M.COM. SEMESTER - I (CBCS)
ECONOMICS FOR BUSINESS DECISIONS
Q.1. Explain the meaning and scope of
Business economics.
ANS:
Business or managerial economics involves application of economic
principles to the problems of the firm or business enterprise which are
productive economic units operating in an economy. Business economics assumes
micro-economic character. As a specialized branch of economics, it adopts and
adapts economic models in the problem solving and decision-making process of a
firm. It studies the problems and principles of individual firms or an industry
and helps the business firm in forecasting and evaluating market trends. It is
normative in nature and therefore it is prescriptive in character i.e., it is
concerned with what firm should do under the given conditions in which it
operates. It determines the objectives of the enterprise and then develops the
means to achieve the laid down objectives. It deals with future planning,
policy making and decision making.
SCOPE OF BUSINESS ECONOMICS
The scope of business economics includes the following:
1. Demand Analysis and Forecasting
2. Cost Analysis
3. Market Structure
4. Price determination in different markets
5. Profit analysis
6. Capital budgeting
DEMAND ANALYSIS AND FORECASTING
Demand is defined as “Desire backed by willingness and
ability to pay.” The oncept of demand has three aspects, namely; (i) the desire
to buy, (ii) the willingness to pay and (iii) the ability to pay. These three aspects
combined constitute demand. The absence of any one of these three aspects will
nullify demand. For instance, the consumer may have the desire to buy but is
not willing to pay or the consumer has both the desire and willingness to pay
but do not have the ability to pay or the consumer has the ability to pay but
not the willingness and desire to buy. All these situations or instances do not
constitute demand. India is believed to be self-sufficient in her food
requirements. The go-downs of Food Corporation of India are overflowing.
However food self-sufficiency in India is true only from the economic or the
demand point of view as percent of India’s population is living below the
poverty line according to World Bank figures for the year 2011. If demand for
food is generated by 100 percent of the population, India would become a food
deficit country and may have to depend upon food imports to satisfy domestic
food demand. Mere desire to buy and the willingness to pay without the ability to
pay cannot and does not constitute demand.
COST ANALYSIS
The concept of cost is central to business
decision-making. Cost consciousness contributes to cost minimization or cost
optimization which leads to cost effectiveness and business expansion. A firm
which produces its goods and services at a comparatively lower cost with a
qualitative edge over its competitors will not only survive but also prosper.
The micro-economic effect of cost consciousness will be the prosperity of individual
firms. When cost effective firms in different industries and sectors of the economy
produces its goods and services by minimizing cost and maximizing quality, the
macro-economic effect would be increase in economic welfare of the largest
possible number of people.
MARKET STRUCTURE
A Market may be defined as any place or process that
brings buyers and sellers together with an objective to enter into a transaction
at an agreed price. The functions of a market economy are carried out through
the market mechanism. Markets are therefore the very basis of an economy.
Markets may be found in different forms such as the organized markets for
commodities like oil, sugar, wheat, rice, gold, copper, iron, rubber and what
have you, financial markets for stocks, shares, currencies of the world and financial
instruments of various types, goods markets consisting of various goods and
services which are traded through the market mechanism, factor markets through
which factor inputs like land, labour, capital and enterprise are traded.
PRICE DETERMINATION IN DIFFERENT MARKETS
The firms that produce a given product and its close
substitutes put together are known as an industry. The industry demand curve is
the market demand curve for any firm in the industry. When firms decide their output,
they must know as to what quantity of output will be sold at various prices.
Hence, the firms are interested to know their individual demand curve. The
structure of the market in which a firm operates determines the relationship
between the market demand curve for the product and the individual demand curve
of the firm in a given industry. Once the individual demand curve is known to
the firm, it can easily determine its price and output policy. The ability of
the firm to decide its price and output policy depends upon the nature of the
market structure in which the firm is situated. Thus a competitive firm with
zero market power can in no way influence the market price of the product that
it produces. A competitive firm is a price taker and not a price maker. It simply
has to accept the market price and once the market price is known, a
competitive firm can only decide its equilibrium output.
PROFIT ANALYSIS
The equilibrium condition of any firm under any market is
(MC = MR). It is also the profit maximizing condition. However, the actual profit
made by the firm depends upon, amongst other things, the position of the cost
and revenue curves. Greater the difference between these curves, greater will
be the profit and vice versa. The profits made by a firm also depend upon the
nature of the market. In a competitive market, the firm will make only normal
profits in the long run. At the extreme other you have oligopoly wherein the
profits made by a firm will depend upon the nature of oligopoly. In collusive
oligopoly, there is market sharing and the price is determined by the market
leader. The firms can make super normal profits. However, under non-collusive
oligopoly, the firms will make only normal profits due to competition and price
war. A monopoly firm will always make super normal profits. Firms under monopolistic
competition may make super normal profits in the short run.
CAPITAL BUDGETING
Investment decision making is known as capital budgeting. Amongst alternative investment avenues, the firm has to decide on the most profitable investment opportunity. The study of capital budgeting involves stages such as the search for investment opportunities, forecasting cash flows expected to flow from each investment opportunity, computing the cost of capital and identifying the most profitable investment opportunity. Firms may use various methods to evaluate investment decisions such as the payback period method, the net present value method or the internal rate of return method.
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