NATURE OF BUSINESS ECONOMICS

NATURE OF BUSINESS ECONOMICS

Economics has been broadly divided into two major parts i.e. Micro Economics and Macro Economics. Before explaining the nature of Business Economics, it is pertinent to understand the distinction between these two.

Micro Economics is basically the study of the behaviour of diuerent individuals and organizations within an economic system. In other words, Microeconomics examines how the individual units (consumers or firms) make decisions as to how to eflciently allocate their scarce resources. Here, the focus is on a small number of or group of units rather than all the units combined, and therefore, it does not explain what is happening in the wider economic environment.

We mainly study the following in Micro-Economics:

(i) Product pricing;

(ii) Consumer behaviour;

(iii) Factor pricing;

(iv) The economic conditions of a section of people;

(v) Behaviour of firms; and

(vi) Location of industry.

Macro Economics is the study of the overall economic phenomena or the economy as a whole, rather than its individual parts. Accordingly, in Macro-Economics, we study the behaviour of the large economic aggregates, such as, the overall levels of output, total consumption, total saving and total investment and also how these aggregates shift over time. It analyzes the overall economic environment in which the firms, governments and households make decisions. However, it should be kept in mind that this economic environment represents the overall euect of the innumerable decisions made by millions of diuerent consumers and producers.

A few areas that come under Macro Economics are:

(i) National Income and National Output;

(ii) The general price level and interest rates;

(iii) Balance of trade and balance of payments;

(iv) External value of currency;

(v) The overall level of savings and investment; and

(vi) The level of employment and rate of economic growth.

While Business Economics is basically concerned with Micro Economics, Macro economic analysis also has got an important role to play. Macroeconomics analyzes the background of economic conditions in an economy which will immensely influence the individual firm’s performance as well as its decisions. Business firms need a thorough understanding of the macroeconomic environment in which they have to function. For example, knowledge regarding conditions of inflation and interest rates will be useful for the business economist in framing suitable policies. Moreover, the long-run trends in the business world are determined by the prevailing macroeconomic factors.