What Are the Economic Determinants of a Business?

Business economy is an area in applied economics that uses mathematical methods and economic theory to study the interactions of businesses with the physical markets, capital and associated factors and organizations. It is concerned with the economic activities of the production, processing, distribution and marketing of a firm’s resources. The analysis of the economic principles governing business decisions makes it possible for managers to make decisions that will be beneficial to the firm. It also helps them to determine the allocation of resources of a firm.

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What Are the Economic Determinants of a Business?

Business economy is an area in applied economics that uses mathematical methods and economic theory to study the interactions of businesses with the physical markets, capital and associated factors and organizations. It is concerned with the economic activities of the production, processing, distribution and marketing of a firm’s resources. The analysis of the economic principles governing business decisions makes it possible for managers to make decisions that will be beneficial to the firm. It also helps them to determine the allocation of resources of a firm.

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The scope of business economy is much wider than the traditional narrow focus on the business cycle and micro economic activity of firms. It can also include the scope of government spending and its effects on economic activity. In fact, the study of this broad area of economic activity is called the Business Economics or Econometrics. The economic concepts that are part of business economy include supply chain analysis, micro-economic fundamentals including demand, supply, pricing, investment, technology and government spending and also the broader topics like human institutions, international trade and finance and financial systems.

The basic economic concept used by researchers who study the business cycle is the theory of demand and supply. In a market economy, there is a demand for some goods and services while at the same time there is also a supply of those items. This can be represented graphically through a supply-demand graph. For instance, when there is a high demand for computers but a low supply of them, the government spending on computers will cause an increase in the price of computers, forcing a decrease in the supply of computers.

On the other hand, if there is no sufficient demand for computers but there is a sufficient supply, then the supply will again increase causing an increase in the price of computers resulting in a decrease in the cost of computing devices. One can draw the business cycle in this manner many times. If, for instance, there is an increase in the inflationary price level, there will be positive economic growth because the cost of living will rise. However, if the price level decreases, then there will be a reduction in the growth of business due to the cut in the number of computers.

This is just one way of analyzing the business cycle and its determinants. Another determinant is the state of the economy. Economic indicators such as gross domestic product (GDP), durable goods orders, industrial production, employment, consumer price index, balance of payments, foreign trade, exchange rates and market value of currency are considered as indicators of the state of the economy. A negative sign in any of these economic indicators indicates that the economy is experiencing or going through a recession.

There are various ways of measuring the health of the economy. One can talk about the macroeconomic indicators, which include gross domestic product, durable goods orders, industrial production, employment, consumer price index, balance of payments, foreign trade, exchange rates and market value of currency. These are some of the important determinants of the health of the economy. However, they do not take into account the inter-diversified systems of internalized costs. Externalized costs such as the impact of changes in capital assets and internalized costs like the change in operational efficiencies are also important determinants of the health of the economy.

By talking about the externalized costs, it means that the true costs have been measured and passed on to the shareholders who actually own the business. These true costs are often referred to as the externalized costs of production or process. True costs refer to the damages caused by non-revenue producing activities. They are sometimes referred to as externalized inputs, which is a fancy term that simply means that they were not produced in house.

An alternative view on the business cycle is called the market economy. This form of economy is influenced by the externalized costs and has a long term tendency to up the efficiency of the production process. There is no centralization of costs. The centralization of costs occurs when a major change in production capacity takes place and this affects people’s income. In this type of economy, demand and supply of goods and services to determine prices. Therefore, many people believe that this form of economy is more efficient than the traditional or centralized form of economy where prices are determined by supply and demand.

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