Business Economics: Meaning, Nature, Scope and Objectives dynamictutorial.blogspot.in | Monday, May 19, 2014
Business or Managerial Economics:
Managerial Economics generally refers to the integration of ec onomic theory with business practice. practice. While economics provides the tools which explain various concepts such as Demand, Supply, Price, Competition etc. Managerial Economics applies these tools to the management management of business. business. In this sense, Managerial Economics is also understood to refer to business economics or applied economics. Definitions of Managerial Economics According to Prof. Spencer Sigelman, Managerial Economics deals with integration of economic theory with business practice for the purpose of facilitating decision making and forward planning by management. According to Prof. Hauge, Managerial Economics is concerned with using logic of economics, mathematics & statistics to provide effective ways of thinking about business decision problems. According to Prof. Joel Dean, The purpose of Managerial Economics is to show how economic analysis can be used in formulating business policies. Nature and characteristics
of Managerial Economics:
1.Microeconomics: It studies the problems and principles of an individual business firm or an individual industry. It aids the management in forecasting and evaluating the trends of the market.
2.Normative economics: It is concerned with varied corrective measures that a management undertakes under various circumstances. It deals with goal determination, goal development and achievement of these goals. Future planning, policy-making, decision-making and optimal utilisation of available resources, come under the banner of managerial economics. 3.Pragmatic: Managerial economics is pragmatic. In pure micro-economic theory, analysis is performed, based on certain exceptions, which are far from reality. 4.Uses theory of firm: Managerial economics employs economic concepts and principles, which are known as the theory of Firm or 'Economics of the Firm'. Thus, its scope is narrower than that of pure economic theory. 5.Takes the help of macroeconomics: Managerial economics incorporates certain aspects of macroeconomic theory. Knowledge of macroeconomic issues such as business cycles, taxation policies, industrial policy of the government, price and distribution policies, wage policies and antimonopoly policies and so on, is integral to the successful functioning of a business enterprise. 6.Aims at helping the management: Managerial economics aims at supporting the management in taking corrective decisions and charting plans and policies for future. 7.A scientific art: Science is a system of rules and principles engendered for attaining given ends. Scientific methods have been credited as the optimal path to achieving one's goals. Managerial economics has been is also called a scientific art because it helps the management in the best and efficient utilisation of scarce economic resources. 8.Prescriptive rather than descriptive: Managerial economics is a normative and applied discipline. It suggests the application of economic principles with regard to policy formulation, decision-making and future planning. It not only describes the goals of an organisation but also prescribes the means of achieving these goals.
Scope of Managerial Economics
The scope of Managerial Economics is so wide that it embraces almost all the problems and areas of the manager and the firm. It deals with demand analysis and forecasting, resource allocation, production function, cost analysis,inventory management , advertising, price system, capital budgeting etc. However, the scope of managerial economics may be discussed under following points: a)
Demand analysis and forecasting : Demand forecasting is the process of finding
the values for demand in future time period. The current values are needed to make optimal current pricing and promotional policies, while future values are necessary for planning future production inventories, new product development etc. Correct estimates of demand is essential for decision making , strengthening market position and enlarging profits. b)
Cost and Production Analysis : Production deals with the physical aspects of the
business investment. It is the process whereby inputs are transformed into outputs. Efficiency of production depends on ratio in which various inputs are employed absolute level of each input and productivity of each input. A production function is the relation which gives us the technically efficient way of producing the output given the inputs. The firm must undertake co st estimation and forecasting to judge the optimality of present output levels and assess the optimal level of production in future. c)
Inventory Management: It refers to stock of raw materials which a firm
keeps. If it is high, capital is unproductively tide up which might, if stock of inventory is reduced, be used for other productive purpose . On the other hand, if the level of inventory is low, production will be hampered. Hence, managerial economics with methods such as ABC analysis a simple simulation exercise and some mathematical models with a view to minimize inventory cost. d)
Advertising: Managerial economics helps in determining the total advertis-
ing cost and budget, the measuring of economic effects of advertising and form an integral part of decision making and forward planning. e)
Market Structure and Pricing Policies: Managerial economics helps to clear sur-
plus and excess demand to bring market equilibrium as there is continuos
changes in market. Success of business firm depends on correctness of price decisions. Price theory works according to the nature of the market depending on the number of sellers, demand conditions etc. f)
Resource Allocation: Managerial economics with the help of advanced tools
such as linear programming are used to arrive at the best course of action for the maximum use of the available resources and its substitutes. g)
Capital Budgeting: Capital is scarce and it costs something . Hence, manage-
rial economics helps in decision making and forward planning on allocation of capital to various factors of productions , marketing and management. h)
Investment Analysis: It involves planning and control capital expendi-
ture. Whether or not to invest funds in purchase of assets or other resources in an attempt to make profit and how to choose among completing uses of funds. Managerial economics help in analysis and decision making on the investment of funds. i)
Risk and Uncertainty Analysis:
As business firm have to operate under condi-
tions of risk and uncertainty both decision making and forward planning becomes difficult. Hence managerial economics helps the business firm in decision making and formulating plans on the basis of past data, current information and future prediction.
Objectives of Business Economics Managerial economics provides such tools necessary for business decisions. Managerial economics answers the five fundamental problems of decision making. These problems are: (a) What should be the product mix? (b) Which is the least cost production technique and input mix? (c) What should be the level of output and price of the product? (d) How to take investment decisions
(e) How much should be the selling cost. In order to solve the problems of decision- making, data are to be collected and analysed in the light of business objectives. Business economics supplies such data to the business economist. As pointed out by Joel Dean "The purpose of managerial economics is to show how economic analysis can be used in formulating business policies" The basic objective of managerial economics is to analyse economic problems of business and suggest solutions and help the managers in decision-making. The objectives of business economics are outlined as below: ØTo integrate economic theory with business practice. ØTo apply economic concepts: and principles to solve business problems. ØTo employ the most modern instruments and tools to solve business problems. ØTo allocate the scarce resources in the optimal manner. ØTo make overall development of a firm. ØTo help achieve other objectives of a firm like attaining industry leadership, expansion of the market share etc. ØTo minimise risk and uncertainty ØTo help in demand and sales forecasting. ØTo help in operation of firm by helping in planning, organizing, controlling etc. ØTo help in formulating business policies. ØTo help in profit maximisation.
Uses of Business Economics Business economics is useful because:
(i) It provides tools and techniques for managerial decisions, (ii) It gives answers to the basic problems of business management, (iii) It supplies data for analysis and forecasting, (iv) It provides tools for demand forecasting and profit planning, (v) It guides the managerial economist.
Thus, Business economics offers a number of benefits to business managers. It is also useful to individuals, society and government.