F.Y.B.COM. SEMESTER - I
BUSINESS ECONOMICS
Q.1 Discuss scope and importance of business
economics.
ANS:
MEANING
Business Economics is also called as Managerial Economics.
It involves application of economic theory and practice to business. In
business, decision making is very important. Decision making is a process of
selecting one course of action out of available alternatives. Thus business
economics serves as a link between economic theory and decision-making in the
context of business. Following are few definitions of Business Economics.
Spencer and Siegelman:
It is “the integration of economic theory with business
practice for the purpose of facilitating decision making and forward planning
by management.”
Henry and Hayne:
“Business Economics is economics applied in decision
making. It is a special branch of economics. That bridges the gap between
abstract theory and managerial practice.”
Salvatore:
“Business Economics refers to the application of economic
theory and the tools of analysis of decision science to examine how an
organisation can achieve its objectives most effectively.”
SCOPE OF BUSINESS ECONOMICS
Scope is nothing but the subject matter of business
economics. Scope of Business Economics is very wide.
1) Market Demand and Supply
In economics both demand and supply are the important
forces through which market economy functions. Individual demand for a product
is based on an individual’s choice / Preferences among different products,
price of the product, income etc. Individual demand is nothing but desire
backed by individual’s ability and willingness to pay. By summing up the demand
of all the consumers or individuals for the product we get market demand for
that particular product. Individual Supply is the amount of a product that
producer is willing to sell at given prices. By summing up the supply of all
the producers for the product we get market supply for that particular product.
The market price where the quantity of goods supplied is equal to the quantity
of goods demanded is called as equilibrium price. Existence, growth and future
of business or firm depends on what price market determines for its product.
2) Production and Cost Analysis
Knowledge of business economics helps manager to do
production and cost analysis. Production analysis helps to understand process
of production and to make optimum utilisation of available resources. Cost
analysis on the other hand helps firm to identify various costs and plan budget
accordingly. Both production and cost analysis will help firm to maximize
profit.
3) Market structure and Pricing Techniques
Markets are very important in business economics. Study of
markets such as perfect completion, monopoly, oligopoly, monopolistic market
etc. is very significant for producers. It is very imperative for manager or
producer to identify type of market that will be there for their products.
Knowledge of markets and competition will help them to take better decision
regarding pricing of the product, marketing strategies etc. Pricing techniques,
on the other hand, helps the firms to decide best remunerative price at
different kinds of markets.
4) Forecasting and coverage of risk and
uncertainty
Knowledge of business economics helps manager to forecast
future. For example, Demand forecasting. It means estimation of demand for the
product for a future period. Demand forecasting enables an organization to take
various decisions in business, such as planning about production process,
purchasing of raw materials, managing funds in the business, and determining
the price of the commodity. Likewise forecasting future helps firm to take
important decisions and cover risk and uncertainty associated with those
decisions.
5) Inventory Management
Knowledge of business economics will help producer to
reduce costs associated with maintenance of inventory such as raw materials,
finished goods etc.
6) Allocation of resources
Business Economics provides advanced tools such as linear
programming which helps to achieve optimal utilisation of available resources.
7) Capital Budgeting
Capital budgeting or investment appraisal is an official
procedure used by firms for assessing and evaluating possible expenses or
investments. It is a process of planning of expenditure which involves current
expenditure on fixed/durable assets in return for estimated flow of benefits in
the long run. Investment appraisal is the procedure which involves planning for
determining whether firm’s long-term investments such as heavy machinery, new
plant, research and development projects are worth the funding or not.
Knowledge of business economics helps producer to take appropriate investment
decisions with the help of capital budgeting.
IMPORTANCE OF BUSINESS ECONOMICS
1. Knowledge of business economics helps business
organization to take important decisions as it deals with application of
economics in real life situation.
2. It helps manager or owner of firm to design policies
suitable for their firm or business.
3. Business economics is useful in planning future course
of action.
4. It helps to control cost and monitor profit by doing
cost benefit analysis.
5. It helps in forecasting future for taking important
decisions in present.
6. It helps to set appropriate prices for various products
by using available pricing techniques.
7. It helps to analyse effects of various government
policies on business and take appropriate decision.
8. It helps to degree of efficiency of firms by using
various economic tools.
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