SCOPE OF BUSINESS ECONOMICS

SCOPE OF BUSINESS ECONOMICS
The scope of Business Economics is quite wide. It covers most of the practical problems a manager or a firm faces. There are two categories of business issues to which economic theories can be directly applied, namely:

1. Microeconomics applied to operational or internal Issues

2. Macroeconomics applied to environmental or external issues

Therefore, the scope of Business Economics may be discussed under the above two heads.

1. Microeconomics applied to operational or internal Issues
Operational issues include all those issues that arise within the organisation and fall within the purview and control of the management. These issues are internal in nature. Issues related to choice of business and its size, product decisions, technology and factor combinations, pricing and sales promotion, financing and management of investments and inventory are a few examples of operational issues. The following Microeconomic theories deal with most of these issues.

• Demand analysis and forecasting: Demand analysis pertains to the behaviour of consumers in the market. It studies the nature of consumer preferences and the euect of changes in the determinants of demand such as, price of the commodity, consumers’ income, prices of related commodities, consumer tastes and preferences etc. 

Demand forecasting is the technique of predicting future demand for goods and services on the basis of the past behaviour of factors which auect demand. Accurate forecasting is essential for a firm to enable it to produce the required quantities at the right time and to arrange, well in advance, for the various factors of production viz., raw materials, labour, machines, equipment, buildings etc. Business Economics provides the manager with the scientific tools which assist him in forecasting demand.

•  Production and Cost Analysis: Production theory explains the relationship between inputs and output. A business economist has to decide on the optimum size of output, given the objectives of the firm. He has also to ensure that the firm is not incurring undue costs. Production analysis enables the firm to decide on the choice of appropriate technology and selection of least - cost input-mix to achieve technically eflcient way of producing output, given the inputs. Cost analysis enables the firm to recognise the behaviour of costs when variables such as output, time period and size of plant change. The firm will be able to identify ways to maximize profits by producing the desired level of output at the minimum possible cost. 
• Inventory Management: Inventory management theories pertain to rules that firms can use to minimise the costs associated with maintaining inventory in the form of ‘work-in-process,’ ‘raw materials’, and ‘finished goods’. Inventory policies auect the profitability of the firm. Business economists use methods such as ABC analysis, simple simulation exercises and mathematical models to help the firm maintain optimum stock of inventories. 
•  Market Structure and Pricing Policies: Analysis of the structure of the market provides information about the nature and extent of competition which the firms have to face. This helps in determining the degree of market power (ability to determine prices) which the firm commands and the strategies to be followed in market management under the given competitive conditions such as, product design and marketing. Price theory explains how prices are determined under diuerent kinds of market conditions and assists the firm in framing suitable price policies. 
•  Resource Allocation: Business Economics, with the help of advanced tools such as linear programming, enables the firm to arrive at the best course of action for optimum utilisation of available resources. 
• Theory of Capital and Investment Decisions: For maximizing its profits, the firm has to carefully evaluate its investment decisions and carry out a sensible policy of capital allocation. Theories related to capital and investment provide scientific criteria for choice of investment projects and in assessment of the eflciency of capital. Business Economics supports decision making on allocation of scarce capital among competing uses of funds. 
• Profit Analysis: Profits are, most often, uncertain due to changing prices and market conditions. Profit theory guides the firm in the measurement and management of profits under conditions of uncertainty. Profit analysis is also immensely useful in future profit planning. 
•  Risk and Uncertainty Analysis: Business firms generally operate under conditions of risk and uncertainty. Analysis of risks and uncertainties helps the business firm in arriving at eflcient decisions and in formulating plans on the basis of past data, current information and future prediction. 

2. Macroeconomics applied to environmental or external issues

Environmental factors have significant influence upon the functioning and performance of business. The major macro economic factors relate to:

• the type of economic system 
• stage of business cycle 
•  the general trends in national income, employment, prices, saving and investment. 
•  Government’s economic policies like industrial policy, competition policy, monetary and fiscal policy, price policy, foreign trade policy and globalization policies 
•  working of financial sector and capital market 
•  socio-economic organisations like trade unions, producer and consumer unions and cooperatives.
•   social and political environment. 

Business decisions cannot be taken without considering these present and future environmental factors. As the management of the firm has no control over these factors, it should fine-tune its policies to minimise their adverse euects.