need to create an implementation plan. This involves identifying
what resources are required and gaining support from employees and
stakeholders. Getting others on board with your decision is a key component of
executing your plan effectively, so be prepared to address any questions or
concerns.
7. Review your decision
An often-overlooked but important step in the decision making process is
evaluating your decision for effectiveness. Ask yourself what you did well and
what can be improved next time. If your decision didn’t work out the way you
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Department Of Commerce
Vijayanagar College, Hosapete.
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planned, you may want to revisit some of the previous steps to identify a better
choice.

Shreenag A G
Department Of Commerce
Vijayanagar College, Hosapete.