Hello everyone, welcome to the Singhvi Online family. Hope you are in the best of health and spirit. In the previous blog, we understood what economics is about, and we did economic analysis. Now we are going to learn Business Economics & Decision-Making with the help of Business Economics.
Table of contents:
- Definition of business economics
- What is decision-making?
- Integration of business economics with economic theory
The important point to remember is that we are understanding economics from the viewpoint of how economics can be implemented in business. We all know that our wants are unlimited and means are limited. The same applies to business also. To summarize, Just like humans have unlimited wants and scarce resources, businesses to have unlimited goals and limited means to achieve them. The success and survival of any business depends upon sound decision-making. It is very essential to understand what exactly decision-making means? To understand it let us take a small example when you get a salary, what is that? Your immediate answer would be its money earned for putting efforts day in and day out and endless sacrifices made. Yes, you are correct, but what is money earned from an economics viewpoint? It is your resource. Now our wants are unlimited, like when I receive my salary, I have to make a choice whether to buy toys for my child or save for his future? Now, when I choose to save ie. I am making a decision to save. It’s that simple.
What is decision-making?
Decision-making involves:
· Evaluation of feasible alternatives.
· Rational judgment on the basis of information:
· Choice of particular alternative which the decision maker finds most suitable.
Now the question is why does the question of choice arise?
Because:
Productive resources: land, labor, capital, and management are:
Limited and can be employed in alternative uses.
Thus, it leaves the management of the company with the problem of decision-making.
The success and survival of any business depends on sound decisions.
The management of the company generally needs to make strategic, operational decisions.
A few examples of issues requiring decision-making in the context of business given below:
· Should our firm be in the business?
· Should the firm launch a product, given the highly competitive market environment?
· If a firm decides on launching the product, which available technique of production should be used?
· From where should the firm procure the necessary inputs and at what prices to have a competitive edge in the market?
· Should the firm make the components or buy them from other firms?
· How much should be the optimum output and at what price should the firm sell?
· How will the product placed in the market? Which customer segment should we focus on and how to improve customer experience? Which marketing strategy should be chosen? How much should be the marketing budget?
· How to combat risk and uncertainties involved?
Conclusion: decision-making refers to selecting an appropriate alternative that will provide the most efficient means of attaining a desired end from two alternative courses of action.
However, decision-making on above and similar issues is not simple and straightforward.
Now let us understand why is decision-making not that simple?
Because the economic environment in which the firm operates is: highly complex and dynamic.
Integration of business economics with economic theory
Since most of the time decisions need to be taken under conditions of uncertainty and imperfect knowledge it adds to the problem. Now let us put ourselves in manager’s shoes, and it’s a request to all please just close your eyes and imagine as if you are the manager of the company. It sounds amazing right, but as it is rightly said with authority comes responsibilities. Now, how would you solve this problem of uncertainty and imperfect knowledge? You as managers should be equipped with proper methodology and appropriate analytical tools and techniques.
Now the question that arises is how can business economics meet the needs of the management?
By providing a huge corpus of theory and techniques.
| Business economics integrates economic theory with business practice. |
| Business economics refers to integration of economic theory with business practice. |
Now let us understand how economics fills the gap between economic theory and business practice:
Firstly, Theories of economics provides the tools which explain various concepts such as:
· Demand
· Supply
· Cost
· Price
· Competition, etc.
Secondly, business economics applies these tools in the process of business decision-making.
Thus, business economics comprises that part of:
· Economic knowledge
· Logic
· Theories and
· Analytical tools
That is used for rational decision-making.
Thus, we can conclude economics fills the gap between economic theory and business practice.
Having understood this, let us consider some important facts about business economics:
Facts:
- Business economics has close connection with economic theory (micro as well as macro)
- Operations research
- Statistics
- Mathematics and
- The theory of decision-making.
- A professional business economist has to integrate the concepts and methods from all these disciplines in order to understand and analyze practical managerial problems.
- Business economics is not only valuable to business decision makers but also for managers of non-profit organizations such as NGOs and voluntary organizations.
- Business economics also referred as managerial economics.
Now let us understand business economics given by Joel Dean : Joel Dean defined business economics in terms of use of the economic analysis in the formulation of business policies. Business economics is essentially a component of applied economics as it includes application of certain quantitative techniques such as:
- Linear programming
- Regression analysis
- Capital budgeting
- Break even analysis and
- Cost analysis
Business economics may also be defined as the use of economic analysis to make business decisions involving the best use of an organization’s scarce resources.
Take test and check your understanding :
Thanks for Reading, Always Welcome to learn something new.