Applications of economics in business decision making
BUSINESS DECISION MAKING:
Any business is essentially an economic activity. Economics provides an analytical understanding of the economic activity. Apparently, business economics is the off spring of economics seed in business arena. Economics is a study of men as they live, behave move and think in the ordinary business of life .Economics studies “They were people are organised for economic tasks by corporation, by trade unions and by government.” Economics thus essentially pertains to an understanding of life’s principle preoccupation.
Business economics however is the economics involved in business decision making. Business economics, in the true sense is the integration economic principles with business practise. The subject matter of business economics, as such should utilize economic analysis that can be helpful in solving business problems, policy and planning. But one can make good use of economic them in business practices unless he masters the basic contents, principles and logic of economics.
In business decision making however the real situation tends to be quite different from theoretical assumptions. Actually
- There are multiple goals in running a business
- There is a lack of certainty due to dynamic changes
- The pervasiveness of uncertainty may create disappointment in realisation of business expectations.
As such economic theory cannot provide a clear cut solution to business problems.
Nonetheless, economic theory does help in arriving at a better decision.
But there may be number of obstacles and weaknesses of economic analysis in actual decision making situation.
There exists a wide gap between the theory of firm and business economics in practise.
In economic theory for instance the firm the decision maker identifies profit maximising output by equating marginal revenue with marginal cost. But in actual practice this may not be possible to attain due to resource constraints. In this case the business decision should be made with the help of linear programming optimization.
Economics is logic of choice. It teaches the art of rational decision making. Thus economics is of significant use in modern business as decision making is the core of business and the success in the business depends on right decisions. In business also, a firm or a business unit faces the problem of decision making in the curse of alternative action, in view of the constraints set by given resources which are relatively scarce.
Business economics is fundamentally concerned with the art of economising, i.e., making rational choice to yield maximum return out off minimum resources and efforts, by making the best selection among alternative course of action.
Business economics is however not a branch of economic theory but separate discipline by itself having its own principles and methods. But essentially business economics rests on the edifice of economics. Knowledge of economics is certainly useful to the business people . Business must know the fundamentals of economics and economic theories for a meaningful business analysis
ROLE OF MANGERIAL ECONOMIST IN BUSINESS:
In a knowledge base economy and business those who contained to be expertise in managerial economics are referred to as managerial economists.
Making decisions and processing information are two primary tasks of mangers. In order to make intelligent decisions mangers must be able to obtain, process and use information . The purpose of earning economic theory is to help managers know what information should be obtained and how to process and use the information.
The task of organizing and processing information and then making an intelligent decision based upon this information and the basic theory can take two general forms
- Task of making specific decisions by managers ,
- General task of mangers to use readily available information to make a decision or carry out a course of action that furthers the goals of the organization.
There are several specific decisions that the mangers might have to take e.g. whether or not to closed down a branch of a firm that has recently been unprofitable , whether or not a store should stay open more hours a day , whether to pay outside computing or copying services rather than install an in house computer or copier. After conducting a survey of British industry, Alexander and Kent came to the conclusion that managerial economist undertakes the following specific functions:
- Product scheduling,
- Demand Forecasting,
- Market Research,
- Economic Analysis of the industry,
- Investment Appraisal,
- Security management Analysis,
- Advise on foreign Exchange management,
- Advise on trade,
- Pricing and the related decisions and
- Analysing and forecasting environmental factors.
All of these and a myriad of other managerial decisions required the use of basic economics.
Economic theory helps decision makers to know what information is necessary to make an intelligent decision to find the correct solution to a problem and to learn n how to process and use that information. After obtaining the desire information or as much information as is economically feasible to obtain, the manger must analyze this information and use it in correspondence with the theoretical and statistical tools available to make the best decision possible under the circumstances .
We find that business is influenced by two sets of decision factors
- External Factors
- Internal Factors
Business is influenced not only by what decisions are taken within the firm but also by general business environment .While the internal factors are within its control, the external factors lie outside its sphere of control. The firm can make only timely adjustments to their external factors. The role of the managerial economist is to understand there external factors and to suggest policies which the firm should follow to make the best use if the external and internal factors.
(A) External Factors:
- The most important external factor is the general economic condition of the economy, such as the level and rate of growth of national income, regional income distribution, influence of international factors on the domestic economy, the business cycle, etc.The managerial economists must obtain and process information with regard to these changes, advise the management regarding their likely effects on the operations of the firm and suggest possible ways to further the organization’s goals.
- The prospects of demand for the product. Is there a change occurring in the purchasing power of the public in general or in some particular regions? Is this change in purchasing power a result of changes in real income of the people as a result of price level changes? Are fashions, tastes and preferences undergoing any change and thus affecting the demand for the product? A managerial economist tries their answers and advises the firm accordingly.
- The managerial economists also try to find out if there is anything which is influencing the input cost of the firm. For example, what about the cost of labour in different regions and for different operations? Is there going to be some change in the government credit policy? And so on.
- The market conditions of raw material and finished product is also a subject of study by the managerial economist. He has to understand the nature of the markets firm which the firms is buying its raw materials and of the market where it is selling its output. This understanding helps the managerial economist to recommend a pricing policy for successful management of the firm.
Managerial economist can also help in the expansion of the firm’s share in the market
Managerial economist has also to keep in touch with the governments’ economic policies and the central bank’s monetary policies, annual budgets of the government, etc.
More accurate and quicker a managerial economist is to recognize, understand and analyse these changes in the external factors, more useful would be prove to the management.
(B) Internal Factors:
The role of managerial economist in internal management is as important as his contribution towards the management of external factors. He helps in deciding about the production, sales and inventory schedules of the firm. He not only provides information regarding their present level but also forecasts their future trend.
Managerial economist is used best to provide the pricing and profit policies. As the present day firms are after multi – product firms, a successful managerial economist tries to find for the firms the most profitable output mix and the best prices for its various outputs, given the market conditions.