Business Economics: Understanding Economic Systems and Decisions

This essay delves into the interconnectedness of economics and business, examining how economic principles influence business decisions and operations. It explores the impact of both microeconomic and macroeconomic factors on the business environment, including an analysis of demand, supply, and market structures. The essay investigates the fundamental economic problem of scarcity and its implications for resource management, firm behavior, and managerial decision-making. It further examines various economic systems, such as traditional, command, market, and mixed economies, and their respective influences on business strategies. The paper also discusses the significance of demand and supply functions, equilibrium pricing, and consumer behavior in shaping business outcomes. Finally, it analyzes different market structures, including perfect competition, monopolistic competition, monopoly, and oligopoly, emphasizing the critical role of managerial decisions in each context. The essay concludes by highlighting the importance of understanding economic theories and external environmental factors for successful business management. The assignment is contributed by a student to be published on the website Desklib, a platform that provides AI-based study tools for students.

Running head: BUSINESS ECONOMICS
BUSINESS ECONOMICS
Name of the student
Name of the university
Author’s note

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Introduction
Economics and business economics are interrelated to each other. The paper will study
how different variables such as micro and macroeconomic of economics impacts the business
environment. The study of economics is based on the fundamental problem concerning the
scarcity of resources. The business entities produce goods with the help of these scarce
resources. Thus it needs effective management and strategic decision. The understanding and
complete knowledge of the economic system and its types helps a manager to take his business
decisions that can be successful in the particular economic system. Every decision making is
based on the theories of demand and supply functions. The firm foresees future demand and
produces accordingly. The producers don’t produce when the demand has been created in the
market; rather, they predict these demands for carrying production function. There are different
market structures which need different types of decision making from the managers. The pricing
decisions and the production decisions are based on the characteristics which these market
structures show.
Discussion
Economics and its relation to the business environment
Economics is a subject that studies the production, distribution and consumptions of
goods and services. It involves decisions concerning what to produce, how to produce, and when
to produce. The study of economics helps the managers of the business to take decisions
concerning the production as per the market demand in the economy. There are several factors
present in the economy that affects a business decision, and those are microeconomic factors and
microeconomic factors. Microeconomic factors consist of those factors which can directly
impact the business operation while macroeconomic factors consist of different factors which

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impact the business operations indirectly (Janssen et al. 2017). The individual demand for a
business product and individual supply concerning it are examples of the microeconomic
variable. In contrast, the aggregate demand and the aggregate supply of the whole economy of a
nation are the macroeconomic factors. The businesses find it easy to produce in the influence of
microeconomic variables as these are considered controllable by the managers. In contrast,
businesses find it difficult to control macroeconomic factors (Jalal 2018).
Economic problem and factors of production
The economic problem which exists in society and defines the base of the economic
study is the limited resources available and how to utilize these scares resources to meet the
demands of the consumers with the fact that the human wants and needs are unlimited. The
resources are limited means the natural resources like land, which is limited in its quantity.
Secondly, the resources which have limited use like machinery (Sproten et al. 2018). The
resources are broadly divided into four categories such as land, entrepreneurship, capital and
labour. Land involves human resources that are important for the production process. Capital
resources are the equipment and tools on which a company invest to start the production process.
The entrepreneurship shows the expertise and innovations, which is the base of the production.
The entrepreneurs have a great role in analyzing future demand and look into the opportunity for
producing goods and services to earn the profit (Prajogo 2016).
Firm behaviour and managerial decision making
The success of any business depends on the way the business approach towards the
internal and external business environment. It defines the behaviour of the business that how it
performs in the presence of uncertain macroeconomic factors. The macroeconomic environment
consists of a different environment such as economic environment, political environment, legal

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environment and the social environment. The economic factors consist of a change in currency
rates, inflation rate etc. the political factors consist of different schemes and programs of the
current government. The stability of the political system of a country is very important for
conducting business smoothly (Newman et al. 2020). The legal factors include the rules and
regulations imposed by the government. The business standards and laws create the legal
environment for the business. The social factors include the culture, religions and different
resources such as water, air and land. The business exists in between all these factors. The
managers need to foresee the future challenges imposed by these external environments
(Veselovsky et al. 2017).
The economic system and its types
Businesses operate in a different economic environment. Economic of one country may
differ from the other country. There are four types of economic systems such as traditional
system, command economy, market economy and the mixed economy. The traditional economy
depends on the production, which is done traditionally not using so advanced technology. The
features of this economy do not match with others. It tries to retain its culture and custom in it.
The command economy has a centralized control system. The decisions of managers are not as
independent as it is controlled by government decisions (Ajayi 2016). The prices of goods and
services are favourable. The main aim of the command economy is to use its resources
sustainably and protect it for future growth too. The managerial decisions are influenced by these
features and contain social objectives in their business motive. The market economy is a free
market where the managers are independent of taking their decisions. The decisions are based on
the demand and supply functions. Consumption and production function of the economy
(Rajagopal, Venkatesan and Goh 2017). The market decides what quantity of goods and services

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to be produced as per the market demand. The business decisions are based on the
foresightedness of future demand and produce accordingly at present to meet the future demand.
The managers who successfully plan the production after analyzing the internal and external
factors generate profits for their business and operates in a sustainable way (Krajnakova,
Navickas and Kontautiene 2018).
Demand and supply function
Demand is the quantity of specific goods and services that consumers are willing and able
to purchase at a specific price. There are several factors that affect the demand for the goods and
services. The price of the goods, the income of the consumers, changes in the taste and
preferences among consumers, the price of the related goods and services, etc. The quantity
demanded is the aggregate demand for the goods and services which is demanded by the
consumers in a given period. It depends on the price of those goods and services. The
relationship between the price and the quantity demanded of a product is inversely proportional
(Akmam et al. 2018). This is the main reason why managers try to lower the prices of the goods
by the strategic plans so that they can attract more customers to their business. Supply is the
quantity of goods that an entrepreneur decides to produce and sell in the market. There are
several factors which affect the supply of goods. Some of them are: the price of the good,
number of suppliers present in the market, change in the technology etc (Akmam et al. 2018).
Equilibrium price and consumer behaviour
The equilibrium price at which the goods are sold in the market is the price which is
arrived by the intersection of the individual demand and supply curve in the economy. The price
of the commodity in perfect competition or a free economy, are determined by the market forces.
The behaviour of consumers concerning their purchases of various goods and services depends

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on the price of the goods (Jalilvand et al. 2017). The consumer behaviour towards purchasing a
commodity differs with the change in prices of the commodity. This develops the importance of
managerial economics. There are several problems in making business decisions. The choice of
product that a firm decides to produce and choices of the resources which are required for its
production. The use of factors of production at an optimum level and maximizing the output to
earn greater revenue involves extensive decision making of the manager. The revenue is
distributed among the employees and different individual and entities involved in the production
process. These practices involve the strategic management of the resources and the decision
making of the managers (Millo, Barman and Hall 2016).
Market structure and types of market
A market is defined as a place where different sellers and buyers are present and
exchange goods and services among them. This is the prime characteristics of the market. There
are different structures in the market. The structure is basically determined due to the presence of
different characteristics of the market (Massa, Tucci and Afuah 2017).
Perfect competition is a market structure where there are many buyers and sellers. There
are homogenous products sold in the perfect competition. The price of the product is determined
by the market forces. Thus the decisions of the buyers and sellers of purchasing or producing the
goods are not manipulated by other factors. The producer produces goods as per the demand of
the market.
In a monopolistic market structure, there are many buyers and sellers, but the product is
not homogenous. The products of one producer are differentiated by the other producer’s
product. The firms are competing with each other. These create the area for sellers decision
making that how he will make his good different having the same primary features to compete

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with other seller and capture the customer base. There are different brands of a single product.
The brand which is capable of attracting customer attention wins the race (Abou, Zowghi and
Agarwal 2019).
In a monopoly market structure, there is a single seller. There are no other sellers to
compete. The pricing decisions and the decision of the production are determined by this single
seller only. The other form of market structure is the oligopoly market structure. The existence of
a few sellers or producers in the oligopoly makes it different from other market structures. These
producers control the total supply of the goods and try to influence the price. The action of one
producer is affected by the action of another producer. Thus, producers are interdependent for
taking decisions of pricing or for controlling supply.
In all the market structure, one challenge that the managers face is the price
determination and the production decisions. It is one of the significant decision that managers are
needed to take. The duty of a manager is to make decisions that prove to be successful in future
by using their knowledge and skills. The managers are required to know the exact nature of
different structures and how they are affected by the outer environment. Managers consider
every important theory of economics to validate their decisions. Every market structure needs
different pricing decisions, and thus the theory of equilibrium of different market structure is
very important while taking decisions (Karabag 2019).
Conclusion
Thus the paper concludes that the business decisions consider so many factors which are
not internal rather present in the external environment of the business. The managers of any
business entity will fail in his decision if the prediction concerning the demand and supply fails.

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The study of factors of external environment such as economic factors, social factors, political
factors and the legal factors play a vital role in decision making. The paper concludes that are
several economic theories based on demand, supply and the equilibrium price, which affects the
business decisions. The different types of market structures differ in terms of the decision
making concerning price or production due to different characteristics shown by each of them.

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