Scope of Business Economics

The scope of Business Economics tells us the range of subject-matter it actually covers — the specific business problems it is equipped to analyse. Because a firm operates both internally (its own production and pricing) and within a wider economy (over which it has no control), the scope is usually organised into microeconomic areas (the firm's own decisions) and a few macroeconomic areas (the business environment).

A. Microeconomic areas — the core of the subject:

1. Demand analysis and forecasting. Estimating how much of a product customers will buy, how demand responds to price and other factors (elasticity), and predicting future demand — the starting point of every production and sales plan.
2. Production and cost analysis. Studying the relationship between inputs and output, and how costs behave as output changes (fixed vs variable costs, cost curves), so the firm can produce efficiently at the least cost.
3. Market structure and pricing analysis. Understanding the type of market the firm operates in (perfect competition, monopoly, monopolistic competition, oligopoly) and choosing the pricing policy best suited to it.
4. Profit management. Analysing the nature of profit, planning for a target profit, and measuring/controlling it — since profit is the central objective of most business activity.
5. Capital management (capital budgeting). Deciding how to allocate the firm's scarce capital among competing investment projects to earn the best long-term return.

B. Macroeconomic areas — the business environment:

Even though a single firm cannot control the wider economy, its decisions are strongly affected by it. So Business Economics also studies the relevant parts of macroeconomics: the level of national income and employment, the general price level and inflation, trade cycles (booms and slumps), and government economic policy (taxation, monetary policy). A manager must read these environmental conditions correctly before committing to any big decision.