How does economics relate to business? 

Economics relates to business because it studies how international financial conditions influence businesses and how businesses impact people's financial choices. Macroeconomics studies national and international decisions and how those choices shape the larger business world. Microeconomics examines individual behavior and seeks to explain how people respond to changes in supply and demand and wages.

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The two fields are interrelated. Business involves sales and the decisions that go into making sales. This includes human resources and allocating resources in order to best drive profits.

Economics is divided into two major subcategories: macroeconomics and microeconomics. Macroeconomics studies the economic decisions of states and nations while microeconomics examines economic decisions made at the individual level. Businesses are affected by macroeconomics because tariffs can affect how much a business can charge for a product. Businesses are also affected by interest rates. When interest rates are lower, a business can decide to borrow more money and expand. Microeconomics also impact businesses. They have to appeal to the consumer by offering the lowest price for high quality goods.

Economics also affect business in terms of the laws of supply and demand. When supplies are tight, the business may be able to sell goods for a higher price. When there is too much of a good in the market, a business may have to slash prices in order to move inventory.

Laws of supply and demand also affect the labor market. When there are many people looking for work, businesses do not have incentives to raise wages. The company can find a cheaper employee easily. In a tight labor market, the business may have to increase wages or benefit packages in order to retain talent.

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While business and economics are two closely related fields, one (economics) serves to lay the foundation of the other (business) through its various models and underpinnings. The interdependence of these two fields operates much the same way as chemistry to metallurgy or physics to engineering.

Specifically, economics is a social science that studies how societies use resources to produce and distribute goods and services and how the public consumes that which is produced. It analyzes the transfer of wealth among different segments of a society and how both individuals and groups respond to financial incentives. It is primarily concerned with the choices that businesses, governments and other producers make (among labor, technology, finance, etc.) in order to maximize output of a given commodity with scarce or limited means to produce the given object.

Moreover, the broader study of economics can be broken down into subdivisions called micro and macroeconomics. Microeconomics deals with the habits of individual producers and consumers while macroeconomics is focused on larger economies such as state and national governments. The governmental system in which an economy operates (i.e., capitalism versus socialism) can have a drastic effect on the levels of output and costs of production.

Businesses provide the goods and services that those in the economics field study. Knowledge of economic models can help a given business understand how to better control production and distribution costs, maximize efficiency, incentive labor participation, drive output and, ultimately, increase profits.

Business as a discipline involves learning the principles of finance, operations, hiring, management, product development, customer service, marketing, sales and other factors to create commodities that customers find valuable. Economics gives business owners a way to study how all of these things can be used most effectively to achieve that value proposition. In other words, economics studies the allocation of resources to produce the goods and services that drive business decisions in the marketplace.

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Before you understand how economics is related to business, you need to define the terms first.

Business can be defined as a company or firm engaged in profit-making activities, or it could be a series of actions and activities with the main aim of producing and selling goods and services for a profit. In both definitions, profit-making is the main goal of a business.

There is no single definition for economics. However, the one that gives a clear link of between economics and business is that of Lionel Robbins. Robbins defines economics as the study of how human beings struggle to make ends meet using scarce resources.

How Economics relates to Business

Businesses rely on the economic principle of scarcity to make money. If goods and services were readily available, it would be impossible to sell them and realize profits. Due to scarcity, people are willing to pay money to obtain certain goods and services in order to satisfy their needs and wants.

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While economics is not the same as the study of business, economics does relate to business in many ways.  For example, the following economic ideas relate very much to business.

  • Price elasticity of demand.  This concept has to do with pricing.  It has to do with how consumers respond to price changes.  An understanding of this is vital to understanding how to price items.
  • Factors that change demand.  For example, one factor that changes demand is consumer tastes.  Firms need to know this so that they can try to manipulate consumer tastes to prefer their product.
  • Fixed costs and variable costs.  Firms need to understand the various kinds of costs and how they affect decisions on how much of a product to make.

In these and many other ways, economics has relevance to business.

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