CA Foundation Business Economics Study Material Chapter 1 Nature and Scope of Business Economics – Introduction

WHAT IS ECONOMICS ABOUT?

The word ‘Economics’ is derived from the Greek word ‘Oikonomia’ which means household management. Till 19th century, economics was known as ‘Political Economy’. In 1776, Adam Smith published his book entitled “An Inquiry into the Nature and Causes of the Wealth of Nations” which is considered as the first modern work of Economics.

Every individual, every society and every country in this world faces the problem of making CHOICE. This is because of two facts—

  • Human wants are unlimited; and
  • The means (resources) to satisfy unlimited wants are relatively scarce and these scarce resources have alternative uses.

As a result we are confronted with the problem of making choice of wants to be satisfied or the choice among the uses of resources. Thus, we are faced with the problem of allocation of resources to various uses.

The definition of Economics is however is narrow because it concentrates only at present i.e., how to use relative scarce resources to satisfy unlimited human wants. So it gives the picture of a society with fixed resources, skills and productive capacity, deciding what type of goods and services to be produced and how to distribute among the members of society.

However, over a period of time growth takes place. With growth there is increase in the resources and improvement in the quality of resources. But this growth in production and income is not smooth. It is through ups and downs. Economics, therefore, deals not only with how a country allocates its scarce productive resources but also with increase in the productive capacity of resources and with the reasons which led to sharp fluctuations in the use of resources.

Economics gives us understanding on economic issues like changes in the price of a commodity, changes in general price level of goods and services, poverty, level of unemployment, etc. The understanding of such helps us to decide the models and frameworks that can be applied in different situations. The tools of economics helps us to choose the best course of action from various alternatives available. However, economic problems are of complex nature and are affected by economic forces, political set-up, social norms, etc. Thus, economics does not guarantee that all problems will be solved appropriately but it helps us to examine the problem in right perspective and find suitable measures to deal with it.

Meaning of Business Economics

  • Business Economics is also referred to as Managerial Economics. It is application of economic theory and methodology.
  • Every business involves decision-making as survival and success depends on sound decisions.
  • Decision making means the process of –
    • evaluating various course of action,
    • making rational judgment on the basis of available information, and
    • selecting i.e. making choice of a suitable alternative by decision maker.
  • Decision making is not simple and straight forward. It has become very complex due to ever changing business environments, growing competition, large scale production, big size of business houses, complex laws, cost awareness, etc. In other words the economic environment in which the firm operates is very complex and dynamic.
  • Business Economics provides a scientific base to the professional management of a business activity. It provides tools like budgeting, market analysis, cost-benefit analysis, etc. which can be scientifically applied to take sound business decisions. Thus, Business Economics is a sub-branch of Economics which aims at the scientific application of economic knowledge, logic, theories and tools to take rational business decisions. Thus, it is an APPLIED ECONOMICS.
  • Business Economics is closely connected with both viz., Micro-Economic Theory as well as Macro-Economic Theory. It is also useful to the managers of ‘not-for-profit’ organisations.

DEFINITIONS OF BUSINESS ECONOMICS

  • “Business Economics in terms of the use of economic analysis in the formulation of business policies. Business Economics is essentially a component of Applied Economics as it includes application of selected quantitative techniques such as linear programming, regression analysis, capital budgeting, break-even analysis and cost analysis.” – Joel Dean
  • “Business Economics is concerned with the application of economic laws, principles and methodologies to the managerial decision making process within a business firm under the conditions of risks and uncertainties.” – Evans Douglas