Subject: Commerce

Class: B. Com 1st Year

Name of the Paper: Business Economics
Paper: Fourth
Titled: Nature and Scope of Business Economics
Key Words: Business Economics, Nature, Scope, Micro Economics
Declaration
The content is exclusively meant for academic purposes and for enhancing teaching and learning. Any other use for
economic/commercial purpose is strictly prohibited. The users of the content shall not distribute, disseminate or share it
with anyone else and its use is restricted to advancement of individual knowledge. The information provided in this e-
content is authentic and best as per my knowledge.

Dr. Manish Kumar Singh

Department of Commerce
Dr. Vibhuti Narayan Singh Campus Mahatma Gandhi
Kashi Vidyapith
Gangapur, Varanasi
Email: - singhmanishcom@gmail.com
Discussed Objective
Contents Meaning of Business Economics

Nature of Business Economics

Scope of Business Economics

Central Problems of an Economy

Difference between Business Economics and Economies

Conclusion

References

Questions
Objective:
The objective of this E- content is to let the students know about the concept, nature and scope of
Business Economics. It will also aware them about the central problems of an economy and distinction
between business Economics and Economics.

Definition:
Business economics is a field of applied economics that studies the financial, organizational, market-
related, and environmental issues faced by corporations. Economic theory and quantitative methods
form the basis of assessments on factors affecting corporations such as business organization,
management, expansion, and strategy. Studies might include how and why corporations expand, the
impact of entrepreneurs, the interactions among corporations, and the role of governments in
regulation.
The Basics of Business Economics
• Economics, broadly, refers to the study of the components and functions of a particular marketplace or
economy, such as supply and demand, and the effect of the concept of scarcity. Within an economy,
production factors, distribution methods, and consumption are important subjects of study. Business
economics focuses on the elements and factors within business operations and how they relate to the
economy as a whole.
• The field of business economics addresses economic principles, strategies, standard business practices, the
acquisition of necessary capital, profit generation, the efficiency of production, and overall management
strategy. Business economics also includes the study of external economic factors and their influence on
business decisions such as a change in industry regulation or a sudden price shift in raw materials.

Real World Example of Business Economics

• There are various organizations associated with the field of business economics. In the United States, the
National Association for Business Economics (NABE) is the professional association for business economists.
The organization’s mission is “to provide leadership in the use and understanding of economics.” In the
United Kingdom, the equivalent organization is the Society of Business Economists.
• Economic theory and quantitative methods form the basis of microeconomic assessments of factors affecting
corporations.
• Business economics encompasses subjects such as the concept of scarcity, product factors, distribution, and
consumption.
• Managerial economics is one important offshoot of business economics.
• The National Association for Business Economics (NABE) is the professional association for business
economists in the United States.
 Nature of Business Economics

I. Business Economics is a Science

• What is Science? It is simply a systematic body of knowledge which can establish a relationship between
cause and effect. Further, Mathematics, Statistics, and Econometrics are decision sciences. Business
Economics integrates these decision sciences with Economic Theory to arrive at strategies to help
businesses achieve their goals. Hence, it follows scientific methods and also tests the validity of the results.
• This is one aspect of the nature of business economics.
II. It is based on Micro Economics
• We understand the basic difference between micro and macroeconomics. A business manager is certainly
more concerned about achieving the objectives of his own organization. After all, this helps him in ensuring
profits and long-term survival of the firm.
• Business Economics is more concerned with the decision-making situations of individual establishments.
Therefore, it depends on the techniques of Microeconomics.
III. It Incorporates Elements of Macro Analysis
• Even though all businesses focus on their profitability and survival, a firm cannot operate in a vacuum. The
external environment of the economy like income and employment levels in the economy, tax policies, etc.,
affects the firm. All these external factors are components of macro economy.
• Therefore, a business manager has to take all such factors into consideration which may influence his
business environment.
IV. It is an Art
• Business Economics is an art as it requires the practical application of rules and principle to achieve set
objectives.
V. Use of Theory of Markets and Private Enterprises
• Business Economics primarily uses the theory of markets and private enterprises. It uses the theory of
the firm and resource allocation in a private enterprise economy.
VI. Pragmatic in Approach
• Microeconomics is purely theoretical and analyzes economic occurrences under unrealistic
assumptions. On the other hand, Business Economics is pragmatic in its approach. It tries to solve the
problems which the firms face in the real world.
VII. Interdisciplinary
• Business Economics incorporates tools from many other disciplines like mathematics, statistics,
accounting, marketing, etc. Therefore, is in interdisciplinary in nature.
VIII. Normative
• Broadly speaking, Economic Theory has evolved along two lines – Positive and Normative.
• A positive or pure science analyses the cause and effect relationship between variables in a scientific
manner. However, it does not involve any value judgment. In simpler words, it describes the economic
behaviour of individuals or society without focusing on the desirability of such behaviour.
On the other hand, normative science involves value judgments. It suggests a course of action under the
given circumstances.
Usually, Business Economics is normative in nature. It offers suggestions for the application of economic
principles while forming policies, making decisions, and planning for the future. However, firms must
understand their environment thoroughly to establish decision rules. This requires the study of positive
economic theory.
Therefore, we can say that Business Economics combines the essentials of both the theories while keeping
more emphasis on the normative economic theory.

The Scope of Business Economics

Microeconomics Applied to Operational Issues
As the name suggests, internal or operational issues are issues that arise within a firm and are within the
control of the management. It is within the scope of business economics to analyze this.
Further, a few examples of such issues are choice of business, size of business, product designs, pricing,
promotion for sales, technology choice, etc. Most firms can deal with these using the following
microeconomics theories:
I. Analysing Demand and Forecasting
• Analysing demand is all about understanding buyer behaviour. It studies the preferences of consumers along with the effects of changes in
the determinants of demand. Also, these determinants include the price of the good, consumer’s income, tastes/ preferences, etc.
• Forecasting demand is a technique used to predict the future demand for a good and/or service. Further, this prediction is based on the past
behaviour of factors which affect the demand. This is important for firms as accurate predictions help them produce the required quantities of
goods at the right time.
• Further, it gives them enough time to arrange various factors of production in advance like raw materials, labour, equipment, etc. Business
Economics offers scientific tools which assist in forecasting demand.
II. Production and Cost Analysis
• A business economist has the following responsibilities with regards to the production:
• Decide on the optimum size of output based on the objectives of the firm.
• Also, ensure that the firm does not incur any undue costs.
• By production analysis, the firm can choose the appropriate technology offering a technically efficient way of producing the output. Cost
analysis, on the other hand, enables the firm to identify the behaviour of costs when factors like output, time period, and the size of plant
change. Further, by using both these analyses, a firm can maximize profits by producing optimum output at the least possible cost.
III. Inventory Management
• Firms can use certain rules to reduce costs associated with maintaining inventory in the form of raw materials, work in progress, and finished
goods. Further, it is important to understand that the inventory policies affect the profitability of a firm. Hence, economists use methods like
the ABC analysis and mathematical models to help the firm in maintaining an optimum stock of inventories.
IV. Market Structure and Pricing Policies
• Any firm needs to know about the nature and extent of competition in the market. A thorough analysis of the market structure provides this
information. Further, with the help of this, firms command a certain ability to determine prices in the market. Also, this information helps firms
create strategies for market management under the given competitive conditions.
• Price theory, on the other hand, helps the firm in understanding how prices are determined under different kinds of market conditions. Also, it
assists the firm in creating pricing policies.
V. Resource Allocation
• Business Economics uses advanced tools like linear programming to create the best
course of action for an optimal utilization of available resources.
VI. Theory of Capital and Investment Decisions
• Among other decisions, a firm must carefully evaluate its investment decisions an
allocate its capital sensibly. Various theories pertaining to capital and investments offer
scientific criteria for choosing investment projects. Further, these theories also help the
firm in assessing the efficiency of capital. Business Economics assists the decision-
making process when the firm needs to decide between competing uses of funds.
VII. Profit Analysis
• Profits depend on many factors like changing prices, market conditions, etc. The profit
theories help firms in measuring and managing profits under such uncertain conditions.
Further, they also help in planning future profits.

VIII. Risk and Uncertainty Analysis

• Most businesses operate under a certain amount of risk and uncertainty. Also, analyzing
these risks and uncertainties can help firms in making efficient decisions and
formulating plans.
Central Problems of an Economy:
The problem of choice arises on account of the pressure of three interrelated facts, viz, human wants are
unlimited, means required to satisfy these wants are limited and means are capable of being put to
alternative uses. There would be no problem if the scarce means had only a single use. However, in
reality, these scarce means have alternative uses.
Thus, whenever the problems of choice and scarcity arise, economics is said to be emerged, this is why,
every economy has to face and solve the following basic problems:

Allocation of Resources:
The available resources of the society may be used to produce various commodities for different groups
and in different manner.
It requires that decisions regarding the following should be made:
What to produce? (Types and amount of commodities to be produced):
Land, labour, capital, machines, tools, equipment's and natural means are limited. Every demand of every
individual in the economy cannot be satisfied, so the society has to decide what commodities are to be
produced and to what extent. Goods produced in an economy can be classified as consumer goods and
producer goods. These goods may be further classified as single use goods and durable goods.
It is undoubtedly the basic problem of the economy. If we produce one commodity, it will mean that we are
neglecting the production of the other commodity. We assume that all the factors of production in the economy
are fully absorbed, so if we want to increase the production of one commodity, we will have to withdraw
resources from the production of the other commodity.
On the basis of our requirements goods are further classified as goods- for necessaries, comforts and luxuries. The
economy is also faced with the problem, how much goods should be produced for necessaries, comforts and
luxuries.
How to produce? (Problem of the selection of the technique of production - choice between labour-intensive and
capital-intensive techniques):
After the decision regarding the goods to be produced is taken, next problem arises as to what techniques should
be adopted to produce commodity. Goods can be produced in large-scale industries or in small-scale village and
cottage industries.
The economy has to decide between automatic machines and handicrafts. Hence two main options are-either
capital- intensive technology (more capital and less labour) or labour-intensive technology (more labour and less
capital). The economy has to decide about the technique of production on the basis of labour and capital. For
whom to produce? (Problem of distribution of income):
Goods and services produced in the economy are consumed by its citizens. The individuals may belong to
economically weaker sectioned or rich class of people. Actually this is the problem of distribution. In case of
capitalism the decision is taken on the basis of the purchasing powers of the consumers. Socialistic economy takes
decision regarding goods and services to be produced on the basis of requirements of the individuals.
 Difference between Business Economics and Traditional Economics:
We are aware that Business Economics has evolved from Traditional Economics. Even though there
are many similarities between them, but there are certain differences between the two.

1. Traditional Economics focuses primarily with the theoretical aspect whereas Business Economics devotes
with the practical aspect. The former is associated with concepts, theories, models and building theoretical
framework. The latter is associated with the applications of the selected theories and concepts to solve business
problems and help the business decision making process.

2. Business Economics is fundamentally micro-economic in nature. It studies the activities of an individual firm
or unit. There is an extensive application of the concepts and theories of microeconomics in it. The traditional
Economics has both micro and macro aspects within its purview.

3. Business Economics is essentially normative in nature. But, the Traditional Economics is concerned with both
positive and normative economics. Positive Economics explains the economic phenomena as they are, while
normative economics discusses as to what they ought to be. Business Economics explains what objectives and
avenues a business should pursue and how they are to be. Therefore, it is normative in nature.

4. Traditional Economics studies the complex economic phenomena and rational human behaviour by
developing certain meaningful and consistent assumptions, hypothesis and developing models. Business
Economics endeavors to solve real life complex business problems. It selectively applies economic models with
required modifications to solve the business problems.
5. Traditional Economics concentrates only the economic aspect of the
problems but Business Economics deals with some non-economic
aspects of the problems along with the economic aspects.

6. Business Economics focuses on the theory of profit only. Whereas, the

Traditional Economics has within its ambit not only profit maximization
but also other aspects like Utility maximization, distribution theories of
wage, rent interest and welfare economics as well.

7. The scope of Business Economics is restricted as compared to the

scope of the Traditional Economics.
Conclusion:
Business Economics is that branch of knowledge in which economics principles are
integrated with business management. Therefore for the study of subject matters of
business economies the management and economies related different methods are
systematically used the various methodology of business Economies are deductive
method, inductive method, case study method and econometric method.
References:
1. Singh H.K. & Singh Meera. Fundamental of Business Economics, Nootan
Publication.
2. Singh S.K., Business Economics, Sahitya Bhawan Publication.

Questions:
1. Discuss the nature and scope of business economics.
2. What are the central problems of an economy?
3. Explain the differences between business economics and traditional
economics.