For a layman, the economic world is a complex place. Usually, economic theories are simple and hypothetical in nature. Hence, most managers find a difference between the propositions of these theories and the real economic world. This is where Business Economics steps in. It enables the application of economic logic and analytical tools and attempts to bridge the gap between theory and practice. In this article, we will describe the nature of business economics to help understand the economic theories better.
Before we start to study the nature of business economics, it is important to understand that economics is broadly divided into two major parts:
- Micro Economics
- Macro Economics
This is the study of the way individual units make decisions regarding the efficient allocation of their scarce resources. Also, these individual units are consumers or firms.
In microeconomics, the focus is on a small number of units rather than all units combined. Further, it does not give us a picture of the happenings in the wider economic environment. The study includes:
- Product pricing;
- Consumer behavior;
- Factor pricing;
- The economic conditions of a section of people;
- The behavior of firms; and
- Location of the industry.
Browse more Topics under Introduction To Business Economics
- Meaning Of Business Economics
- Scope of Business Economics
- Basic Problems Of An Economy
- Capitalist Economy
- Socialist Economy
- Mixed Economy
- Role Of Price Mechanism
This is the study of the behavior of large economic aggregates like overall output levels, total consumption, etc. The study also includes the shift of these aggregates over time. Therefore, macroeconomics analyzes the overall economic conditions which are an overall effect of millions of decisions made by different firms and consumers.
- National Income and National Output;
- The general price level and interest rates;
- A balance of trade and balance of payments;
- The external value of currency;
- The overall level of savings and investment; and
- Level of employment and rate of economic growth.
Nature of Business Economics
Business Economics is a Science
What is Science? It is simply a systematic body of knowledge which can establish a relationship between cause and effect. Further, Mathematics, Statistics, and Econometrics are decision sciences.
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. This is one aspect of the nature of business economics.
It is Based on Micro Economics
We understand the basic difference between micro and macroeconomics. A business manager is certainly more concerned about achieving the objectives of his own organization. After all, this helps him in ensuring profits and long-term survival of the firm.
Business Economics is more concerned with the decision-making situations of individual establishments. Therefore, it depends on the techniques of Microeconomics.
It Incorporates Elements of Macro Analysis
Even though all businesses focus on their profitability and survival, a firm cannot operate in a vacuum. The external environment of the economy like income and employment levels in the economy, tax policies, etc., affects the firm. All these external factors are components of Macroeconomy.
Therefore, a business manager has to take all such factors into consideration which may influence his business environment.
It is an Art
Business Economics is an art as it requires the practical application of rules and principle to achieve set objectives.
Use of Theory of Markets and Private Enterprises
Business Economics primarily uses the theory of markets and private enterprises. It uses the theory of the firm and resource allocation in a private enterprise economy.
Pragmatic in Approach
Microeconomics is purely theoretical and analyzes economic occurrences under unrealistic assumptions. On the other hand, Business Economics is pragmatic in its approach. It tries to solve the problems which the firms face in the real world.
Business Economics incorporates tools from many other disciplines like mathematics, statistics, accounting, marketing, etc. Therefore, is in interdisciplinary in nature.
Broadly speaking, Economic Theory has evolved along two lines – Positive and Normative.
A positive or pure science analyzes the cause and effect relationship between variables in a scientific manner. However, it does not involve any value judgment. In simpler words, it describes the economic behavior of individuals or society without focusing on the desirability of such behavior.
On the other hand, normative science involves value judgments. It suggests a course of action under the given circumstances.
Usually, Business Economics is normative in nature. It offers suggestions for the application of economic principles while forming policies, making decisions, and planning for the future. However, firms must understand their environment thoroughly to establish decision rules. This requires the study of positive economic theory.
Therefore, we can say that Business Economics combines the essentials of both the theories while keeping more emphasis on the normative economic theory.
Solved Question on Nature of Business Economics
Q1. What is a normative economic theory?
Answer: A normative economic theory takes real-life situations into consideration and suggests policies to improve the economic welfare of the firm. Normative means relating to an ideal or standard and based on what is considered to be a normal way of doing things. In other words, it offers suggestions for the application of economic principles while forming policies, making decisions, and planning for the future.
While the positive economic theory describes the economic world as it is, the normative theory offers suggestions to improve it. In Business Economics, both positive and normative theories are used. However, more emphasis is laid on the latter.