INCOME TAX NOTES

Business Economics and its type.

 Business Economics






In the broadest sense, economics refers to the study of the components and functions of a particular marketplace or economy—such as supply and demand—and the impact of the concept of scarcity. Within economics, production factors, distribution methods, and consumption are important subjects of study. Business economics focuses on the elements and factors within business operations and how they relate to the economy as a whole.

Types of Business Economics

 

1.Managerial Economics

Managerial economics is a field of study within business economics that focuses on the microeconomic factors that influence the decision-making processes with an organization. The strategic decisions of corporations result in either a profit or a loss for the company. Managerial economic principles are intended to influence and guide corporate strategy and decisions toward the best outcomes for a company.

Business Economics for Nonprofit Organizations

While nonprofit organizations and for-profit organizations may have different goals, both of these types of organizations perform similar business functions and require similar expertise. In addition, they must also strive to limit waste and maximize the overall usefulness of their available resources in order to maintain their viability as enterprises.

 

Economic objectives of firms

 

Profit maximization goal.

Usually, in economics, we assume firms are concerned with maximizing profit. Higher profit means:

  • Higher dividends for shareholders.

  • More profit can be used to finance research and development.

  • Higher profit makes the firm less vulnerable to takeover.

  • Higher profit enables higher salaries for workers

 

 

Usually, in economics, we assume firms are concerned with maximizing profit. Higher profit means:

  • Higher dividends for shareholders.

  • More profit can be used to finance research and development.

  • Higher profit makes the firm less vulnerable to takeover.

  • Higher profit enables higher salaries for workers

 

Sales maximization goal.

 

Managers of modern business are more interested in maximizing their sales rather than profit.it has been suggested that maximize sales revenue subject to a minimum profit constraint. This minimum profits constraint is specific at the minimum level that is just enough to keep shareholders happy.

 

3. Profit Satisficing

 

 

Shareholder –goal-profit maximization

Manager –keep the boss happy, enjoy work.

  • This is a problem because although the owners may want to maximize profits, the managers have much less incentive to maximize profits because they do not get the same rewards, (share dividends)

  • Therefore managers may create a minimum level of profit to keep the shareholders happy, but then maximize other objectives, such as enjoying work, getting on with other workers. (e.g. not sacking them) This is the problem of separation between owners and managers.

  • This ‘principal-agent problem can be overcome, to some extent, by giving managers share options and performance-related pay although in some industries it is difficult to measure performance.

Long run profit maximization

In some cases, firms may sacrifice profits in the short term to increase profits in the long run. For example, by investing heavily in new capacity, firms may make a loss in the short run but enable higher profits in the future.

5. Social/environmental concerns

A firm may incur extra expense to choose products that don’t harm the environment or products not tested on animals. Alternatively, firms may be concerned about local community / charitable concerns.

  • Some firms may adopt social/environmental concerns as part of their branding. This can ultimately help profitability as the brand becomes more attractive to consumers.

  • Some firms may adopt social/environmental concerns on principal alone – even if it does little to improve sales/brand image.

 

6. Co-operatives

Co-operatives may have completely different objectives to a typical PLC. A co-operative is run to maximize the welfare of all stakeholders – especially workers. Any profit the co-operative makes will be shared amongst all members.

Growth maximization

This is similar to sales maximization and may involve mergers and takeovers. With this objective, the firm may be willing to make lower levels of profit in order to increase in size and gain more market share. More market share increases its monopoly power and ability to be a price setter.

Demand analysis

  1. Factor determining demand

    1. General Factor 

  1. Price of the product

  2. Income of the consumer

  3. Test and preference of the consumer

  4. Prices of related good

  1. Additional factors related to luxury goods and durables

    1. Consumer expectations of futures prices

    2. Consumer expectations of futures income

3)additional factor related to market demand 

  1. Size of regional distribution of population

  2. Composition of population

  3. Distribution of income.