Business Economics

What is Business Economics?

Business Economics refers to the study of economics system where as economics system refers to the environment in which a person earns his lively – hood through performance of various activities. As a subject economics activities performed by human being to earn his lively-hood.

Whether Economics is a study of wealth, man, or human welfare, it is a matter of situation when a person tries to study this subject. When anybody study economics for money matter, it is named as study of wealth.

When we study Economics for human beings, it is termed as a study of mankind.

When we talk about the welfare activities or their performance at a social level it is termed as study of human welfare.

Business Economics

Nature of Business Economics

Nature of Business Economics :  Under this, we generally discuss whether Economics is science or art or both and if it is a science, whether, it is a positive science or a normative science or a normative science or both.

Method of Business Economics

Method of Business Economics : 

  1. Deductive Method :  Deductive method goes from general to particular. this method accepts certain universal truths or axioms and tries to arrive at inference about a particular event through a logical analysis and reasoning.
  2. Inductive Method : Inductive Method goes from particular to general. Under this method, economic laws and theories are derived on the basis of experiments and observations.

business economics

Basic Business Economics Problems

An Individual has to choose between different alternative uses of the available resources. Since his wants differ in intensity, every rational individual will make efforts in intensity to effort to find a use that yields him maximum satisfaction. The problem of choice gives rise to various central problems of an economy.

There are Four basic problems of an Business economy :

  1. What to Produce
  2. How to Produce
  3. For whom to Produce
  4. Other economic Problems

1. What to Produce : The first major problems to which every economy has to seek answer relates to the allocation of available productive resources among various available competing uses. An economy is to decide two things:

  • Which of the possible commodities should be produced.
  • How much of these commodities should be produced.

Example : Steel can be used in the manufacture of cars and scooters, refrigerators and washing machines, bicycles etc. Steel, like every other resource has many alternative uses.

2. How to Produce :  When a decision relating to the type of goods are decided, then further they have to decide how to Produce these goods i.e. an economy has to choose as between different alternative methods or techniques of production.

The various techniques of production can be classified into two groups:

  • Labour :  intensive technique – is one in which more quantity of labour per unit of output is used.
  • Capital : intensive technique –  makes use of less labour per unit of output.

Example : wheat can be grow with primitive tools and manual labour, or it can be grown with complex machinery and little labour.

3. Whom to Produce : The third related decision that an economy has to take concern the distribution of goods for consumption among the members of the society. The goods would be claimed by all those who possess money income to spend on the goods produced in the economy.

Example :  How much should go to labour in the form of wages, to land in the form of rent, to capital in the form of interest and to enterprises in the form of profit?

4. Other Economic Problems :  

  • “Are the country’s resources being fully utilised or some of them lying idle”?
  • “How efficient is the society’s production and distribution”.
  • “is the economy’s capacity to produce goods and services growing from year to year or is it remaining static”?

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What is meant by “Price Mechanism”? What are its effects?

Price Mechanism is an economic term that refers to the buyes and sellers who negotiate prices of goods or services depending on demand and supply. A price mechanism or market – based mechanism refers to a wide variety of ways to match up buyers and sellers through price rationing. Consumers react to prices with higher or lower demand and producers act accordingly. In other words prices with higher or lower demand and producers act accordingly determine the quantity supplied. if consumers demand is high at a certain price, then producers know that they ought to increase supply. if demand is low then they ought to reduce supply.

Adam Smith, one of the Founding Fathers of economics famously wrote of the “invisible hand of the price mechanism”. He described how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self – internet to allocated resources in society’s interest. The remains the central view of all free – market economists, i.e. those who believe in the virtues of a free – market economy with minimal government intervention.

The Price Mechanism is a term used to describe the means by which the many millions of decisions takes each day by consumers and businesses interact to determine the allocation of scarce resources between competing uses.

An example of a price mechanism uses announced bid and ask prices. Generally speaking, when two parties wish to engage in a trade, the purchaser will announce a price he is willing to pay (the bid price) and seller will announce a price he is willing to accept (the ask price).

The main advantage of such a method is that conditions are laid out in advance and transactions can proceed with no further permission or authorization from any participant. When any bid and ask pair are compatible, a transaction occurs, in most cases automatically.

Effects of Price Mechanism :

Price Mechanism causes many changes in the economic environment. if there is an increase in demand then prices will go higher causing a movement along the supply curve. An example of price mechanism in the long term is the oil crisis during the 1970s.

The crisis caused more nations to start producing its own oil due to dramatic price increase of oil. Since more nations started to produce oil, the supply curve shifted more to the right meaning there was more supply of oil.

Price Mechanism affects every economic situation in the long term. Another good example of price mechanism in the long run is fuel for cars. if fuel becomes more expensive, then the demand of fuel would not decrease fast but eventually companies will start to produce alternatives such as bio – diesel fuel and electronic cars. Price Mechanism is a system by which the allocation of resource and distribution of goods and services are made on the basis of relative market price.


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