Business/Managerial Economics for BBS 1st year 2021 (TU)

 

Business Economics -व्यावसायिक अर्थशास्त्र_:  

Introduction - परिचय_:

Economics is the study of how individuals and societies use limited resources to meet unlimited needs. People always want to improve their living standards. People’s wants are limitless. The resources are considered to be scarce because their supply is limited.

The scarcity of resources forces us to choose, and the problem of choice is the source of the study of economics. Households have to choose how to spend their limited income on various goods and services to meet their needs. Business firms need to choose how much to produce, how to produce and for whom to produce so as to maximize profits.

Man has to do various activities to fulfill his need. People have to involve economic activities. Production, consumption, exchange, distribution, etc. are the major economic activities. Thus economics deals with human needs and the efforts made to meet those needs. In other words, the method of studying and analyzing economic activities related to human life is called economics.

Economics is studied and analyzed in two ways, micro and macro. These two words were first used in economics by Prof. Ragnar Frisch in 1933 and then these words have been widely used and are now an integral part of economics.

Concept of Business (Managerial) Economics - व्यावसायिक अर्थशास्त्रको अवधारणा _:  

It is difficult to define business economics. Its study dates back to the 1950s. So, it is considered as a new branch of economics. It is a specialized branch of economics. It uses economic principles in decision-making and forward-thinking planning.

Decision making is the process of finding a solution to a problem. There are two or more options to solve any problem. The best option is to decide. For example, if a producer wants to buy raw materials in the market and chooses one of the various quotations, it is a business decision. The decision-making process involves the process of selecting the most appropriate option from the various options.

Forward planning is a process of making plan and thinking ahead for the future. For example, how much will be the sales in the future? What could be the next strategy for sales promotion? etc.

Profit is the ultimate goal of all business firms. Firms have different options. To get maximum profit from the given resources, it is necessary to choose the best option out of the various options and use the right procedure. Economic principles and methods such as maximizing profits, estimating demand, setting ideal prices, minimizing costs, estimating and maximizing income help managers achieve ideal returns from business problems.

The purpose of business economics is to use the principles of economics to improve the economic status of business. So, it is based on microeconomics. However, managers need to be aware of the state of the economy as a whole and its indicators. This helps them in their decision making process. Although it focuses on microeconomics, it also supports macroeconomics.

 

DEFINING BUSINESS ECONOMICS - व्यावसायिक अर्थशास्त्रको परिभाषा _:  

Business Economics, is also known as managerial economics. It is a special branch of economics that deals with the use of microeconomic analysis to decision-making techniques of businesses and management units. It acts as the through media between economic theory and pragmatic economics. It links the gap between "theory and practice". Business economics can be defines as:

 According to Spencer and Siegelman:

“The integration of economic theory with business practice for the purpose of facilitating decision-making and forward planning by management”.

 According to McGutgan and Moyer:

“Managerial economics is the application of economic theory and methodology to decision-making problems faced by both public and private institutions”.

It is an integral part of traditional economics and is an extension of economic concepts to the real business situations. It is an applied science in the sense of a tool of managerial decision-making and forward planning by management. In other words, it is concerned with the use of economic theory to business management. It is based on microeconomics in two categories: positive and normative.

The following conclusions can be drawn from the above definitions:

1. It is a branch of economics.

2. It can also be called managerial economics and industrial economics.

3. It is the science of decision making.

4. It combines economic principles with business practice.

5. Under this, the principles of economics are making decisions and forward planning to solve the problems.

 

 

 

 

 

FEATURES/CHARACTERISTICS OF BUSINESS ECONOMICS

The following characteristics of business economics will show its nature:

1. Micro economics -सूक्ष्म अर्थशास्त्र _: It is micro economic in nature. This is so because it studies the problems of an individual business unit. It does not study the problems of the entire economy.

2. Normative science- आदर्श अर्थशास्त्र _: It is a normative science. It is concerned with what management should do under particular situations. It sets the goals of the enterprise. Then it develops the ways to achieve these goals. It always tries to match the future with the present.

3. Pragmatic - यथार्थपरक _: It is pragmatic (practical). It uses all the theories of economics in management. It tries to solve the managerial problems of the business by using economic concepts and models.

4. Prescriptive- निर्देशात्मक _: It is prescriptive rather than descriptive. It indicates solutions to various business problems. This particular feature helps the business unit to rectify its own mistakes.

5. Uses macroeconomics- वृहत् अर्थशास्त्रको प्रयोग _: Macro economics is also useful to business economics. It provides an integral decisions in which the business operates. It takes the help of macro-economics to understand the external conditions such as business cycle, national income, and economic policies of Government etc.

6. Aims at helping the management- व्यवस्थापनलाई सहयोग गर्ने उद्देश्य _: Theory of firm tries to solve business problems to maximize profits. It mainly uses economic concepts and principles to solve the business problems. The main aim of business economics is to help the management in taking correct decisions and preparing plans and policies for future. It analyses the problems and give solutions.

8. Multi disciplinary - बहु विषयी _: It makes use of most modern tools of Mathematics, Statistics and Operations Research in planning, decision etc.

9. Art and science- कला र विज्ञान _. It is both a science and an art. Science is the systematic study of knowledge. Science formulates tools, methods and techniques. Art uses these tools in practice.   

 

 

 

 

 

 

 

OBJECTIVES OF BUSINESS ECONOMICS

It provides such tools necessary for business decisions. It answers the five fundamental problems of decision making. These problems are:

(a) What should be the product mix?

(b) Which is the least cost production technique and input mix?

(c) What should be the level of output and price of the product?

(d) How to take investment decisions?

(e) How much should be the selling cost?

To solve the problems of decision- making, data are to be collected and analyzed in the light of business objectives. It supplies such data to the business economist. As pointed out by Joel Dean "The purpose of Business economics is to show how economic analysis can be used in formulating business policies". The basic objective of Business economics is to analyze economic problems of business and suggest solutions and help the managers in decision-making.

The objectives of business economics are outlined as below:

1. To integrate and apply economic theory with business practice to solve business problems.

2. To employ the most modern instruments and tools to solve business problems.

3. To allocate the scarce resources in the optimal manner for ovall development of a firm.

4. To help achieve other objectives of a firm like attaining industry leadership, expansion of the market share etc.

5. To minimize risk and uncertainty

6. To help in demand and sales forecasting.

7. To help in operation of firm by helping in planning, organizing, controlling etc.

8. To help in formulating business policies.

9. To help in profit maximization.

Business economics is useful because:

(i) It provides tools and techniques for managerial decisions to solve the basic problems of business management,

(ii) It supplies data for analysis and forecasting demanad and profit planning.

(iii) It guides the business economist.

Thus, Business economics offers a number of benefits to organizations. It is also useful to individuals, society and government.

SCOPE (NATURE) OF BUSINESS ECONOMICS (व्यावसायिक अर्थशास्त्रको क्षेत्र)

It is a developing science. Its scope is gradually increasing in the modernized world. It covers the following areas

1. Demand analysis and forecasting - माग विश्लेषण र पूर्वानुमान _: The main part regarding scope is demand analysis and forecasting. A business firm is an economic unit which transforms productive resources into finished goods. A firm must decide its total output before preparing its production schedule and deciding on the resources (land, labour, capital and technology) to be employed. Demand forecasts serves as a guide to the management for maintaining its market share in competition with its rivals, thereby securing its profit.

2. Cost and production analysis - लागत तथा उत्पादन विश्लेषण _: A firm's profitability depends much on its costs of production. A wise manager would prepare cost estimates for a series of output and find the factors that cause differences in cost. Once the factors are known, it can be possible to determine the optimum level of output where the cost of production would be minimum. Sound pricing policies (determining selling price) depend much on cost control. The main topics of it are: Cost concepts, cost-output relationships, Economies and Diseconomies of scale and cost control.

3. Pricing decisions, policies and practices - मूल्य निर्धारण, नीति तथा अभ्यास / प्रयोग _:  Another task before a business economics is the pricing of a product. Since a firm's income and profit depend mainly on the price of the product, the pricing policies and all such decisions are to be taken after careful analysis of the nature of the market in which the firm works. The important topics covered in this field of study are: Market Structure Analysis, Pricing Practices and Price Forecasting.

4. Profit analysis - नाफा विश्लेषण _: A successful business economist is one who can form more or less correct estimates of costs and revenues at different levels of output. The more successful an economist is in reducing uncertainty, the higher are the profits earned by the business. Therefore, profit-planning and profit measurement create the most challenging area of business economics.

5. Capital management - पूँजीको व्यवस्थापन _:  Another challenging problem for a modern business economist is planning the capital investment. Investments are made in the plant and machinery and buildings which are very high. Therefore, capital management requires top level decisions. It deals with Cost of capital, Rate of Return and Selection of projects etc.

6. Effective utilization of business resources - व्यावसायिक स्रोतहरुको प्रभावकारी उपयोग _:  It also studies how well resources can be put to best possible use. Various tools and techniques are used to determine least cost- maximum profit combinations. Methods such as linear programming, networking analysis are used in determining the optimal levels of performance.

7. Effective use of economic policies for business development - व्यावसायिक विकासका लागि आर्थिक नीतिहरुको प्रभावकारी प्रयोग _:  Business economics is micro in character but it is always influenced by macro factors. For example, an individual firm’s idea (micro economic) of manufacturing plastic bags may be affected by the ban on plastic by the government (macroeconomic). Thus economic policies (macro) have to be carefully studied in order to make proper business decisions. Sometimes economic policies of government also create favourable environment for business units.

8. Others - अन्य _: a. Supply analysis b. Competitor analysis c. Distribution and transportation management d. Inventory management: e. Linear programming: f. Environmental issues: g. Business cycles:

 

Importance of Business Economics: - व्यावसायिक अर्थशास्त्रको महत्व _

Business and industrial enterprises aim at earning maximum profits. In order to achieve this objective, it helps to take decisions by choose the best alternative. It is concerned with such aspects and tools of analysis, it is related to the decision making process.

Spencer and Siegelman have described the importance of managerial economics in a business and industrial enterprise as follows:

(i)  Accepting traditional theoretical concepts to the actual business behavior and conditions - वास्तविक व्यावसायिक व्यवहार र शर्तहरुको परम्परागत सैद्धान्तिक धारणाहरुको स्वीकार गर्नु{_: It combines tools, techniques, models and theories of traditional economics with actual business practices and with the environment in which a firm has to operate. According to Edwin Mansfield, “Managerial Economics attempts to bridge the gap between purely analytical problems that intrigue many economic theories and the problems of policies that management must face”.

(ii) Estimating economic relationships - आर्थिक सम्बन्धहरुको अनुमान गर्नु{_: Business economics estimates economic relationships between different business factors such as income, elasticity of demand, cost volume, profit analysis etc.

(iii) Predicting related economic quantities - आर्थिक परिमाणसँग सम्बन्धित चरहरुको पूर्वानुमान गर्नु{_: Business economics helps the management in predicting various economic quantities such as cost, profit, demand, Capital, production, price etc. As a business manager has to function in an environment of uncertainty, it is imperative to anticipate the future working environment in terms of the said quantities.

(iv) Understanding significant external forces - महत्वपूर्ण बाह्य शक्तिहरुको बारेमा ज्ञान हुनु_: The management has to identify all the important factors that influence a firm. These factors can broadly be divided into two categories. Managerial economics plays an important role by assisting management in understanding these factors.

(a) External factors - बाह्य शक्तिहरु_: A firm cannot exercise any control over these factors. The plans, policies and programs of the firm should be formulated in the light of these factors. Significant external factors impinging on the decision making process of a firm are economic system of the country, business cycles, fluctuations in national income and national production, industrial policy of the government, trade and fiscal policy of the government, taxation policy, licensing policy, trends in foreign trade of the country, general industrial relation in the country and so on.

 (b) Internal factors - आन्तरिक शक्तिहरु_: These factors fall under the control of a firm. These factors are associated with business operation. Knowledge of these factors aids the management in making sound business decisions.

(v) Basis of business policies - व्यावसायिक नीतिहरुको आधार_: Business economics is the founding principle of business policies. Business policies are prepared based on studies and findings of managerial economics, which cautions the management against potential upheavals in national as well as international economy. Thus, managerial economics is helpful to the management in its decision-making process.

Relation of Business Economics with Traditional Economics

- परम्परागत अर्थशास्त्रसँग व्यावसायिक अर्थशास्त्रको सम्बन्ध _

The interdependence between Business and traditional economics can be seen in the following titles:

In the field of production - उत्पादनको क्षेत्रमा _: There is a close relationship between business and traditional economics in the field of production. There is a need for an efficient allocation of resources to get the optimal level of production by reducing the minimum amount of input resources.

For such the business managers should know economies of scale, the law of diminishing return, the optimal combination of inputs, etc. and these are the matters of traditional economics.

In the field of sales promotion - बिक्री प्रबद्र्धनको क्षेत्रमा _ : Demand for any commodity depends upon many factors like the income of the consumer, size of the population and its composition, advertisement, the elasticity of demand, consumer's expectations, etc. These all are studied under traditional economics. But to promote the sales volume application is done by business economics.

In the field of financial decisions- आर्थिक निर्णयको क्षेत्रमा _. For rational investment decisions, managerial economies have to consider the concept of the time value of money which is the subject matter of traditional economics.

By using concepts of traditional economics, managerial economics analyses the allocation of resources under the situation of uncertainty.

Business forecasting - व्यावसायिक पूर्वानुमान _ : Based on the trade cycle of the economy, the theory of income & employment, a theory of inflation, etc. business economics has to forecast the future of the business which is the most important issue for business economics. Therefore, without the help of traditional economics, business forecasting is not possible.

Decision making - निर्णय लिन _: Every decision making process has various steps and techniques. In such a process, business economics uses the concept of traditional economics up to the required extent. In the decision making process, all the key basics are always known by traditional economics.

Therefore, business economics is the integration of economic theories with business practices to facilitate decision making and planning by management and which requires continuous and deep link between traditional economic analysis and busines economics.

Difference between Business Economics and Traditional Economics  

- परम्परागत अर्थशास्त्र र व्यावसायिक अर्थशास्त्रबीच भिन्नता/अन्तर/फरक _

There is deep interdependence between traditional economics (Microeconomic theories) and business economics for facilitating decision making and planning.

However, there exist some major differences between traditional economics and business economics. The major points of difference are as below;

Basis	Business Economics	Traditional Economics
Inclusion	Microeconomic aspects only.	Microeconomic and macroeconomic both.
Positive vs normative	Normative only	Positive as well as normative.
Theory vs applied	It is applied and practical.	It is more theoretical.
Problems	Only studies problem of firm	It studies problems of firm and individual both.
Scope	Limited	Wide scope
Economic vs non-economic	It only concerned with economic aspects.	Economic and non-economic both aspects.
New vs established	It is new and dynamic science.	It is old and well-established science.
Decision	It is related to making decisions.	It helps to take decisions.

 

 

 

Concept of Microeconomics - सूक्ष्म/व्यष्टि अर्थशास्त्रको अवधारणा _

Modern economists have divided the whole economic theories into two parts: microeconomics and macroeconomics. These words in economics were first used by Ragnar Frisch in 1933. The both terms micro and macro were derived from Greek words ‘mikros’ and ‘makros’ meaning ‘small’ and ‘big’ respectively. It is clear from these derivations that microeconomics focuses attention on the behaviour of individual economic entities like a firm, a household, etc. and macroeconomics deals with the behaviour of the entire economic society in general.

Microeconomics सूक्ष्म / व्यष्टि अर्थशास्त्र_

Micro means a small part. Microeconomics is the study of the economic actions of individuals and small groups of individuals. This includes, according to Professor Boulding. “The study of particular firms, particular households, individual prices, wages, income, individual industries, particular commodities. सूक्ष्म अर्थशास्त्रले कुनै एउटा फर्म, एउटा परिवार, व्यक्तिगत मूल्य, ज्याला, आम्दानी, व्यक्तिगत उद्योग र निर्दिष्ट (तोकेको) वस्तुहरुको अध्ययन गर्दछ ” It concerns itself with the analysis of price determination and the allocation of resources to specific uses. The determination of equilibrium output of the firm or industry, the wage of a particular type of labour, the price of a particular commodity like rice, tea, or car are some of the fields of microeconomic theory. It considers problems of income distribution. Its interest is in relative prices of particular goods and services.

Thus, microeconomics studies:

(i) How resources are allocated to the production of particular goods and services,

(ii) how the goods and services are distributed among the people, and

(iii) how efficiently they are distributed.

The allocation of resources to a particular goods depends upon the prices of other goods and the prices of factors producing them. In other words, other things being equal, it is the allocation of resources that determines what to produce, how to produce, and how much to produce. This decision, in turn, depends upon the relative prices of goods and services. Thus, it is the study of price theory: how the price of a particular commodity like rice, tea, milk, fans, scooters, etc. is determined; how the wages of a particular type of labour, interest on a particular type of capital asset, rent on a particular land and profits of a particular entrepreneur are determined; and how efficiently the various resources are allocated to individual consumers and producers. We briefly study these problems below.

In microeconomics the analysis of price determination and allocation of resources is studied in three different stages:

(i) The equilibrium of individual consumers and producers,

(ii) The equilibrium of a single market, and

(iii) The simultaneous equlibrium of all markets.

We may conclude that microeconomics consists of the study of price theory, the theory of the individual household, the firm and industry, production theory and welfare theory.

Features of Microeconomics -सूक्ष्म / व्यष्टि अर्थशास्त्रका विशेषताहरु_

The features of microeconomics are as follows:

Study of individual units - व्यक्तिगत एकाइहरुको अध्ययन _: It studies the economic actions of individual units such as individual consumer, or producer, particular firm, price of a commodity etc.
Microscopic study of the economy - अर्थतन्त्रको सूक्ष्म अध्ययन _: It shows a magnified view of an individual unit. It analyses small units in detail. It examines how these individual units perform economic activities and reach equilibrium.

Price theory/Value theory- मूल्य सिद्धान्त _: It is concerned with the product pricing and factor pricing.
Study of economic welfare - आर्थिक कल्याणको अध्ययन _: How can we maximize the welfare of the society through efficient allocation of resources is studied here. It also studies how the resources are allocated for the production of a particular goods or services and how efficiently it can be distributed.
Partial equilibrium analysis - आंशिक सन्तुलनको विश्लेषण _: It uses a partial equilibrium approach. The equilibrium points are identified assuming ‘other things remain constant’ (ceteris paribus). It ignores the interpendence of economic variables.
Slicing method - विखण्डन विधि _: Its analysis adopts the slicing method. Under this method, the entire economy is divided into smaller units and then each unit is analyzed individually in detail.

Marginal analysis- सीमान्त विश्लेषण _: Marginal means change in the total due to an additional unit. The additional unit is known as the marginal unit. It is based on the principle of marginalism as important economic decisions are based on the marginal unit.
Science of economizing - मितव्ययिताको विज्ञान _:  It suggests economizing, that is optimum utilization of resources.
Tools for evaluating economics policies - आर्थिक नीतिहरुको मूल्याङ्कन गर्ने औजार_: It provides tool for evaluating economic policies of the government.
Understanding the working of the economy - चालू अर्थतन्त्रको बारेमा ज्ञान _: Study of micro economics is very important in understanding the working of the free enterprise economy.

Based on assumptions- मान्यताहरुमा आधारित _: Its analysis is based on certain assumptions such as laissez-faire, full employment, perfect competition, ceteris paribus, etc. Such assumptions although make the analysis simple, but may not exist in reality.

Analysis of market- बजारको विश्लेषण _:  Its studies deals with the study of different market structure namely, perfect competition, monopoly, monopolistic competition, oligopoly, duopoly. It analyses how prices and output are determined in the market.