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Definition Of Business Economics Commerce Essay

Paper Type: Free Essay Subject: Commerce
Wordcount: 2339 words Published: 1st Jan 2015

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Business economics, also called Managerial Economics as a field in applied economics uses economic theory and quantitative methods to analyze business enterprises and the factors contributing to the diversity of organizational structures and the relationships of organizations with labour, Capital ,land ,taxes international trade and product markets. Managerial Economics consists of that part of economic theory which helps the business manager to take decisions. Business involves decision-making. Decision making means the process of selecting one out of two or more alternative courses of action. Economic theories help to analyze the practical problems faced by business organizations. Business economics integrates economic theory with business practice. It is a special branch of economics that bridges the gap between economic theory and business management. It deals with the use of economic concepts and principles for decision making in a business unit. It is called Business Economics or Economics of the organizations. Every business is operated by some resources and these are limited . Business economics tells the techniques about how to utilize resources for maximum satisfaction . Both micro and macro economics tools are used in business economics . But micro economics are so related to business economics because for effective operating of business , micro economics helps to optimize demand , production and price and factor price theories.


In simple words, business economics is the discipline which helps a business

manager in decision making for achieving the desired results. In other words, it deals with the application of economic theory to business management.

According to 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”.

According to Mc Nair and Meriam, “Business economics deals with the use of

economic modes of thought to analyses business situation”.

From the above said definitions, we conclude the following objectives of business economics:

1) Explanation of nature and form of economic analysis

2) To apply economic concepts: and principles to solve business problems

3) Spell out the relationship between Managerial Economics and other disciplines

outline the methodology of managerial economics.

4) To make overall development of a firm.

5) To minimize risk and uncertainty

6) To help in demand and sales forecasting.

7) To help in operation of firm by helping in planning, organizing, controlling etc.

8) To help in formulating business policies.

9) To help in profit maximization.


Managerial Economics and Business economics are the two terms, which, at times have been used interchangeably. However, the term Managerial Economics has become more popular and seems to displace progressively the term Business Economics. Business economic seeks to establish rules which help business organizations attain their goals, which indeed is also the essence of the word normative. However, if the firms are to establish valid decision rules, they must thoroughly understand their environment. This requires the study of positive or descriptive theory.


As regards the scope of business economics, no uniformity of views

exists among various authors. However, the following aspects are said to

generally fall under business economics.

1. Demand Analysis and Forecasting

2. Cost and production Analysis.

3. Pricing Decisions, policies and practices.

4. Profit Management.

5. Capital Management.

6. Inventory management

7. Linear programming and theory of games

8. Environmental issues

9. Business cycles

These various aspects are also considered to be comprising the subject matter of business economic. Thus, managerial economics comprises both micro and macro-economic theories.

The subject matter of managerial economics consists of all those economic concepts, theories and tools of analysis which can be used to analyze the business environment and to find out solution to practical business problems.


The following characteristics of business economics are:

1. Micro economics: Managerial economics is micro economic in character. This is so because it deals with the problems of an individual business unit. It does not study the problems of the entire economy.

2. Normative science: Managerial economics is a normative science. It is concerned with what management should do under particular circumstances. It determines the goals of the enterprise. Then it develops the ways to achieve these goals.

3. Pragmatic: Managerial economics is pragmatic. It concentrates on making economic theory more application oriented. It tries to solve the managerial problems in their day-today functioning.

4. Prescriptive: Managerial economics is prescriptive rather than descriptive. It

describes solutions to various business problems.

5. Uses macro economics: Marco economics is also useful to business economics. Macro-economics provides an intelligent understanding of the environment in which the business operates. Managerial economics takes the help of macro-economics to understand the external conditions such as business cycle, national income, economic policies of Government etc.

6. Uses theory of firm: Managerial economics largely uses the body of economic concepts and principles towards solving the business problems. Managerial economics is a special branch of economics to bridge the gap between economic theory and managerial practice.

7. Management oriented: The main aim of managerial economics is to help the

management in taking correct decisions and preparing plans and policies for future. Managerial economics analyses the problems and give solutions just as doctor tries to give relief to the patient.

8. Multi disciplinary: Managerial economics makes use of most modern tools of

mathematics, statistics and operation research. In decision making and planning

principles such accounting, finance, marketing, production and personnel etc.

9. Art and science.-Managerial economics is both a science and an art. As a science, it establishes relationship between cause and effect by collecting, classifying and analyzing the facts on the basis of certain principles. It points out to the objectives and also shows the way to attain the said objectives.


1. Business economic is concerned with those aspects of traditional economics which are helpful for business decision making in real life. These are adapted or modified with a view to enable the manager take better decisions.

2. It also incorporates useful ideas from other disciplines such as Psychology, Sociology, Accounting. Statistics and Mathematics can be used to solve or at least throw some light upon the problems of business management. Business economics takes the help of other disciplines having a bearing on the business decisions in relation various explicit and implicit constraints subject to which resource allocation is to be optimized.

3. Business economics helps in reaching a variety of business decisions in a

complicated environment.

4. Business economics makes a manager a more competent model builder.

It helps him appreciate the essential relationship Characterizing a given


5. At the level of the firm. Where its operations are conducted though

known focus functional areas, such as finance, marketing, personnel and production, business economics serves as an integrating agent by coordinating the activities in these different areas.

6. Business economics takes cognizance of the interaction between the firm

and society, and accomplishes the key role of an agent in achieving the its social and economic welfare goals. It has come to be realized that a business, apart from its obligations to shareholders, has certain social obligations. Business economics focuses attention on these social obligations as constraints subject to which business decisions are taken.

It serves as an instrument in furthering the economic welfare of the

society through socially oriented business decisions.


Business economics is useful because:

1) It provides tools and techniques for managerial decisions

2) It gives answers to the basic problems of business management.

3) It supplies data for analysis and forecasting.

4) It provides tools for demand forecasting and profit planning.

5) It guides the managerial economist.

6) It provides optimal Solution to Business Problems.

7) Business economics study is very helpful for effective utilization of business resources. It determines every factor’s price on supply and demand of such factor so, that the price becomes optimize by this supply and demand analysis.

8) Keynesian ‘s general theory of employment tells us that full employment depends on investment and effective demand if both will increase after this employment can increase . Govt. takes steps for increasing investment in self employment schemes and try to help to sell the products after this full employment generated.

Thus, Business economics offers a number of benefits to business managers. It is also useful to individuals, society and government.


The basic function of a management executive in a business organization is decision making and forward planning. Decision Making means the process of selecting one action from two or more alternative courses of action whereas forward planning means making plans for the future. The question of choice arises because resources such as capital, land, labor and management are limited and can be employed in alternative uses.

The application of economics to business management or the integration of economic theory with business practice, as Spencer and Siegelman presents, the following aspects :-

Reconciling traditional theoretical concepts of economics in relation to the actual business behavior and conditions. In economic theory, the technique of analysis is one of model building whereby certain assumptions are made and on that basis, conclusions as to the behavior of the firms are drowned. The assumptions, however, make the theory of the firm unrealistic since it fails to provide a satisfactory explanation of that what the firms actually do. Hence the need to reconcile the theoretical principles based on simplified assumptions with actual business practice and develops appropriate extensions and reformulation of economic theory, if necessary.

Estimating economic relationships, viz., measurement of various types of elasticities of demand such as price elasticity, income elasticity, cross-elasticity, promotional elasticity, cost-output relationships, etc. The estimates of these economic relationships are to be used for purposes of forecasting.

Predicting relevant economic quantities, eg., profit, demand, production, costs, pricing, capital, etc., in numerical terms together with their probabilities. As the business manager has to work in an environment of uncertainty, future is to be predicted so that in the light of the predicted estimates, decision making and forward planning may be possible.

Using economic quantities in decision making and forward planning, that is, formulating business policies and, on that basis, establishing business plans for the future pertaining to profit, prices, costs, capital, etc. The nature of economic forecasting is such that it indicates the degree of probability of various possible outcomes, i.e. losses or gains as a result of following each one of the strategies available. Hence, before a business manager there exists a quantified picture indicating the number of courses open, their possible outcomes and the quantified probability of each outcome. Keeping this picture in view, he decides about the strategy to be chosen.

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Understanding significant external forces constituting the environment in which the business is operating and to which it must adjust, e.g., business cycles, fluctuations in national income and government policies pertaining to public finance, fiscal policy and taxation, international economics and foreign trade, monetary economics, labor relations, anti-monopoly measures, industrial licensing, price controls, etc. The business manager has to appraise the relevance and impact of these external forces in relation to the particular business unit and its business policies.


In business organizations and firms business economics plays a very important role .The usefulness of business economics lies in adopting the tools from economic theory, incorporating relevant ideas from other fields to take better business decisions. business economics serve as a catalytic agent in the

process of decision making by different functional departments at the firm’s

level. For the organizations appropriate direction one should follow the rules of business economics. which will be helpful in organizations success.


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