Theory Vs Application of Economics in Business
The subject of Business Economics is a wide study. The study is mainly concerned with the economics of the business. Business Economics particularly bridges down the gap of theoretical knowledge of economics and practical application of the same in the conduct of business.
In this context, we are going to discuss the fundamental aspects of business economics, the division of business economics, and the nature and scope of the same are to be studied.
Definition of Business Economics
In simple terms, we can say that business economics is a concentration of applied economics that deals with the finance, organization, market, and environment-related factors which are primarily faced by the companies or business organizations.
Business Economics studies the key elements of scarcity thus dealing with its concept, the product factors, distribution, and consumption of these resources.
Division of Business Economics - Macroeconomics and Microeconomics
The prevalent theories which we study on economics seem to be simple, while the actual application is a much more complex task. The managers who are new to the field face the maximum trouble in correlating their recently learned theories and their application in the real world. For such scenarios, the manager needs to know business economics. Business economics is an amalgamation of logical and analytical tools that attempts to solve the differences between the theories and the practice. It is important to study the details of the nature and scope of business economics.
However, for a better understanding of the concepts, it is important to understand the two major parts of economics- microeconomics and macroeconomics.
Microeconomics
Microeconomics is defined as the study of the decision-making process of individual units with respect to the proper allocation of their limited resources. These individual units are also called firms or consumers. The focus is directed to individual units or a small number of units instead of a combination of all the units. It provides a restricted picture of the situation and excludes the broader economic environment. The study of microeconomics includes the following topics.
Consumer behaviour,
Pricing of products,
Firm’s behaviour,
Pricing of factors,
Industry location, and,
Economic conditions of certain groups of people.
Macroeconomics
Macroeconomics is defined as the study of the economical behaviour of larger aggregates like total consumption, overall output, and it also considers the shift in the position of these aggregates. Therefore, it encompasses all the decisions made by different consumers and their effect on the overall economy. The study of macroeconomics includes the following topics.
General price and rates of interest,
National output,
National income,
The external value of the national currency,
Balance of payments,
Balance of trade,
Rate of economic growth,
Level of employment.
Nature of Business Economics
To explain the nature and scope of business economics, it is important to look at it from the following angles.
From the Perspective of Science
Science can be defined as a systematic approach to generating a relationship between cause and effect. Statistics mathematics and econometrics are all considered to be decision sciences. To describe the nature of business economics, it can be considered as an integration of decision sciences with the theories of economics, so that the businesses can strategize their plans to achieve their goals. It follows a scientific approach and also checks the validity of all the results thus obtained.
From the Perspective of Microeconomics
Looking into the basic differences between microeconomics and macroeconomics, a businessman will certainly first focus on the objectives and the achievements of his own organization. He should target his profit-making abilities and ensure the long-term survival of his company in the first place. Business economics focusses more on the analysis and decision-making abilities of the individual businesses and therefore utilizes the techniques related to the concept of microeconomics.
Incorporation of Macroeconomic Elements
Although business economics is largely based on the microeconomy, the nature, and scope of business economics notes certain concepts of macroeconomics as well. For example, although any business will mainly focus on its survival in the market and on its profits, it cannot function in isolation. External factors like tax policies, the country’s economy, employment rate, income, etc., are considered within the purview of macroeconomics.
Therefore, although a business is mostly considered as a segment of microeconomics, the nature and scope of business economics also contain elements of macroeconomics.
From the Perspective of Art
The concept of art can also be used to discuss the nature and scope of business economics. It also involves the practical application of regulations and rules to move forward towards the goals of the company.
Incorporation of Theories of Private Enterprises and Markets
Business economics considers the resource allocation theory prevalent in the private enterprise economy. Therefore the nature and scope of business economics notes also include market and private enterprise theories.
Pragmatic Approach
In comparison to the theoretical nature of the microeconomy, business economics has a pragmatic approach. It is more related to finding efficient solutions to the problems faced by companies in the real world.
Interdisciplinary Nature of Business Economics
Business economics has an interdisciplinary approach by involving disciplines from statistics, mathematics, marketing, accounting, etc.
Normative
On a broader basis, economic theory can be described in two ways- normative and positive. Normative science includes judgments that have values. It analyses the circumstance and provides suggestions on the course of action. A positive approach establishes a scientific approach to define the cause-effect relationship without the involvement of any value judgment. Business economics provides more focus on the normative approach but considers both approaches.
Scope of Business Economics
The scope of business economics can be put under various heads:
Microeconomics which deals with Operational Issues
Macroeconomics applied to environmental issues.
This was an exhaustive study of the preview of Business Economics. The study is segregated into two divisions which we have thus studied. From the academic point of view, theoretical understanding is required, while if you want to opt for business then the practical application of the same study is to be done.
FAQs on Nature of Business Economics: Explained
1. What is Business Economics and what is its main purpose?
Business Economics is the practical application of economic theories and principles to solve real business problems. Its main purpose is to help business managers in decision-making and forward planning by providing a logical framework for analysing the business environment.
2. How does Business Economics connect Microeconomics and Macroeconomics?
Business Economics is primarily a part of microeconomics because it focuses on the issues of an individual business, like pricing and output. However, it also uses principles of macroeconomics because every business operates within a larger economy and is affected by factors like inflation, government policies, and national income.
3. What kind of day-to-day business problems can be better understood using Business Economics?
Business Economics provides tools to understand and solve several common business problems, including:
- Demand Analysis: How many units of a product will customers buy?
- Cost Analysis: How can we produce goods at the lowest possible cost?
- Pricing Decisions: What is the best price to charge for our product?
- Profit Management: How can we maximise our profits?
- Investment Decisions: Is it a good idea to invest in new machinery?
4. Why is Business Economics considered both a science and an art?
Business Economics is considered both because it has two sides. It is a science as it uses a systematic body of knowledge and established economic theories to analyse problems. It is an art because applying these theories successfully to real-world situations requires practical skill, creativity, and experience from the manager.
5. How does Business Economics use an abstract theory like the 'Law of Demand' in a practical way?
Business Economics acts as a bridge between theory and practice. For example, the 'Law of Demand' is a general economic theory. A business manager uses this concept to make a practical pricing decision. By understanding that higher prices usually lead to lower demand, the manager can forecast how a price change will impact sales and overall revenue, helping them set the optimal price.
6. What does it mean for Business Economics to be 'normative' in nature?
To say Business Economics is normative means it is prescriptive; it suggests what 'should be' done. Instead of just describing an economic situation (which is positive economics), it provides value judgements and recommends courses of action to achieve specific business goals, such as suggesting a policy to reduce costs or increase sales.
7. How is Business Economics different from traditional Economics?
The key difference is their focus. Traditional Economics is broader and more theoretical, studying the economy as a whole (e.g., poverty, unemployment). Business Economics is more specific and practical. It applies selected tools from economics to solve the internal problems of a single business firm.
8. Why is it important for a commerce student to understand the 'nature' of Business Economics?
Understanding its nature helps a student see economics not just as a set of theories, but as a practical problem-solving tool. It builds a foundation for making logical and informed business decisions in future roles like management or entrepreneurship, moving beyond guesswork to structured analysis.
