Introduction

• What is Business Economics?

• It is a branch of economics that focuses on the behavior of individual

consumers, business firms and government in trying to mobilize and
allocate scarce resources to satisfy their respective objectives

• Ie Maximization of utility/ satisfaction,

• Profit maximization &

• Soc-Econ welfare maximization.

Introduction

Business environment on the other hand focuses on the surroundings that

regulate the functioning of economy/ business firms. It is composed of…..

• Economic,

• Political,

• Social,

• Technological,

• Legal and Ecological frameworks that influence stakeholder decisions.

• Therefore, BEE focuses on the interaction between key economic

stakeholders with the operating environment in view of respective objectives.
Introduction ctd
• The underlying economic problem affecting the interests of the
above entities is resource scarcity..
• Despite, BEE provides complementary concepts of choice and
opportunity cost to effect resource optimization
• The above can be applied by all entities to achieve their
respective objectives
• Choice ….. how individuals and society choose to allocate scarce
resources in order of most to lest satisfying
• OC—what you forego when choosing one alternative over
another. Better rewarding option
Introduction ctd

• However, the wider business environment impacts on stakeholder

decisions beyond the simplistic models of choice and opportunity cost
interventions.

• The framework factors of the business environment identified above

(pol..,eco..,soc..,tec..,leg..& eco..) affect decisions of business firms,
consumer & government.

• See the sample questions overleaf…..

• Q1 Recently, bank of Uganda determined the CBR at 7% as intervention to

stimulate borrowing and investment. However, the governor declined to cap

interest rates like the case in Kenya; insisting that market forces of demand and

supply will take course in determining interest rates”.

• Evaluate the strategic benefits and shortfalls underlying the Uganda’s CBR

open policy on business operations

• Q2 2018/19 budget saw imposition of a 1% tax on deposits, withdrawals and

receipts on mobile money transactions in effort to finance the National Budget.

• Discuss the effects of the above tariff on business operations.

Search leads

• The relationship between the …..

 The Political environment and consumer utility (satisfaction) + pdf

+ journal

 Economic environment and consumer utility (satisfaction)

 Social environment and consumer utility (satisfaction)

 Technological environment and consumer utility (satisfaction)

Legal environment and consumer utility (satisfaction)

Ecological environment and consumer utility (satisfaction)

• The relationship between the …..

Political environment and profit maximization by business firms

Economic environment and profit maximization by business firms

Social environment and profit maximization by business firms

Technological environment and profit maximization by business

firms

Legal environment and profit maximization by business firms

Ecological environment and profit maximization by business firms

• The relationship between the …..

Political environment and social economic welfare maximization objective

 Economic environment and social economic welfare maximization

objective

Social environment and social economic welfare maximization objective

Technological environment and social economic welfare maximization

objective

Legal environment and social economic welfare maximization objective

Ecological environment and social economic welfare maximization objective.

Objectives of business firms
Profit maximization

This is the traditional theory of business firms

It is assumed that business firms have the ability to set a price and
output that maximize profits in the short and long run.

This assumption is now criticized by economists who have studied

modern-day organizations and their broad objectives.

 In particular, the ‘divorce between ownership and management/

control’ do not provide for the profit maximization objective .
Why might a business depart from profit maximization?
1. Imperfect information about Demand and Cost Conditions
 It is difficult for firms to identify their profit maximizing output,
since demand (Price) and costs condition keep changing
2. Often the day-to-day pricing decisions of businesses are taken on the
basis of “estimated demand conditions”.
3. Most modern businesses are multi-product firms operating in a range
of separate markets. The amount of information that they have to
handle is enormous.
4. Competition, which introduces new products /services will affect the
pricing behavior of the firm.
Therefore, the idea that there is a neat and single profit maximizing
price and output is not feasible.
Alternative theories to profits mxn
Behavioral Theories of the Firm

They believe that modern corporations are complex organizations

composed up of various groups or stakeholders. e.g.

Employees, Managers, Customers , The local community, Suppliers &

competitors, Shareholders and government…..
Each of these groups is likely to have different objectives or goals at
different points in time.
It is incumbent upon the firm to identify the most influential entity
and realign its objectives to satisfy their interests
Alternatives to profit maximization ctd
• Satisficing behavior involves the owners setting minimum
acceptable levels of achievement in terms of business revenue and
profit.

• Managerial Satisfaction model

An alternative view was put forward by Oliver Williamson (1981),

who developed the concept of managerial satisfaction (or utility).
This can be enhanced by success in raising sales revenue.
Alternatives to profit maximization ctd

• Sales Revenue Maximization:

• Was developed by William Baumol (1959).

• According to him, the behavior of manager-controlled

businesses are divorced from the shareholders.ie

• Price and output decisions taken by managers tend to favor

their interests (sales revenue maximization) and that of the
share-holders (Profit Maximization).
Arguments for sales revenue maximization
• Baumol argues that annual salaries and other perks for managers are
more closely correlated with total sales revenue rather than profits

Financial institutions consider sales as measure of performance

 sales figures are more accessible than profit figures (monthly Vs

annually)

Managers themselves prefer sales performance since profits go to the

pockets of shareholders

Salaries and allowances of top managers are more closely linked to sales
than to profits.
Arguments for sales revenue mxn Ctd
Routine personnel problems are easily handled with growing sales.

If profit maximization is the goal, a fall in some other period may be
judged on poor performance yet in the long run, profit levels are never
constant

Growth in sales are a signal of firm strength especially in negotiations

Therefore, Baumol prefers a system where shareholders determine

the minimum profit margin and allow managers to exercise their
influence in effort to maximize sales. See diagram
Minimum profit constraint diagram
 Explanation

The maximum profit maximizing output is at Q2 (where the vertical

distance between the total revenue and total cost curve is at its greatest)

Revenue is maximized at output Q1 where the total revenue curve

reaches a maximum (i.e. marginal revenue is zero)

If shareholders insist on the business achieving a minimum profit as

shown, then the managers of a business have the discretion to vary
price and output anywhere between Q2 and Q4

At any output beyond Q3 (where total revenue and total cost intersect),
losses are made
• Take home;
• Determine the strategic value of Business Economics & Environment
to the contemporary business managers
Thank you for your participation