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What Is Business Economics?

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  • Written By: Helen Akers
  • Edited By: Jessica Seminara
  • Last Modified Date: 03 November 2016
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Business economics looks at the financial choices of firms and how they choose to control their resources. The study and practice is a subset of microeconomics, which examines the actions and results of individuals rather than an overall average. In business economics the issues of expansion, bankruptcy and dissolution, management structure, business relations, capital projects, and investment strategies are dealt with.

Opportunity cost is a factor that is behind most decisions in business economics. A firm must weigh not only the price of doing something or not doing something, but the qualitative benefit that could be gained or lost. For example, the opportunity costs of an employer not offering health insurance benefits to its employees would be the increased likelihood of turnover, ill will, and job dissatisfaction. The benefits of offering a substantive plan at a reasonable cost might include increased job satisfaction, retention, improved attitudes, and positive word-of-mouth advertising.

Firms make strategic decisions in regards to capital investments and projects that may result in a profit or loss. Business economics considers how firms make these decisions and what economic factors might influence them. Companies have a certain amount of resources to work with, but may need to acquire more in order to achieve their strategic objectives. A capital investment in new production plant equipment that will eventually increase efficiency and reduce costs might require the company to seek outside sources of funding.

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In seeking this funding, firms need to decide which types of monies hold the least amount of risk. If a firm receives the majority of its funding from an angel investor — a wealthy individual who uses his own money to invest — its actual financial costs may be reduced if that investor is willing to lend them funds with a very low interest rate. In exchange, however, the angel investor may want to serve on the board of directors or have executive control over the capital project. The loss of control and intrusion of an outsider into company decision making would be an opportunity cost.

During this type of decision making process, the firm may decide that the costs associated with issuing debt in the form of bonds are too high. It then looks for a lower-priced substitute that will still meet its funding needs. Issuing equity in the form of common stock may prove to be a more suitable choice. In terms of business economics, a firm acting in a sensible manner will seek out the choice that minimizes its costs while maximizing its benefit.

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