CONCEPT OF BUSINESS ECONOMICS
A business is activities perform by any organization through
utilizing its financial, human, technical and informational resources to
achieve the pre determined objectives. In course of this action business
organization must use its resources as efficiently as possible since they are
limited in supply and there are costs in acquiring and using them. These
include employees (known as labor), machinery and buildings (known as capital),
and the land on which the buildings stand. Businesses also have the expertise
of their top managers (known as entrepreneurs) who put the labor, capital and
land together to produce the finished products most efficiently. Their purpose,
amongst other things, is to ensure the business is profitable and grows. If
losses are made over time the business will close. Hence, entrepreneurs must
think about what and how the business produces, and its long term direction.
Economics is, therefore, the study of how the resources land,
labor, capital and enterprise are used or allocated by a country to meet its
demands for goods, services and ideas, now and in the future. The resources are
employed by businesses or firms and are also known as inputs to the production
process, or factors of production.
Investopedia has considered business economics as a field in economics
that deals with issues such as business organization, management, expansion and
strategy. This studies might include how and why corporations expand, the
impact of entrepreneurs, the interactions between corporations and the role of
governments in regulation. Business economics explains how the policy adopted
by ministry of finance and central bank influence to the business and what kind
of world business scenario should be understand so that to expand and build up
resistance of own business is answered by the business economics. Basically the
important of this subject is to the business managers so that to realize the
reality and real practices in the economy and its impact on the business on the
two way - positive and negative.
To deal with the role of business economics it is necessary to discuss
about the outputs of business. In general, goods and services are considered as
an output of any business. But in broad sense ideas and externalities are also
included as an business output which in general is included in study. Here we
will discuss four output of any business.
Goods
Businesses is known as producers or manufacturer of goods and
services. Goods are classified by economists under two main headings, consumer
goods and producer goods. Examples of consumer goods include cars, mobiles,
chocolate bars, Levis, compact discs, and personal computers if used at home
for personal or leisure use. The people who buy them are consumers, or
customers and they live in households. In contrast, producer goods, as the name
suggests, are used to produce other goods. Examples of producer goods include
robots used on assembly lines to manufacture cars, personal computers used in
offices for work purposes, and cement mixers on building sites. Many businesses
are, therefore, the customers of other businesses which buy their output.
Services
Services consist of the provision of non-physical items. The
list of services are endless. It includes knowledge provided by teacher,
services given by doctors, entertainment given by the football match between
India and Nepal, listening to a live concert, working out at your local gym,
staying in a hotel, watching a video of the latest movie (as opposed to the
video as a physical object), and so on. In each case, consumers are using or
consuming a particular service which gives it a distinctive character compared
with a good. A service is used up in the act of consumption although it may
live in our memory such as the fond remembrance of dry picnic with friends.
Businesses also provide services to other businesses and, in that sense, the
latter are consumers of the former’s products. For example cleaning agencies
employ staff to clean offices in the evening or early morning when the work
force are not there.
Ideas
An idea is intellectual property which can also be bought and
sold. Examples include the ideas in a novel or computer software. It is not
easy to buy or sell. Of course, the book
and floppy disk containing the ideas are goods.
Externalities
The production process of a business also creates another type
of output which occurs to society as a whole but whose effect may not be
reflected in a company’s accounts. This type of output is called an externality
and may be a benefit to society or a cost. It occurs as a consequence of either
production by businesses or consumption by an individual or household.
Pollution caused by a factory is the obvious example of an externality and it
imposes a cost on society which is known as negative externality. Conversely
there may be external benefits, e.g. enjoying a neighbor's garden full of
flowers in summer.
Above four output will be possible if they passes through the
certain production process. The production process is the use of raw materials
or inputs or factors of production, to produce outputs of goods, services and
ideas; it may also produce externalities. These inputs consist of:
Land
This includes not just what its name suggests but also what is
found on it and in it – forests and the timber obtained from them, minerals
such as crude oil, natural gas and diamonds, and even the fish in the sea. The
cost to be paid by employing land, defined in its widest sense, in the
production process, is known as rent.
Labor
This is that part of the population who work. Approximately
half the Japanese population are too old to work, ill and so unable to work.
Though the pace of development of Japan is not declining. They are not worried
about having large no of old population but worrying about how to manage the
labor they are coming there in. How the work force is determined, and how the
number of unemployed are used in economy will be discussed in this book.
Capital
This word is used for machinery, factories, computers, office
blocks and information technology. Capital loses its value over time as
buildings suffer wear and tear, and so need maintenance, whilst computers
become technologically obsolete. So businesses have to set money aside to
replace capital as it wears out or becomes technologically obsolete; this is
known as depreciation. The term capital is found to distinguish as a
liquid form (money) and machine. This money may be used to finance a new
office block or a new factory. Alternatively it may be used to purchase shares
in existing companies. Interest is the return earned from making capital
available to a business. Finally, working capital is the term used to describe
stocks of components and raw materials waiting to be converted into finished
goods, and the finished goods themselves, held in warehouses, for example,
waiting to be delivered to retailers for sale.
Enterprise
Enterprise or
entrepreneurship is the resource provided by the entrepreneur. It is the
expertise he/she provides to combine the other resources most efficiently to
produce the output of goods or services. It requires managerial, financial,
inter-personal and strategic abilities if the business is to succeed. Famous
examples of entrepreneurs are Binod Chaudhary, Chairman of CG Group, Rupert
Murdoch, chairman of the News Corporation which owns publishing and
broadcasting businesses around the world, and Bill Gates who co-founded
Microsoft.
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Scarcity of resources
There is a limited supply of resources,
i.e. they are scarce or finite, whereas the demand for goods and services
produced from them is virtually infinite. This means resources have to be
used by businesses and government as efficiently as possible to enable
society to best supply what is needed to meet its own needs and demands.
Every time a resource is used in one way it means that it cannot be used in
other ways. Land used to build a by-pass cannot be used for housing, or as an
industrial site, or left alone for the wildlife who live there. An economy
therefore seeks to achieve allocative efficiency. This means that it wants to
use its resources so efficiently that none are wasted. If it were to make any
changes to their use no one could be better off except at the cost of someone
else being worse off.
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The costs of using resources
Each tutor at your university or college who teaches you is
paid a salary or, if employed part time, a wage of between Rs. 4000 and Rs.
10000 per period. This is a cost for the university or college, called the
historic cost. Similar costs apply to the use of other resources, as discussed
above. For the economist, there is also a second cost to be taken into account,
known as the opportunity cost. This is defined as the next best alternative
foregone. For example your are learning here at college, because you have
chosen to get education first, if you are not studying then you may be working
as a assistant manager for a local marketing agency or bank. You forgone the
income of working assistant manager so that to study at college. Here your
opportunity cost is the tentative income of that post where you may have worked
if not studying at college. So why does you study at college instead of working
on tutor teach when he/she could earn
more money in business? The answer is that there are non-monetary returns, such
as job-satisfaction, that provide sufficient benefit as to offer the best total
return i.e. monetary and non-monetary.
RELATION OF BUSINESS ECONOMICS WITH TRADITIONAL ECONOMICS
Economics and Managerial Functions
Economics contributes a great deal towards the performance of
managerial duties and responsibilities. Just as biology contributes to the
medical professional and physics to engineering, economics contributes to the
managerial profession. All other qualification being the same, managers with a
working knowledge of economics can perform their functions more efficiently
than those without it. The basic function of the managers of a business firm is
to achieve the objective of the firm to the maximum possible extent with the
limited resources placed at their disposal. It means economics is essentially
the subject to study for the logic, tools and techniques of making optimum use
of available resources to achieve the given ends.
In performing the function of manager, he has to take a number
in conformity with the goals of the firm. Many business decisions are taken
under the condition of uncertainty and risk. Uncertainty and risk arise mainly
due to uncertain behavior of the market forces, changing business environment,
emergency of competitors with highly competitive products, government policy,
external influence on the domestic market and social and political changes in
the country. The complexity of the present business world adds complexity to
business decision making. However the degree of uncertainty and risk can be
greatly reduced if market conditions are predicted with a high degree of
reliability. The prediction of the future of the business environment alone is
not sufficient. What is equally important is to take appropriate business and
to formulate a business strategy in conformity with the goals of the firms.
Boumol has pointed out three main contribution of economic
theory to business economics.
First, one of the most important thing which the economic
theory can contribute to the management science is building analytical models
which helps to recognize the structure of managerial problems, eliminate the
minor details which might obstruct decision making and help to concentrate on
the main issue.
Second, economic theory contributes to the business analysis 'a
set of analysis method' which may not be applied directly to specific business
problems, but they do enhance the analytical capabilities of the business
analysts.
Thirdly, economics theories offer clarity to the various
concepts used in business analysis which enables the managers to avoid
conceptual pitfalls.
Business economics – How it differs from traditional economics?
Business economics uses largely the same concepts and
terminology as economics and addresses many of the same issues. The students
might therefore ask how and why a distinction is made between the two. Authors
would argue that business economics is worthy of being distinguished and
studied separately for a number of reasons. First and foremost, business
economics specifically seeks to investigate and analyze how and why businesses
behave as they do, and what the implications of their actions are for the
industry in which they operate, and for the economy as a whole. Businesses are
constrained in their operations by many factors, both internal and external.
The internal factors include: the types of resources businesses use, their
availability, and how they are combined together in the production process; the
nature and levels of the costs businesses incur in producing their goods or
services; and the extent to which growth can be achieved internally as opposed
to by acquisitions or mergers.
Externally, businesses face constraints from the types of
market in which they operate: how competitive are they, for example, and hence
how easy to enter or leave; what is the level of demand for the products they
produce, and the trends in this demand over time. Other constraints are from
policies imposed by the government in relation to competition, minimum wages
paid and so on. Additionally, businesses have to work within the constraints
imposed on them by the economy. In times of economic recession, for instance,
falling consumer demand due to reduced incomes and rising unemployment may limit the ability of
businesses to launch new products, diversify into new markets or even survive.
Therefore, business economics seeks to analyze these constraints which face
businesses, draw conclusions as to how and why businesses behave as they do,
and analyze the implications of such behavior. Business economics also draws on
a wide range of different theories from a variety of different disciplines of
which economics is just one, albeit the main one. Economics has had a major
impact on the development of other intellectual disciplines such as business
strategy, organizational behavior, human resource management and marketing. All
of these have drawn on it for parts of their theoretical content and, in turn,
business economics draws on developments in these other areas.
Business and Economics
Business is an Economic Activity
An economic activities involves the task of adjusting the
resources (means) to outputs (ends) or the ends to means. An economic activity
may assume different forms such as consumption, production, distribution and
exchange. The nature of business differs, depending upon the form of economic
activities being undertaken and organized. For example manufacture is primarily
concerned with production; the stock exchange business is mainly concerned with
the buying and selling of shares and debenture; the business of government is
to run the administration. The government may also own control and manage
public enterprises. The business of banks is to facilitate transactions with
short term and long term funds. These examples can be easily multiplied. The
point to be noted is that each business has a target to achieve and for this
purpose each business has some resources at its disposal. Sometimes the target
has to be matched with the given resources and sometime the resources have to
be matched with the given target. Either way the task of business is to
optimize the outcome of economic activities.
A business Firm is an Economic Unit
A business firm is essentially a transformation unit, it
transform inputs into outputs of goods and services or a combination of both.
The nature of input requirements and the types of output flows are determined
by the size, structure, location and efficiency of the business firm under
consideration. Business firms may be different sizes and forms. They may
undertake different types of activities such as mining, manufacturer, farming
trading transport, banking etc. The motivational objective underlying all these
activities is the same viz., profit maximization in the long run. Profit is
essentially a surplus value- the value of outputs in excess of the values of
inputs or the surplus of revenue over the cost, a business firm undertakes
transformational process to generate this surplus value. The firm can grow
future if the surplus value is productively invested. Firm therefore carefully
plans the optimum allocation of resources to get optimum production. The
entries process of creating, mobilization and utilization of the surplus
constitutes the economic activity of the business firm.
Business Decision Making is an Economic Process
Decision making involves making a choice from a set of
alternative courses of action. choice is at the root of all economic activity.
The question of choice and evaluation arises because of the relative scarcity
of resources. If the resources had not been scared an unlimited amount of ends
could have been met. But the situation of resource constraint is very real. A
business firm thinks seriously about the optimum allocation of resources
because resources are limited in supply and most resources have alternative
uses. The firm therefore intends to get the best out of given resources or to
minimize the use of resources for achieving a specific target. In other words
when inputs is the constraining factor, the form's decision variable is the
output. And when output is the constraining factor then the firm's decision
variables is the input. Whatever may be the decision variable, procurement or
production, distribution or sale, output or input, decision making is
invariably the process of selecting the best available alternative. That is
what makes it an economic pursuit.
Thank You!!!
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