Business economics studies how firms make financial decisions, including expansion, bankruptcy, management structure, and investment strategies. Opportunity cost is a key factor, and firms must weigh the qualitative advantages and disadvantages of their choices. Capital investments and financing decisions are also important, with companies seeking the option that minimizes costs and maximizes benefits.
Business economics examines the financial choices of firms and how they choose to control their resources. Study and practice is a subset of microeconomics, examining the actions and achievements of individuals rather than an overall average. In business economics, the issues of expansion, bankruptcy and dissolution, management structure, business relationships, capital projects and investment strategies are addressed.
Opportunity cost is a factor behind most decisions in business economics. A firm must weigh not only the price of doing something or not doing something, but the qualitative advantage 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 greater likelihood of turnover, ill will, and job dissatisfaction. The benefits of offering a substantial plan at a reasonable cost could include increased job satisfaction, retention, better attitudes, and positive word-of-mouth publicity.
Firms make strategic decisions about capital investments and projects that may result in profit or loss. Business economics considers how firms make these decisions and what economic factors might influence them. Companies have a certain amount of assets to work with, but more may need to be acquired to achieve their strategic goals. A capital investment in new manufacturing plant equipment that will ultimately increase efficiency and reduce costs may require the company to seek outside sources of financing.
In seeking this financing, companies must decide which types of money hold the least risk. If a business receives the majority of its financing from an angel investor – an affluent individual who uses their own money to invest – its actual financing costs could be reduced if that investor is willing to lend them funds at an interest rate very low. In return, however, the angel investor may want to serve on the board of directors or have executive control over the capital project. Loss of control and the intrusion of an outsider into the corporate decision-making process 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. Then look for a cheaper replacement that still meets your financing needs. Issuing shares in the form of common stock may be a more appropriate choice. In terms of business economics, a company that acts sensibly will seek the choice that minimizes its costs while maximizing its benefits.
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