Business Economics or Managerial Economics

Meaning of Managerial Economics or Business Economics:

Although the systematic study of economics was started in the 18th century, the history of the development of business economics is not so long. It was born during the 1950s. Therefore, it is regarded as the recent branch of economics. In management studies, the terms ‘Business Economics’ and 'Managerial economics' are often synonyms. Both terms are often used interchangeably.

Business economics is a special branch of economics. It is the application of economic principles and methods to business practices. In other words, it is an application of economic theory to the business practice for decision making and forward planning.

Decision-making refers to the process of selecting one action out of several alternative actions, For example, if a manufacturer of a product wants to buy raw materials in the market, he will have to think according to his goal. In simple, when we go to a shop to purchase a laptop, we will find several brands of laptops in the shop. Out of these brands, we will select one based on our preference. This process is called decision-making. Thus, decision-making involves the process of choosing the best alternative among the various alternatives available to the decision-makers of the firm.

Forward planning is a process of thinking in advance or it implies planning in advance for the future. In any business organization, the actions of tomorrow are thought in advance. For example, the business organization has to think in advance, what would be the sales in the next month? What is the extent of stock of the goods that should be possessed? What would be the sales promotion strategy shortly to increase sales, etc. is thought in advance for the success of the business.

Profit is the ultimate aim of almost all business firms. Hence, decision-making and forward planning will generally be targeted towards the maximization of the firm's profit. This is possible only by making the best use of the scarce resources by making the best decisions about the various aspects of the business during the course of business management.

The economic theories and methods help a business manager to make efficient choices that give optimum results in business problems using techniques such as demand analysis and forecasting, cost and production analysis, product pricing, factor pricing, etc.

As the purpose of managerial economics is to apply economics to the improvement of managerial decisions in an organization, most of the subject matter in business economics has a microeconomic focus. However, business economics also takes the help of macroeconomics to understand the external environment such as business cycle, national income, economic policies of the government, etc, which is useful in business decision-making.

Definitions of Business Economics or managerial Economics:

Economics itself is quite difficult to define accurately; similarly, since business economics is concise as well as comprehensive, it is also more difficult for accurate definition. Many scholars have attempted to define business or managerial economics by emphasizing its various aspects. However, the focus of this section is to summarize them to know what business or managerial economics is all about.

Business economics deals with the application of economic principles and methods for the business and managerial decision-making of firms. The following are some of the attempts to define a business or managerial economics:

According to Spencer and Sigelman, "Managerial economics deals with the integration of economic theory with business practice to facilitate decision making and forward planning by the management."

According to Joel Dean, "The purpose of managerial economics is to show how economic analysis can be used in formulating business policies."

In the words of Mc Guigan and Moyer, “Managerial economics deals with the application of economic theory and methodology to decision making problems faced by the public, private and not for profit institutions. Business economics extracts from economic theory (particularly microeconomics) those concepts and techniques that enable the decision-maker to allocate efficiently the resources of the organization."

From the above definitions of managerial or business economics, we can draw the following conclusions:

1. Business economics is a branch of economics.
2. The term business economics can be used in place of managerial economics.
3. The principles or theories of economics are applied to solve the problems of business organizations through decision-making and forward planning.
4. Business economics integrates economic theories with business practices.
5. Business economics is the science of decision-making.

Features or Characteristics of Business economics or managerial economics:

Based on the meaning and definition of business economics, characteristics of business economics can be highlighted as follows:

1. Business economics is microeconomics: Business economics is micro in character because it is concerned with that part of microeconomics that has the greatest interest and importance to managers or with smaller units of the economy. It studies the problems and principles of an individual firm or an individual industry. It assists the management in evaluating and forecasting the trends of the market.

2. Business economics is normative economics: Business economics belongs to normative economics. Business economics is concerned with what management should be under particular circumstances. First, it determines the goals of the firm, agency, or organization, and then develops the way to attain these goals. It deals with future planning, policymaking, and decision making, and making rational utilization of the available resources of the enterprise.

3. Business economics is pragmatic: Business economics is pragmatic. It avoids difficult issues of economic theory. It tries to solve the managerial problems that appear in their day-to-day functioning.

4. Business economics uses the theory of the firm: Business economics uses that economic concepts and principles which are known as the theory of the firm. Thus, the scope of business economics is narrower than the scope of pure economic theory.

5. Main aim of business economics is to help the management: Main aim of business economics is to help the management in making correct decisions and preparing plans and policies for the future.

Scope of Business Economics or Managerial Economics

Scope means the area covered by the subject. Business economics is a new and developing subject, so it has no defined scope but its scope is increasing day by day. The various aspects described below represent the major areas in which managers have to make decisions. So the subject matter of business economics consists of applying economic principles and concepts in the decision-making by the management of the business firm. Business economics deals with the following areas:

1. Demand analysis and forecasting: Demand for a commodity is affected by several factors called determinants of demand. Demand analysis helps the management in identifying the factors that influence demand for the products. Thus, demand analysis and forecasting are very much important to plan a business, A study of the determinants of demand is also necessary for forecasting future demand which is essential for preparing a production schedule and employing productive resources. Hence, demand analysis and forecasting occupy an important place in the study of business economics.

2. Cost and production analysis: A firm's profitability depends much on its costs of production. A wise manager would prepare cost estimates of a range of output, identify the factors causing variations in costs and choose the cost-minimizing level of output, taking also into consideration the degree of uncertainty in production and cost calculations. Sound pricing policies depend much on the cost of production. Similarly, production analysis is important to avoid wastages of materials and time. Thus, cost and production analysis form a part of business economics.

3. Pricing decisions, policies, and practices: Since a firm's income and profit depend mainly on the price decision, the pricing policies and all such decisions are to be taken after careful analysis of the nature of the market in which the firm operates.

4. Profit management: Each and every business firm is tended for earning profit; it is profit that provides the chief measure of success of a firm in the long period. Economists tell us that profits are the reward for uncertainty bearing and risk-taking. A successful business manager can form more or less correct estimates of costs and revenues at different levels of output. The more successful a manager is in reducing uncertainty, the higher are the profits earned by him. Therefore, profit planning and profit measurement constitute the most challenging area of managerial economics.

5. Capital management: Still another most challenging problem for a modern business manager is of planning capital investment. Investments are made in the plant and machinery, and very high buildings. Therefore, capital management requires top-level decisions. Capital management means planning and control of capital expenditure, It deals with the cost of capital, rate of return, and selection of most suitable projects.

6 Inventory management: A firm should always keep an ideal quantity of stock. If the stock is too much, the capital is unnecessarily locked up in inventories. At the same time, if the level of inventory is low, production will be interrupted due to non-availability of materials. Hence, a firm always prefers to have an optimum quantity of stock. To minimize the inventory cost, managerial economics uses some methods such as ABC analysis. It is an inventory categorization method that consists of dividing items into three categories, A, B, and C: A being the most valuable items, C being the least valuable ones.

Relation of Business Economics with Traditional Economics

There is a close relation between business economics with traditional economics, i.e. micro and macroeconomics. Business economics uses several microeconomics concepts such as marginal cost, marginal revenue, the elasticity of demand, etc. and macroeconomic concepts such as national income, money, investment, consumption, international trade, etc. to make business decisions, The relationship between business economics and traditional economics can be explained as follows:

1. In the field of sales promotion: Demand for any commodity depends upon many factors like income of the consumer, size of population and its composition, advertisement, the elasticity of demand, consumer's expectation, etc, These concepts are studied under traditional economics. Thus, in the field of sales promotion, business economics, and traditional economics are closely interrelated.

2. In the field of production: In the field of production also there is a close relationship between traditional economics and business economics. Business economics uses the concepts of traditional economics to allocate resources efficiently. Another function of business economics is to measure the elasticity of production. For this business managers should have knowledge of economies of scale, the law of diminishing returns, optimal combination of inputs, etc.

3. In the field of financial decisions: In the field of financial decisions, business economics uses the concepts of traditional economics. Business firms use the concept of the time value of money to make decisions regarding investment. Using the concepts of traditional economics, business economics analyses the allocation of resources under uncertainty.

4. Business forecasting: Business forecasting is the most important subject matter of business economics. Traditional economics is the source of business economics for business forecasting. The theory of income, employment, business cycle, etc, are useful variables for forecasting business activities.

5. Decision making: Business decision-makers are interested in traditional economics only to the extent it can help them in making business decisions. Traditional economics contributes to business economics by identifying the key factors in business decision-making. Thus, business economics is the integration of economic theories with business practices to facilitate decision-making and forward planning by management.

Difference between Traditional Economics and Business/ Managerial Economics:

S.N	Traditional Economics	Business Economics
1	Traditional economics deals with the study of concepts, principles, and theoretical aspects of economic analysis.	Business Economics deals with the application of economic principles to the problems of an individual firm.
2	Traditional economics includes both microeconomics and macroeconomics.	Business Economics is essentially microeconomic in character.
3	Traditional Economics is both positive and normative science.	Business Economics is only a normative science.
4	Traditional economics is a study of both the firm and an individual.	Business Economics is a study of the problems of a firm only.
5	Traditional economics studies the rent, wage, interest, and profit theories.	Business economics focuses only on the theory of profit management.
6	Traditional economics considers only the economic factors affecting a problem.	Business Economics considers both the economic and non-economic factor.
7	Traditional Economics is very old and economic theories and laws are well established.	Business Economics is a new and developing subject which was developed after the second world war.
8	Traditional economics study is human behavior on the basis of certain assumptions.	Business Economics is concerned with practical problems.
9	Traditional Economics does not depend upon the process of decision-making.	Decision making is the most important task of Business Economics.
10	The scope of traditional Economics is very wide.	The scope of business economics is not so wide because it is only a branch of traditional economics.