How Economics makes smarter businesses
Few people would claim to know very much about economics, perhaps seeing it as a complex and esoteric subject with little relevance to their everyday lives. It has been generally felt to be the preserve of professionals in business, finance, and government.
Yet most of us are becoming more aware of its influence on our wealth and well being, and we may also have opinions—often quite strong ones—about the rising cost of living, taxes, government spending, and so on. Sometimes these opinions are based on an instant reaction to an item in the news, but they are also frequently the subject of discussions in the workplace or over the dinner table.
So to some extent, we do all take an interest in economics. The arguments we use to justify our opinions are generally the same as those used by economists, so a better knowledge of their theories can give us a better understanding of the economic principles that are at play in our lives.
But what about businesses? How does economics play a critical role in it? Or in contrast, what role does business play in the economy?
Business transactions powers the economy
In any market economy, business plays a huge role. Business is the engine of an economy business provides jobs that allow people to make money and goods and services that people can buy with the money they make. Without business, the economy would be very inefficient and very primitive. In any economy, people need jobs, in any but the most primitive economies, people need to be an able to buy goods and services.
Business derives its social legitimacy and right to operate from the economic value it creates for society at large, from its performance for both investors and a wider network of constituencies, its partnership with governments and other agents in solving social problems, and the trust its leadership inspires in employees and society as a whole.
Businesses provide for both these needs. Most business provide people with jobs. If I open a coffee shop, I will need to hire a barista, staff, dishwasher and other people. My business is providing employment for many people. Now imagine how many people get their jobs from large companies. A large company can provide thousands of jobs. This incredibly important to an economy.
Practical Application of Economics to Business
The business world can be both tough and competitive. Against the uncertainties, problems, and challenges businesses face, a call for an insightful and practical decision making is needed. Managers must make decisions applying economic principles while presenting business problems and its solution. This is where business economics comes in by providing a link between economic theory and the decision sciences in the analysis of managerial decision making.
Specifically, here are some practical applications of economics to businesses.
- Estimation of product demand
- Forecasting future demand
- Deciding input combinations
- Determination of price of product
- Analyze the market structures
- Profit Estimation and planning
- Expenditure estimation
- Estimation of output
- Cost reduction
- Estimation of cost of product
- Evaluating Consumer Preferences