Discuss the relationship between business and economy

Business Economics: Definition, Characteristics and Scope

discuss the relationship between business and economy

Readers Question: What's the relationship between a countries economy and This higher profit makes the company shares more attractive – because they can . What is the difference between Business and Economics? Economics is a social science that attempts to explain how the actions and decisions of firms. Business economics applies economic theory and quantitative methods to the study of organizations and their relationships with labor, capital and markets. What is {term}? Business Economics of a particular marketplace or economy, such as supply and demand, and the effect of the concept of scarcity.

What is the difference between Business and Economics?

Generally speaking, the stock market will reflect the economic conditions of an economy. If an economy is growing then output will be increasing and most firms should be experiencing increased profitability. This higher profit makes the company shares more attractive — because they can give bigger dividends to shareholders. A long period of economic growth will tend to benefit shares. By contrast, if the stock market predicts a recession, then share prices will generally fall — in anticipation of lower profits.

discuss the relationship between business and economy

St Louis Fed If the economy is forecast to enter into a recession, then stock markets will generally fall. This is because a recession means lower profits, fewer dividends and even the prospect of firms going bankrupt, which would be bad news for shareholders. Also, in a period of uncertainty, investors may prefer to buy bonds for the greater security and avoid shares, because of the greater risk involved.

Do falling share prices indicate a recession? However, share prices can fall for many reasons other than recession. But, sometimes share prices fall and there is no correlation with the economy. It could be a correction of over-valued prices or a change in market sentiment.

Many feared this predicted a major global recession. In response policymakers cut interest rates. But, the stock market crash appeared to have no bearing on the economy. The late s were a boom time in many western economies. Many fear this signals the possibility of a recession but it is too early to say definitely whether there is a recession around the corner.

Why can stock markets rise in a recession? In a recession or period of uncertainty, stock markets can sometimes increase, why is this? Stock markets are forward-looking. The stock market may already have priced in the effect of the recession and now the stock market is anticipating a recovery.

For example, stock markets in and performed badly in anticipation of a US recession. But, during a long period of economic stagnation, stock markets might do better than expected because they are recovering former losses.

Difference Between Business and Economics | Social Sciences | Academic | Rickmansworth School

Profits as a share of GDP. Since the credit crunch, we have seen company profit become a bigger share of national income. Despite low economic growth, firms have been able to increase profitability. In short, real wage growth has been muted, but many companies have seen a rise in profits and cash reserves.

This is due to factors, such as the monopoly power of large IT firms, such as Apple, Google and Microsoft. Still they assume such and are always guided by profit-maximising motive. Business economics is essentially concerned with the various decisions of a business enterprise.

discuss the relationship between business and economy

The unit of study of business economics is the firm. Thus, managerial economics studies decision-making behaviour of a firm or an industry. Microeconomics takes into account the behaviour of smaller economic agents, such as a firm or a consumer or an input owner. It deals with the operation of a consumer, a firm involving the determination of price of a commodity, revenue, costs and, hence, profit levels, etc. Managerial economics is, thus, essentially microeconomic in character as it has its origin in theoretical microeconomics.

Lewis suggest that managerial economics should be thought of as applied microeconomics. It is an application of that part of microeconomics focusing on those topics which are of great interest and importance to business managers. These topics include theories of demand, production and cost, profit-maximising model of the firm, optimal prices and advertising expenditures, government regulation, etc.

Managerial economics is concerned with finding optimal solutions to business decision problems.

discuss the relationship between business and economy

Thus, in business economics, the main emphasis is given upon the firm, the environment in which the firm finds itself, and the business decision which firms have to take. In this sense, managerial economics is narrower in scope than pure economic theory. By building up propositions on the basis of a set of assumptions, positive economics tries to explain economic phenomenon.

Normative economics comments on the desirability of that phenomenon and suggests policy measures. Value judgments are, thus, pronounced in normative economics. In the words of Profs. Mote, Paul and Gupta: Managerial economics draws on positive economics by utilizing the relevant theories as a basis for prescribing choices. In this business environment, both internal and external factors work.

Business economics seeks to analyse various internal and external constraints that businesses experience in their process of growth and survival, draw conclusions as to how and why businesses behave as they do.

It casts away abstract economic theories. Managerial economists look at practical applications of theoretical models.

discuss the relationship between business and economy

Finally, business economics is essentially microeconomic in character. In other words, macroeconomic theory has less relevance for managerial economics.


Truly speaking, business economics should also deal with a wider environment—the macro-economy. It studies the determination of aggregate national income, level of employment, general price level, the international balance of payments, etc. It is true that aggregating economic trends or external economic factors do not directly affect business decisions of a firm. But what is true is that changing macro-economy not only influences aggregate or national income but also the demand for the product of a business firm.

Business economics - Wikipedia

Efficient business managers must have awareness as well as keenness of studying and explaining macro- economic environment. In this sense, business economics cannot be devoid of macroeconomics. Subject-Matter and Scope of Business Economics: Problem of resource allocation seems to be a pressing problem for any organisation. Resources are not plentiful. A firm has to organise scarce resources efficiently so that optimal outcomes are obtained. Such resource allocation problem includes production programming, transportation problem, etc.

Non-optimal organisation of resources may spell disaster to any organisation. Inventory and queuing are important problems to any firm. A firm has to hold an optimal level of stocks of raw materials and finished product so that business uncertainties can be minimised. Business managers must decide an optimal level of inventories. Such decisions are taken by firms after considering demand and supply conditions.

Since forward planning by management is essential, a firm must make decisions—whether new machines are to be installed or more professionals are to be employed. As most of the decisions cannot be implemented simultaneously, the firm manager must make a trade-off between decisions.

Taking a particular decision out of a variety of decisions is known as queuing problem.

discuss the relationship between business and economy

A manager places or queues alternative decisions and picks up a right one. Price fixation is another interrelated problem connected with decision-making.

Business Economics: Definition, Characteristics and Scope

A firm has to take up a right pricing decision. Finally, the decision-maker faces investment problems for a variety of reasons. Truly speaking, any forward planning by management involves investment problems which are by nature knotty. Investment problems boil down to the problems of allocating resources over time. A firm has to make decision about the volume of investment.

It must decide where to invest, when to invest. It must know the sources of funds, etc. Anyway, business economics is concerned with decision-making and forward planning. Hague, we can argue that there are links between managerial economics and management science. In fact, the boundaries between the two subjects are not clear-cut but overlapping. Managerial economics is largely an applied branch of microeconomics.

Its macroeconomic content is not to be belittled. It uses the methods and techniques of microeconomics mostly in the field of management. As Haynes and William Warren state: It is the relation of an applied field to the more fundamental but more abstract basic discipline from which it borrows concepts and analytical tools.