The application of economic theory and methodology to enterprises is Business Economics, also known as Managerial Economics. Business is about making decisions. Decision-making means choosing one alternative course of action out of two or more. The question of choice arises because the basic resources, such as capital, land, labour and management, are limited. This will make decision-making a decision-making function that will provide the most effective way to achieve the desired aim, i.e. the profit-maximization.
Various business aspects need the Chief Executive Officer’s attention. He may be asked to choose one option from the many available to him. It would be in the interest of the company to reach an optimal decision, which promotes the objective of the company. The company must be equipped with a rational methodology and the appropriate tools to scientifically formulate the business problem and to find its optimal solution.
Nature of Business Economics :
Two lines were followed by traditional economic theory, that is to say, normative and positive. The standard focuses on prescriptive statements and helps to lay down rules that achieve the specified business objectives. On the other hand, the positive focus is on the description of how the economic system operates without employees. The purpose is to describe its operation.
The focus is on normative theory in business economics. Business economists are looking to lay down rules that help companies to achieve their goals, which is, indeed, the core of the word normative. However, if companies are to lay down valid rules of decision, they must understand their environment thoroughly. The study of positive or descriptive theory is therefore necessary. Business economy therefore combines the basic elements of normative and positive economic theory, with greater emphasis on the former than the latter.
Scope of Business Economics :
With regard to the scope of business economy, different authors have no uniform views. The following aspects are generally said to fall under the economics of companies.
1. Demand Analysis and Forecasting:
A company is an economic organisation that transforms productive resources into marketable goods. The precise estimates of demand are important for business decision-making. A demand forecast can act as a management guide to maintain and reinforce the position of the market and to increase profit. Analyzing demands helps determine the different factors that influence product requests and provides guidelines for demand manipulation.
Demand analysis and projections have been the essential foundation for business planning and occupy a strategic position in management economics. The key topics covered are Demand criteria, Demand differences and Demand predictions.
2. Analysis of costs and production:
In conjunction with the data derived from the accounting records of the firm, an economic cost study may provide significant estimates of costs which are useful for management decisions. There is an element of cost uncertainty because not everyone is aware of and controllable in determining the costs.
3. Decisions, policies and practices on pricing:
Pricing is an important business area. Indeed, price is the genesis of a company’s revenue and as such its success depends to a large extent on the correctness of pricing decisions. The key aspects covered by pricing include. Determining the price in different market forms, method for pricing, differential pricing, product line pricing and price forecasting.
4. Profit Management:
Commercial companies are usually organised to make profits and, as an important measure of the company’s success, profits earned in the long term. If future knowledge were perfect it would have been a very easy task to analyse the profit. But expectations cannot always be achieved in a world of uncertainty, so profit planning and measurement is a complex business economic area. The key aspects covered by this field are nature and profit measurement, profit policy and profit planning technology such as break-even analysis.
5. Management of capital:
The most complicated and troubling business managers include those concerning the capital investments of a company among various types of company problems. The problems are so complex that solving takes considerable time and effort. It involves relatively large sums. The top management often takes the decision concerning the management of capital.
Briefly, the management of capital involves capital planning and control. The main topics are: Return on Capital Cost and Project Selection.