Business economics is a discipline in economic science that makes use of statistical methods and economic theory to examine the factors influencing the diversity of organisational structures and the inter-relatedness of firms with capital, labour and product markets. By studying the inter-relations of business organisations, it tries to shed light on the mechanisms through which economic activity creates and develops economic power. In addition, it also studies the impact of monetary policy, competition and technology on the level of output and income. The economic significance of a firm is evaluated by applying the theory of demand and supply.
Analysis of business has two main components. One deals with the economic principles and concepts, while the other deals with the assessment of the effects of business decisions on the economy as a whole. It is essential to apply business analysis both theoretically and practically. This is because certain actions can affect the economy in one way, but have relatively little or no effect on other sectors of the economy. Thus a firm that spends heavily on advertising may have a positive or negative effect on employment.
A number of methods are used in assessing business problems and their effects on the economy. Two types of theoretical economic approaches are descriptive and explanatory. Descriptive economics describes how prices of goods and services are produced and how they affect the overall economy. It is sometimes called “purchasing theory” because it makes use of the purchasing power of money to reflect changes in the costs of production. Economic theories of demand are used to describe why certain firms are capable of earning a profit and others are not. These theories assume that demand curves exist and that firms that are economically powerful will find their demands satisfied by other firms that are less economically powerful.
Many concepts in business economics fall under the heading of the discretionary theory of demand. This school of thought suggests that there is a certain level of demand that is sufficient to drive the level of prices. Economics assumes that the only factors that affect firm decision-making are demand and supply. The other elements of economic activity are beyond the control of managers. Hence these other factors set the terms of trade and determine the level of prices that are acceptable to firms.
Some topics in business economics are determined by environmental factors. Environmental factors are important in determining price levels and business decisions. For example, the price level necessary to attract consumers is related to the extent of land use. Land use determines the scale of production and distribution of income. In addition, the extent of pollution can be a major influencer of pricing decisions.
Another important area of business decision-making concerns the scope of liability. A firm’s scope of liability is determined by the extent of its physical assets, the legal system’s ability to provide protection and relief, the extent of its claims against other parties, and public policy. A firm’s scope of liability is also influenced by external factors such as the impact of new technologies on the economy, changes in tax laws, and changes in social attitudes toward corporate social responsibility. All these external factors have an effect on the scope of production and distribution of national income. Changes in national income caused by changes in economic scope of a firm can affect business decisions made by firms in different ways.
One branch of business economics that directly observes the economic theories is microeconomics. Microeconomics studies micro aspects of economic activity. A micro economy has limited scope because the size of the economy is small. Microeconomists observe how prices and production are controlled by the behaviour of individual agents within the economy. Two broad fields of microeconomics are microfoundations and macrofounded, each focusing on a specific component of economic activity.
Business and economic concepts can be studied at graduate or doctoral level. At the graduate level, students learn about economic concepts such as theory, practice, and models. They gain knowledge about the methods that a firm uses to make business decisions. Finally, they learn about various economic factors that may have an effect on firm decision-making. Graduates may specialize in one or more areas of business economics.