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Economics is an integral part of any business. It is the nature of Economics that makes it so important to the business. Firstly let’s understand what economics is. Economics is an art and also a science. It mainly discusses the concept of scarcity of resources. We acknowledge the fact that there is only a limited number of resources present in the world. Which begs the question, how do we manage these limited resources so they can last us generations? After all, each generation is dependent on these very resources for its survival.
Economists study this science and come up with policies and solutions that can help us allocate resources efficiently. The basis of these decisions and policies is the matter of phenomenon called demand and supply. As the name suggests, economists analyze the demand for resources among people and determine the ideal supply. In this concept of many other price and non-price factors also come into play.
So, understanding this very interesting subject of economics allows us to see how economics can play a critical role in business. Here is a more in-depth understanding of how economics is important to businesses.
What Is The Role Of Economics In Business?
The importance and role of economics is just as wide as the subject itself. Businesses require financial assistance to sustain themselves in the market. This is not easily possible, which is why most of them hire economic or financial analysts.
The work of these analysts is to put to use the economic concepts that are most broadly studied for national economies, to corporations. This is an incredibly fascinating work. The economy and market conditions that are always fluctuating also have a huge impact on the operations of a business.
Hence, economic analysts working with companies need to figure out how these elements would impact their business precisely. The said elements can include interest rates, changes in fiscal or monetary policies, debt, inflation, etc. These factors are very important to businesses, and they must understand them to adapt to the market. If they fail to do so, then they face the threat of exiting the market. this is also the case with many small and medium-sized businesses that exit the market due to unfavorable conditions, or failure to keep up.
Economics is used in business for decision-making. Companies hire economic analysts to study the different aspects of the business. From such analysis, they can recommend decisions to companies.
Now as mentioned, the role of economics or economic analysts is pretty wide. However, the following are some of the areas of contribution, briefly discussed.
1. Analysis Of Determinants Of Business Growth
Concepts of economics are utilized to identify factors that impact business growth. While doing business, organizations can often ignore how some small and visibly trivial aspects can have a considerable impact.
This is the reason why economists are hired to identify and analyze these factors. These are the factors unique for each business, although the main determinants of business growth can be constant for many.
The identification of determinants allows the management of the company to make the right decisions. These decisions will be made based on the knowledge of the potential areas of strength and weaknesses of a business.
2. Quantifying Information For Decision Making
Information is of two types: quantitative and qualitative. Qualitative is non-numerical in nature, and quantitative is data in numbers. Most analysts of any sort, work with quantitative information. Numbers are interpreted into meaningful statements to understand what they represent.
Companies possess huge amounts of such data and information. This data can seem ambiguous to most and it is not easy to generally understand what they represent.
So, economists research all sorts of variables, including qualitative ones, and quantify this information. Thus, the data collected is then analyzed and interpreted in such a manner that it allows management to take the right decisions.
3. Labor, Wages, And Production
Economic concepts such as marginal productivity, minimum wage, labor allocation, and more are all used in businesses. These concepts are studied to help businesses achieve maximum productivity through optimization.
Economic analysts would inform management on the number of labor they should hire and the threshold of wages to increase productivity.
4. Establishing Prices For Products
Keeping in mind the target customers of a business, economists analyze market situations to determine product prices. This also includes studying the current ups and downs of the economy. A major part of establishing prices is understanding how people react to changes in prices. For example, the impact of sales, discounts, or permanent decreases and increases in prices.
5. Creating Financial Policies For Organizations
Financial policies are the backbone of any organization. These dictate how a company should proceed with monetary dealings and the allocation of its funds.
Economics is required to study the different financial aspects, for example, investment, savings, and expenditure of the company. The analysis of a business’s current financial health will allow economic analysts to create different financial policies for the company. These policies mostly deal with standard elements such as debt financing, loan financing, cost of production, and things of similar nature. The company will then incorporate these policies to either sustain or grow itself in the market.
So, when we understand this perspective, we can see how economic concepts are crucial to the operations of a business.
6. Predict the Growth of The Business
Economics also deals with the prediction of market outcomes. The analysis is done of how one factor may impact the other and in a circular sense, what the end outcome will be. Moreover, economics is used to understand the reaction of rational players i.e., citizens. The economic concept of game theory is an entire study of this very phenomenon. It is utilized to make predictions for the future and according to that, economic analysts would make decisions for the company.
For example, revisit the previous example in the establishment of prices. A part of deciding on the target prices of products is to understand the possible impact it may have. It is necessary for economists to also study the reaction of people to their pricing schemes and changes.
Another example is that economic analysts would predict the profit margins and other elements such as the cost of goods sold or total sales during any economic event. This may be inflation, an increase in tariffs, imports/ export, and so on.
7. Study the Impact of Different Variables on The Business
Lastly, a major role played by economics in business is also the identification of important variables for the company. These variables play a critical role in the day-to-day operations of a business. Much like the ones discussed earlier, these can be variables responsible for growth or weakness. Economists also have to analyze other externalities produced either by themselves or third parties. An externality is also called an external cost and is defined as the indirect impact of any activity that is upheld by a third party.
So, here you go. No need to look for essay writing services. Understanding the role of economics in business is not that hard. In short, Economics is a valuable part of any business. Economic concepts are used by economic and/ or financial analysts to help businesses make the right decisions. These decisions are involved in the production, distribution, and management of the company. Decisions based on economic analyses help businesses remain in the competitive market.
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