ECONOMICS OF BUSINESS
By Aurangzeb Soharwardi
The basis of every business is the economics which not only provides foundational and structural platform but also is integrated with other main business functions like marketing, finance, Human Resource and Production. Economics and Commerce are also closely related fields of study ; both deal with production, the different forms of business enterprises, marketing, finance and banking, transport, insurance, and a wide range of other topics. Whilst Commerce is concerned with how the modern business world works, Economics attempts to explain why it works as it does. Importance of Economics for the businesses. Business economics helps in establishing relationships between different economic factors, such as use of resources, Production ,revenue, income, pricing, profits, losses, and market structure. This helps in guiding managers in effective decision making and running the organization. Economics is the science that deals with the study of scarce resources that society needs to exist. Its production, distribution and reuse. These resources can be goods like; Food, clothing, technology, housing, etc. And among the services we can highlight; Health, education, housing, potable water, electricity and entertainment. There are certain economic principles also which directly impact businesses. Risk and return, Marginal benefits and marginal costs, Opportunity costs , Sunk costs ,Supply and demand ,Elasticity of demand and differentiated cost. First of all economics guides the business in optimal use of resources with minimum waste .This concept of minimum wastage of resources was further elaborated in LEAN Production and LEAN Management concept . Land and natural resources provide the needed raw materials. Labor (Human Resource) transforms raw materials into goods and services and performs other support functions. Capital (equipment, buildings, vehicles, cash, and so forth) are needed for the production process. Entrepreneurship provides the skill, drive and creativity needed to bring the other resources together to produce a good or service to be sold to the marketplace. Understanding of Economics provides a detailed foundation for optimal use of resources. Next is the production in business which draws its foundation from production function of economics. The factors of production used to produce a shirt would include the following, The land that the shirt factory sits on, the electricity used to run the plant, and the raw cotton from which the shirts are made. The laborers who make the shirts, The factory and equipment used in the manufacturing process, as well as the money needed to operate the factory, The entrepreneurship skills and production knowledge used to coordinate the other resources to make the shirts and distribute them to the marketplace. Efficient use of all these factors takes the high quality manufacturing of products. Another important Economic concept linked with business is Market structure. In order to undertake the whole process of marketing for Market / Industry analysis, Market Segmentation, It is imperative to contemplate Market structure of the specific business concern. Market structure not only reveals characteristics and dynamics of specific market but also helps in segmentation, pricing, Promotion and advertising and estimating supply and demand assessments. Price elasticity also varies in different market structures like Perfect competition, Monopolistic Competition, Oligopoly, Monopoly (Natural/Legal) are the main market structures, which have different specifications and characteristics. The other aspect of economics which is very important in business is the concept of supply and demand which helps in marketing functions of Demand forecasting, production planning, economies of scale and supply chain management. In a market characterized by perfect competition, price is determined through the mechanisms of supply and demand. Prices are influenced both by the supply of products from sellers and by the demand for products by buyers. It is important to understand that how supply and demand interact to create an equilibrium price, the price at which buyers are willing to purchase the amount that sellers are willing to sell, then the prices are fixed. Markets rarely operate without outside influences. Sometimes, sellers supply more of a product than buyers are willing to purchase; in that case, there’s a surplus. Sometimes, they don’t produce enough of a product to satisfy demand; then we have a shortage . Economics also helps in ascertaining various stages of Business cycle of the business. Further more in preparing strategies and plans for the promotional activities and advertising , the market structure also helps in understanding and creating differentiation. All those business owners who understand this interplay of economics and business tend to perform better in all business functions as they have the holistic and integrated knowledge.
Economics and Business- (Fundamentals of Business ) Lead Author: Stephen J. Skripak