B com 1st Year Business Economics An Introduction
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B com 1st Year Business Economics An Introduction :-
Business Economics: An Introduction
1. ‘‘Business Economics is the integration of economic theory with business practice for the purpose of decision making and forward planning by management” ? Explain. (Meerut, 2004, 2006)
“Business Economics is a study of the behaviour of firms in theory and practice.” Discuss and give the characteristics of Business Economics. (2005)
The main aim of management of business and industrial enterprise is to maximime the profit of the organisation. To achieve this object, the management have to take the appropriate business decisions, there for edits necessary that manager should have the clear understanding of the economic and environmental conditions under which decisions are to be taken. Hence, the management should have knowledge of different aspects of economic theory and its tool of analysis, involved-in ‘the process of decision making. Practical application of economic theories in solving the economic problems of a business enterprise is known as ‘Business Economics’.
Meaning and Definition of Business Economics
Business economics is a segment of micro-economics which is a branch of general economics. It includes the study of those principles, hypotheses and concepts of economics of firm and business which are widely applied in the analytical study of business environment, business policies, planning, fore casting and decision-makings to achieve the objectives of any business organisation and also to maximise economic welfare of the society. Thus, business economics is the study of those economic principles, logics and techniques which are used to solve the practical problems of a firm. Main definitions of business economics are as follows ‘.
“Business economics is the integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management”. —Spencer & Siegelman
“Business economics consists of the use of economic modes of thought to analyse business situations”.
—McNair & Meriam
“Business economics includes that portion of economics known as the theory of firm, a body Of firm theory, which can be of considerable assistance to businessman in his decision-making”.
—Norman F. Dufty
“Managerial economics is economics applied in decision-making. It is a special branch of economics bridging the gap between abstract theory and man genial practice”. — Havens, Mote & Paul
The purpose of managerial economics is to show how economic anal SIS can be used in formulating business policies”. —Joel Dean
Thus, it becomes clear from the above definitions that it is not a new discipline of economics; it is only an applied branch of economics. It gives knowledge to the management how economic principles can be applied in real business environment. It is the integration of economic theories with. Business practice Business economics attempts to reconcile the techniques and theories of traditional economics with the actual business environment. Thus, it attempts to act as a bridge between-the two branches of knowledge. Business economics is also known as Managerial Economics, Applied Economics or Economics of the Firm etc.
Characteristics of Business Economics
(1) Micro Economics: It is Micro-Economics in nature: It includes the study of problem of an individual firm.
(2) Pragmatic and Applied Approach: Business Economics includes the study of application methods* of economic principles. It deals only on the practical problems faced by the firm in their day-to-day functioning:
(3) Related to the Study of Theory of Firm: It includes the study of theory of firm.’ It includes the study Of profit theories and analysis of demand-supply, cost-revenue, equilibrium, production, pricing, costing, marketing, sales, profit -and capital management, business forecasting, etc. Distribution theories of rent, wage, interest, etc. have not many applications in it.
(4) Perspective Nature: Nature of business economics is perspective and not descriptive. It studies the application of economic principles in planning and decision-makings. It is an applied discipline. It is mainly concerned with the business decision making and value judgment.
(5) Adequate Importance to Macro Economics: Main source of study of business economics is micro-economics, blitz macro economics also plays a vital role in the study of business economics. With the study of macro economics, the business manager acquires knowledge of the overall environment (external forces) under ‘which the firm has to work.
Those aspects of macro economics which affect a business firm significantly, considered as a part of business economics. Some external forces such as business cycle, national income, accounting, foreign trade policy, monetary policy etc. play a crucial role in the working of a concern. Therefore, a manager should have the knowledge of these factors.
(6) A Decision-making at Managerial Level: Business economics helps the management to take decisions and prepare plans and policies for the future. It provides required information’s and data for the appropriate decision-making.
(7) Co-ordinating Nature: Business economics, lies on the border of traditional economics and business management and acts as a bridge between the two branches of knowledge. Integrates the economic theories with the business practice. Thus it has co-ordinating nature. Importance or Utility of Business Economics Generally, success of a business depends on the appropriate decisions taken by the management within appropriate time. In an environment of uncertainty and risk, decision-making and forward planning is a complicated process. Under such conditions, ‘techniques of economic analysis arc useful in taking appropriate decisions and forward planning. Thus, business economics plays an important role in the decision-making process. The importance of the business economics in a business and industrial enterprise are as follows: (1) Helpful in Planning and Decision-making: Business economics helps the management in taking appropriate ‘decisions and efficient forward planning. It helps the management of a firm to make the most efficient and economic utilization of the scarce resources available to the firm. Important decisions for a firm regarding demand, production, pricing, costing etc. are taken with the help of the various tools of business economics. (2) Helpful in Reducing Uncertainty: Generally, business manager has to work in an environment of uncertainty. Although, these uncertainties cannot be fully extinguished yet these can be minimised with the help of business economics.
(3) Helpful in Determining Business Policies: A business manager has to formulate different policies for the smooth functioning of a firm. Theories of demand, production, price, profit etc. helps the management in determining the business policies.
(4) Estimating Economic Relationship: Business economics helps in business planning and decision-making by estimating economic relationship between different business factors, such as income, elasticity of demand, profit analysis, cost volume etc.
(5) Helpful in Understanding of external Environment: Business economics help the management in understanding of external factors which the firm cannot have any control.” There for, the plan, policies and programmers of the firm should be adjusted in the light of these factors, (6) Helpful in co-ordination between Theory and Practice: Business economics is very helpful in bringing co-ordination between theories and applications. It moulds the economic theories in conformity with actual business practice and situations so that these theories can be used successfully by a business firm in taking decisions and forward planning.
(7) Helpful in Predicting Economic Quantities: Business economics is very helpful for the management in predicting various economic variables, such as, cost, profit, demand, production, price etc. Economic analysis helps to make predictions about economics events and thus future should be well predicted in the light of these quantities.
(8) Inducing the Social Responsibility of’ Management: Business economics induces the management towards their social responsibility. It induces the management to make such policies which lead to the optimization of available resources, employment generation, consumer’s satisfaction, labour welfare and economic development of the country.
Q. 2. Define Business Economics. How does to differ from Traditional Economics ? (2004 Back)
Or Define the nature and scope of Business Economics. How does it differ from Traditional Economics ?
Or “Business Economics is an application of economic theory to business management.” Explain and differentiate between Traditional Economics and business Economics. (2005 Back)
Nature of Business Economics For determining the nature of business economics, firstly we have to study whether, it is a science or art or both and also that if it is a science, then, whether, it is a positive science or a normative science.
Business Economics, as a Science : Science is that branch of knowledge which establishes relationship between .cause and effects of an event. It implies a systematic analysis and studio subject. It studies why and how a particular thing happens and what are the effects of an event. From this point of view, it is clear that Business Economics is a science because
(i) For decision making and forward planning, systematic collection, classification and analysis of facts and necessary data are to be made in Business Economics;
(ii) It establishes the relationship between the cause and effect of the economic events;
(iii) It applies economic laws and principles;
(iv) Generally, its laws are universal.
Though, it must be remembered here that business economics is not as stable and perfect Science as Physics and Chemistry, infect, it is a social science under which a firm’s behaviour is studied.
Business Economics as a Positive Science: Positive Science is that branch of science which studies what is being done. It does not suggest the solution of a problem. From this point of view, it can be said that business economics is a positive science because it helps in the study of different aspects of’ a firm such as production, cost, profitability, etc.
Business Economics as a Normative Science: Normative science is that branch of science which studies what should be done. It provides an answer to the question—What ought to be ‘? From this point of view, it can be said that it is a normative science because it studies and analysis the economic problems of a firm and suggests what should have to bc done to achieve its objectives and develops the way of its progress. Many business problems such as what will be the demand of its product ? What should be the price of the product ? How far its profitability can be increased, are analysed in business economics.
Business Economics e an Art: Art is that branch of systematic knowledge which suggests the best possible manner of doing a thing. In the words of Keynes, “An art is a system of rules -for the attainment of a given end.” Business Economics helps the management in the best and most efficient altercation of limited resources of the firm. It helps the management in selecting best possible alternative out of the available different alternatives. It also develops the way for the attainment of the firm’s objectives. Hence, it is clear that business economics is an art also.
In brief, it can be said that Business Economics is a both science as well as an art. That is why, it is known as “Scientific Art”
Scope of Business Economics
Though, there is no uniform pattern in respect of the scope of business economics, yet it includes the followings subjects: (l) Theory of Firm: In the business economics, model of an individual firm or industrial firm, its objectives, principles and functioning etc. are studied.
(2) Demand Analysis and Forecasting: The demand analysis is very important for decision-making of any business organisation or firm. An accurate estimate of demand for products helps a lot in managerial decision-making. This is a major Segment of the scope of managerial economics. It includes analytical study of demand law, elasticity of demand, utility and indifference curve approaches of consumer’s equilibrium, demand forecasting, determinants of demand, impact of income, price and substitution on demand, socio-psychological aspects of demand, etc.
(3) Cost Analysis: The management decisions depend a lot upon cost analysis which is very important part of the scope of business economics. It includes the study of cost concept and its classification, cost and marginal analysis, cost-output relationship, cost’ control, cost planning, cost and benefit analysis etc. Cost and output analysis is necessary for proper profit planning, cost control and sound management practice.
(4) Pricing Policies and Practices: The pricing analysis is an important aspect of the scope of managerial economics. It is the main source of profit-earning by any business organisation. It includes the analytical study of pricing of out put in vari011s forms of market competitions, viz., perfect competition, monopoly, duopoly, oligopoly, monopolistic competition etc., pricing methods, differential pricing, price forecasting pricing planning, etc. Short term and long term price policies of a firm are also studied in this part.
(5) Profit Management: Main aim of all the business and industrial enterprises is to earn maximum profit. Thus, profit management is an important part of the business economics. It is necessary – for the improvement of the efficiency of a firm. In this part profit forecasted is done after taking into consideration the various factors affecting them. It includes the analytical study of the conCept. types, nature and measurement methods of profit, profit forecasting, profit policies and policy-measures, profit planning, profit management, profit decisions, etc.
(6) Production Analysis: The production analysis is very important for the management of any business organisation for achieving the objectives in a given period. It constitutes a major part of the scope of managerial economics. It includes the analytical study of production concept, production function, laws of production/return, iso-product curve analysis, Input-output analysis, linear programming, production policies, production forecasting, production planning, production management, production decisions, etc. It helps in determining the size of firm and the level of production.
(7) Study of Consumer’s Behaviour: Study of consumer behaviour is also must for a businessman. It studies what is the effect of the income, taste and habit on the demand of a commodity? In how much quantity do they purchase a commodity? What are the important factors influencing the demand of a commodity?
(8) Capital Management: Capital budgeting is also an important part of business economics. It is the study of planning and controlling of capital expenditure. In this part capital investment, capital expenditure and its control, return on capital investment, and selection of profitable capital projects etc. are studied.
(9) Financial Analysis: It is very important in managerial decision-makings of a business organisation. It helps in the advanced arrangement of contingency fund to meet short-term and long-term financial requirements. It includes the study of financial policies, and financial decision-makings, etc.
(10) Study of Macro Economics: There are certain subject-matters of macro-economic which arc an important part of the scope of managerial economics because these subject-matters are related to those external factors which affect a lot the business trend and business environment. For example, business cycle, inflation-definition, national income-accounting, foreign trade, demography, etc. Difference Between Business Economics And Traditional Economics
Though business economics is a branch is a traditional economics, yet three exists some difference also. The major points of differences are as under:
Short answer questions
Q.1. Discuss in brief the nature of business economics.
Ans. See page 4.
Q.2. Discuss in brief the scope of business economics.
Ans. See page 5.
Q.3. Distinguish between business economics and traditional economics.
Ans. See page 6 and 7.