Reader’s Question: What are the importance of economics to a business student?
There is a strong overlap between business and economics. A Business student needs to take into account these various aspects of Economics. At various times I have taught Business Studies in addition to Economics. Several topics are the same. These are the key areas of overlap.
Macroeconomic Effects on Business
Monetary Policy – Monetary policy involves changing interest rates to try and meet the government’s inflation target of 2% +/- 1. Interest rates have a significant effect on business. For example, rising interest rates have the following effects:
- The increased cost of borrowing. More difficult to borrow for investment
- Appreciation in the exchange rate. Making it more difficult for exporters.
- Lower consumer spending due to the rising interest rates.
Therefore a business needs to look at the prospects for interest rates and understand the significance of interest rates.
Economic Growth / Economic Cycle
A business student should understand that many businesses are at the mercy of general economic conditions. For example, in the recession of 1981 in the UK, rising interest rates, rising exchange rate and falling growth was disastrous for many of the UK exporters, especially in the manufacturing sector.
Exchange Rate and EURO
It is vital to understand the significance and importance of exchange rates in affecting the prospects for firms engaged in international trade. What would UK firms face from a decision of the UK to join the Euro?
How would firms be affected by a rapid devaluation in the exchange rate?
In short, a devaluation:
- Makes imports more expensive. (Higher costs for firms importing raw materials)
- Exports will be cheaper to foreign companies (increasing demand for exporting goods)
Factors affecting investment
When firms decide what to invest, they will use microeconomic reasons (cost of capital, interest rates and productivity of new investment). But, they will also look at the wider macroeconomic picture.
- Economic growth and prospects for growth
- Inflation and prospects for future costs.
Economic Terms
Some of the important economic terms relevant for business students include:
- Economies of Scale: – increased output leads to lower average costs
- Diminishing returns. In the short run increasing output will probably lead to higher average costs, due to shortage of capital
- Competition Policy – How mergers can be regulated by the Competition Commission. For example, they will weigh up the advantages of mergers and the disadvantages of increased monopoly power
- Inflation – It is important to understand what inflation is – increase in general price level and also understand the costs for firms and the general economy.
- Multiplier effect – Increased injections into the economy leading to higher final increases in GDP