Question

Discuss the role of economic thinking in the nature of businesses and describe how economics can help make better policy choices.

Answer 1

The role of economic thinking in the nature of businesses is associated with Business Economics. Business Economics is the application of economic theory and methodology to business. Business involves decision-making. Decision making means the process of selecting one out of two or more alternative courses of action. The question of choice arises because the basic resources such as capital, land, labour and management are limited and can be employed in alternative uses. The decision-making function thus becomes one of making choice and taking decisions that will provide the most efficient means of attaining a desired end, profit maximation.

According to Mc Nair and Meriam, “Business economic consists of the use of economic modes of thought to analyse business situations.”

Business economics is a discipline which deals with the application of economic theory to business management. Business economic thus lies on the borderline between economic and business management and serves as a bridge between the two disciplines. Business Economics integrates these decision sciences with Economic Theory to arrive at strategies to help businesses achieve their goals. Hence, it follows scientific methods and also tests the validity of the results.

• ROLE OF ECONOMICS IN MAKING BETTER POLICY CHOICE

1. Demand forecasting

A demand forecast can serve as a guide to management for maintaining and strengthening market position and enlarging profits. Demands analysis helps identify the various factors influencing the product demand and thus provides guidelines for manipulating demand. Demand analysis and forecasting provided the essential basis for business planning , policy formulation.

2. Providing a quantitative base for decision making & forward planning

Business economics provide a quantitative base for decision making, policy making & forward planning in a business. Business economist helps to study the in-depth knowledge of the various factors, controllable & non-controllable which influence the working of a business unit. It helps in planning, production & marketing planning, employing the latest organizational model & develop management techniques to maximize output & minimize operating cost of the firm.

3. Traditional Economical Aspects

Business economic is concerned with those aspects of traditional economics which are relevant for business decision making in real life. These are adapted or modified with a view to enable the manager take better decisions. Various policies are formed on the basis of these aspects. Such policies provides guidance to the employees and help them work towards organisational goals.

4. Cost Analysis

A study of economic costs, combined with the data drawn from the firm’s accounting records, can yield significant cost estimates which are useful for formulating management policies . An element of cost uncertainty exists because all the factors determining costs are not known and controllable. Discovering economic costs and the ability to measure them are the necessary steps for more effective profit planning, cost control and sound pricing policy.