Economics is the foundation of all commercial activity and comprises two areas: microeconomics and macroeconomics. Macroeconomics is concerned with the big picture, for example, the national economy and gross domestic product. By contrast, microeconomics is concerned with the small picture and focuses on theories of supply and demand. Microeconomics is very important in business.
Entrepreneurs create businesses by purchasing and utilizing factors of production. In order to estimate the potential return on investment (ROI) of those factors of production, entrepreneurs must have a basic grasp of microeconomic concepts: supply, demand, cost, profit. Without such a grasp, it is impossible to know how much a particular good can be sold for in a particular area. Furthermore, without a grasp of costs and earnings, it is impossible to estimate ROI, thus leading to poor financial investments.
Marketing people must have a basic understanding of microeconomics so that they can set prices for products and decide in which markets to sell those products. A comprehension of microeconomics enables, say, a computer company marketing manager to advise the CEO to start allowing installment payments in case of an economic downturn, thus recovering business from customers hit hard by the recession. A marketing manager without a sense of economics might not realize that such options are available.
Managers must understand the concept of ROI when setting salaries for new hires, as employees are supposed to generate profits for the company. Managers must also have a grasp of microeconomics when making general budget decisions; a project shouldn't be given a budget that exceeds what the project is expected to produce in future earnings. These kinds of decisions are based on the microeconomic concepts of cost, revenue and profit.
Finance and Accounting
Finance people probably use microeconomics more than anyone else in business. Financial analysts use microeconomic and macroeconomic theories in order to forecast the future value of financial assets -- e.g., gold, stocks, bonds -- and other investments. For example, a securities analyst might use microeconomic data to determine the change in income of people in a given country, then use the microeconomic concept of "price elasticity of demand" -- the responsiveness of consumer demand to changes in consumer income -- to determine whether the price of a given asset will rise or fall in that country. Accountants use financial ratios that are derived from microeconomics.
- Photo Credit Jupiterimages/Goodshoot/Getty Images
Role of a Managerial Economist
Managerial economics, or business economics, is a division of microeconomics that focuses on applying economic theory directly to businesses. The application of...
Microeconomic analysis attempts to explain the behavior of individuals and organizations in a given economy. Before being able to understand macroeconomics, or...
Why Is Marginal Analysis Important in Economics?
Most economic decisions are made at the margin. Consumers weigh the benefit from buying one more item; businesses calculate the cost of...
How Is Economics Important to Society?
For most people, economics is all about money and finance and issues of supply and demand. While these are important elements, economics...
The Principle of Microeconomics
Unlike macroeconomics, which studies the economy from the top down by evaluating government policies and monetary theory, microeconomics views the economy from...
Importance of Decision Making in Business
In William Shakespeare's Hamlet, the title character is wrought with indecision. As a result of his indecision, he encounters a tragic death....
Importance of Microeconomic Concepts
The subject of economics broadly divides into two associated disciplines -- macroeconomics and microeconomics. While macroeconomics looks at the "big picture" of...
Microeconomics Research Paper Topics
Microeconomics is different from macroeconomics in that it focuses on supply and demand, the economic behavior of an individual, household, or business,...
Microeconomics is a field with a practically unlimited potential for innovative projects. As economic conditions change, new explanations are required to make...