SCOPE OF BUSINESS ECONOMICS

1.1.3 SCOPE OF BUSINESS ECONOMICS

As regards the scope of Business economics, there is no general uniform pattern. However, the following aspects may be said to be inclusive under Business economics:

                            Demand analysis and forecasting.
               Cost and production analysis
·                        Pricing decisions, policies and practices
                           Profit management
                           Capital management

Scope of any subject means the area of its study. Business Economics has its roots in economic theory. But its scope is different from economic theory. Business Economics provides management with a strategic planning tool. Thus the perspective of business world would be clarified in regards to its working. Business Economics is mainly concerned with the application of economic principles and theories. The scope of Business economics covers two areas of decision making.

·         Operational or Internal Issues

·         Environmental or External Issues

Manager of any business firm faces various problems in his daily working. These problems are divided into two types. First kind of problem is  related with the internal issues of business firms and another kind of problems are related with environmental issues of the business firms.

Hence they are referred as operational or internal issues and environmental or external issues respectively.

OPERATIONAL OR INTERNAL ISSUES

The manager of business firm faces the problems, which are related to the internal issues of the firm. They are controlled by the manager with the help of economic theories and principles. They are as follows.

·         
        What to produce? i. e. Problem of choice of commodity.

·      How to produce? i. e. what techniques are to be used? Either capital intensive or labour    intensive techniques.

·         What capital-labour ratio is to be used?

·         What price is to be levied?

·         How to invest? And at what quantity?

·         How to sell? At what price? How to compete?

·         How the capital and the profit can be managed in order to make the best use of it?

Such types of problems are faced by every manager of business firm which are solved with the aid of economics. These problems are related to the economic theories and principles as follows.

1. Demand Analysis: The manager thinks about the demand for his firm's product. A firm can survive if it is able to cater the demand for its product in market at the proper time and in the right quantity. A firm can economically stand in the market, when its goods are continuously demanded and sold in the market. Manager looks to the market demand of his firm's product. He makes accurate estimate of demand and makes the decisions. Before he come to the final conclusions manager of every business firm can study the basic concepts and theories of demand analysis in economics as law of demand, demand forecasting, elasticity of demand and their variant factors. It provides the basis for analysing the market influences on his product. Demand analysis also throws light on the factors affecting the demand for the business firm. Thus, demand analysis helps to manager in estimating and manipulating the market demand for his product.

2. Theory of production: Theory of production is also called as the theory of firm. Along with the cost of production it also consists of the firm's revenue. It includes the relationship between various factors of production, input-output analysis, capital - labour ratio, optimum production, break even analysis etc. These economic concepts help to business manager in solving the problems related with the production.

3. Cost-Analysis: Cost of production is very significant factor in the process of production. Therefore every manager must to possess a good knowledge of cost analysis it includes various kinds of costs, which are very essential in decision making. The various factors responsible for the variation in cost estimates must be given due weightage. These cost estimates are necessary in future planning. There is uncertainty in regards to cost due to unknown factors. Cost estimates are very essential for most sound profit planning. Hence to find out the firms cost of production, the knowledge of cost analysis is very essential for business manager. It includes various costs concepts cost output analysis, economies of scale, production function, cost control etc.

4. Pricing theories: Managerial economics deals with the pricing theories. Pricing of a product incurs income to the firm. The success of the firm can be comprised in

a)    a sound pricing policy of its product,

b)    how the price is to be determined in various forms of market such as perfect competition, monopoly, monopolistic competition, oligopoly, duopoly etc.

c)    What conditions are affecting on the pricing process in different markets should be known by the manager of a business firm.

Therefore he has to possess the good knowledge of market forms with the help of this knowledge he can form a sound pricing policy. It means that knowledge of pricing theories helps him to formulate good pricing policy and it further assists to decision making.

5. Theory of profit: Profit maximization is the aim of business firm and making profits in long run is a sign of successful entrepreneur. Profit depends on various factors such as internal factors and external factors. These factors include

a)    demand for product,

b)    input prices,

c)    factor prices,

d)    competition,

e)    economic policy,

f)     business risks and

g)    the amount of investment etc.

Knowledge of sound profit earning policy and techniques of profit planning are also important to business manager. Economic theory provides this knowledge.

6. Resource Allocation: Managerial economics also deals with the problem of optimum allocation of resources. Resources are scare, so they should be allocated efficiently to different uses by the manager. In order to solve the problem of resource allocation the manager should possess the knowledge of input-output analysis, linear programming etc. With the help of these economic analysis methods manager arrives to the final conclusions in respect of his decision making.

7. Capital-Investment Analysis: Capital is scare and fundamental factor of production. It is foundation of business. Large amount of capital is invested in big firms. Management faces many problems. In order to solve these problems enough time and labour are required. In brief, the capital budgeting involves planning and control of capital expenses. This topic consists of cost of capital, rate of return, selection of project, Cost-benefit analysis etc. The knowledge of Capital Theory helps to take investment decisions.

8. Inventory Management: Every firm requires raw material. It would be stored in inventories.

a)    What would be the ideal stock of inventories?

b)    How the stock of inventories should be maintained and controlled?

These are some of the problems which the manager has to solve. Knowledge of this stock inventory is achieved from economic theory.

9. Advertising: Advertising is the heart of modern business practices. It is one of the features of modern marketing system. It helps to increase the scale of a product. Therefore every businessman can follow these techniques. How much amount is spent on advertising expenditure? It increases the cost of production of a commodity as well as sales. The advertising expenditure affects the cost and sales. More the advertising expenses, more is the cost and the sales and vice versa. Thus economic theory helps to businessmen in solving their problems and to arrive at definite conclusions.

ENVIRONMENTAL OR EXTERNAL ISSUES

These issues are related to the general business environment in which the firm or business operates and includes

a)    social, economic and political environments; economic environment includes kinds of economic systems, situations existing in the field of production, income, employment, prices, saving and investment,

b)    Financial institutions as banks, financial corporations, Insurance companies, trends in international trade.

c)    It also includes the conditions prevailing in labour and capital markets, government policy, industrial policy, monetary policy consumer's co-operatives etc.

d)    Political environment is related to state activities. It includes the state's attitude towards business firms.

e)    Managerial Economics takes the cognizance of all types of environments affecting the business activity.

These external or environmental issues in managerial economics are related with the Macro-

Economics. Thus, the scope of managerial economics reaches in the sphere of micro as well

as macro economic theories.