Introduction

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. 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. Different aspects of business need the attention of the chief executive. He may be called upon to choose a single option among the many that may be available to him. It would be in the interest of the business to reach an optimal decision- the one that promotes the goal of the business firm. A scientific formulation of the business problem and finding its optimal solution requires that the business firm is equipped with a rational methodology and appropriate tools.

Economic theory underscores the fact that each firm in the industry operates under competitive conditions and hence tries to operate more efficiently to withstand the competition. The indicator of efficiency is profits. The assumption here is that each firm has one man as the owner and entrepreneur, and that his sole aim is to maximize profits. As time passed, one-man firms were replaced by partnerships and giant companies and the structure of the firm changed to include the owner/entrepreneur/shareholders on the one hand and managers on the other. The responsibility of the owners/entrepreneur/shareholders got bifurcated. The day-to-day affairs of the firm were looked after by the managers and owners/entrepreneur/shareholders took organizational decisions aimed at maximizing profits. The goals of the owners/entrepreneurs/shareholders are called organizational goals while the goals of the managers are referred to as business goals also known as operational goals.

Definitions

According to E. F. Brigham and J. L. Pappas, “Managerial Economics is the application of Economic theory and methodology to business administration practise.”

According to McNair and Meriam, “Managerial Economics consists of the use of Economic modes of thought to analyse business situations.”

According to M. H. Spencer and L. Siegelman, “Managerial Economics is the integration of economic theory with business practise for the purpose of facilitating decision making and forward planning.”

According to Hauge, “Managerial Economics is concerned with using logic of economics, mathematics & statistics to provide effective ways of thinking about business decision problems.”

According to Joel Dean, “The purpose of Managerial Economics is to show how economic analysis can be used in formulating business policies.”

Nature Of Business Economics

Business economics is, perhaps, the youngest of all the social sciences. Since it originates from Economics, it has the basis features of economics, such as assuming that other things remaining the same. This assumption is made to simplify the complexity of the Business phenomenon under study in a dynamic business environment so many things are changing simultaneously. This set a limitation that we cannot really hold other things remaining the same. In such a case, the observations made out of such a study will have a limited purpose or value. Managerial economics also has inherited this problem from economics.

The other features of managerial economics are explained as below:

(a) Microeconomics in nature: Business economics is concerned with finding the solutions for different managerial problems of a particular firm. Thus, it is more close to microeconomics.

(b) Operates against the backdrop of macroeconomics: The macroeconomics conditions of the economy are also seen as limiting factors for the firm to operate. In other words, the managerial economist has to be aware of the limits set by the macroeconomics conditions such as government industrial policy, inflation and so on.

(c) Normative economics: Economics can be classified into two broad categories normally. Positive Economics and Normative Economics. Positive economics describes “what is” i.e., observed economic phenomenon. The statement “Poverty in India is very high” is an example of positive economics. Normative economics describes “what ought to be” i.e., it differentiates the ideals from the actual. Ex: People who earn high incomes ought to pay more income tax than those who earn low incomes. A normative statement usually includes or implies the words ‘ought’ or ‘should’. They reflect people’s moral attitudes and are expressions of what a team of people ought to do.

(d) Prescriptive actions: Prescriptive action is goal oriented. Given a problem and the objectives of the firm, it suggests the course of action from the available alternatives for optimal solution. It does not merely mention the concept, it also explains whether the concept can be applied in a given context on not. For instance, the fact that variable costs as marginal costs can be used to judge the feasibility of an export order.

(e) Applied in nature: ‘Models’ are built to reflect the real life complex business situations and these models are of immense help to managers for decision-making. The different areas where models are extensively used include inventory control, optimization, project management etc. In Business economics, we also employ case study methods to conceptualize the problem, identify that alternative and determine the best course of action.

(f) Offers scope to evaluate each alternative: Business economics provides an opportunity to evaluate each alternative in terms of its costs and revenue. The Business economist can decide which is the better alternative to maximize the profits for the firm.

(g) Interdisciplinary: The contents, tools and techniques of Business economics are drawn from different subjects such as economics, management, mathematics, statistics, accountancy, psychology, organizational behavior, sociology and etc.

(h) Assumptions and limitations: Every concept and theory of Business economics is based on certain assumption and as such their validity is not universal. Where there is change in assumptions, the theory may not hold good at all.

Scope Of Business Economics

The main focus of Business economics is to find the solution to Business problems for which the Business economist makes use of the concepts, tools and techniques of economics and other related disciplines.

1. Demand Analyses and Forecasting:

A firm can survive only if it is able to the demand for its product at the right time, within the right quantity. Understanding the basic concepts of demand is essential for demand forecasting. Demand analysis should be a basic activity of the firm because many of the other activities of the firms depend upon the outcome of the demand forecast. Demand analysis provides:

a) The basis for analyzing market influences on the firms; products and thus helps in the adaptation to those influences.

b) Demand analysis also highlights for factors, which influence the demand for a product. This helps to manipulate demand. Thus demand analysis studies not only the price elasticity but also income elasticity, cross elasticity as well as the influence of advertising expenditure. With the advent of computers, demand forecasting has become an increasingly important function of Business economics.

2. Price determination:

Pricing decisions have been always within the preview of Business economics. Pricing policies are merely a subset of broader class of Business economic problems. Price theory helps to explain how prices are determined under different types of market conditions. Competition analysis includes the anticipation of the response of competing firms‘ pricing, advertising and marketing strategies. Product line pricing and price forecasting occupy an important place here.

3. Production and cost analysis:

Production analysis is in physical terms. While the cost analysis is in monetary terms. Cost concepts and classifications, cost-out-put relationships, economies and diseconomies of scale and production functions are some of the points constituting cost and production analysis.

4. Resource Allocation:

Business Economics is the traditional economic theory that is concerned with the problem of optimum allocation of scarce resources. Marginal analysis is applied to the problem of determining the level of output, which maximizes profit. In this respect, linear programming techniques are used to solve optimization problems. In fact, linear programming is one of the most practical and powerful managerial decision making tools currently available.

5. Profit analysis:

Profit making is the major goal of firms. There are several constraints here on account of competition from other products, changing input prices and changing business environment hence in spite of careful planning, there is always certain risk involved. Business economics deals with techniques of averting of minimizing risks. Profit theory guides in the measurement and management of profit, in calculating the pure return on capital, besides future profit planning.

6. Investment decisions:

Capital is the foundation of business. Lack of capital may result in small size of operations. Availability of capital from various sources like equity capital, institutional finance etc. may help to undertake large-scale operations. Hence efficient allocation and management of capital is one of the most important tasks of the managers. The major issues related to capital analysis are:

1. The choice of investment project

2. Evaluation of the efficiency of capital

3. Most efficient allocation of capital

Knowledge of capital theory can help very much in taking investment decisions. This involves, capital budgeting, feasibility studies, analysis of cost of capital etc.

7. Forward planning:

Strategic planning provides management with a framework on which long-term decisions can be made which has an impact on the behavior of the firm. The firm sets certain long-term goals and objectives and selects the strategies to achieve the same. Strategic planning is now a new addition to the scope of Business economics with the emergence of multinational corporations. The perspective of strategic planning is global.