Business economics can be simply viewed as the application of economics for the analysis of business. Business, on the other hand, is an economic activity. There is a need for objectively analyzing structure scope, efficiency and growth of business Economic analysis is done to provide objectivity. However, indiscriminate application of economics to business analysis can, sometimes, create confusing paradoxes. These are referred to as Fallacies. The Business Decisions are taken in the light of Economic Analysis keeping in view the Economic Fallacies.
- Economic Fallacies
- Economic Analysis
- Business Decision
Economic Fallacies
Economic fallacies are listing below:
1. The Fallacy of Composition
To assume what is true for one part will necessarily be true for the whole is fallacy of composition e.g. saving of all families. One saves it is good all save sales unemployment recession e.g. bumper crop
2. Post hoc, ergo propter hoc
It is Latin and its meaning is, “After that therefore, because of that”. What follows is result of the preceding.
3. The Fallacy in Syllogism
Syllogism is a particular form of reasoning. It has
Major premise, Minor premise, and Conclusion
For example: Major premise: Blind can’t read
Minor premise: Ali can’t read
Conclusion: So Mr. Ali is blind
4. Probabilistic vs. Deterministic Inferences
Most generalizations of economic analysis are subject to fulfillment of certain condition called assumptions. One such assumption that dominates economic analysis is “other things remaining the same.” But other things are so diversified that they seldom remain constant. So the conclusions from economic analysis are bound to be probabilistic instead of deterministic.
5. Black, White and Grey
Fallacy of assuming that there is no middle ground so result is accepted or rejected.
6. Wishing it were So
We believe the things we want to believe we always accept favorable interpretation of event or a course of action. This can ruin the analysis.
Economic Analysis
1. Micro Vs Macro Economic Analysis
Micro economic analysis
Its focus is on individual consumer, producer a firm an industry, as single price a single commodity etc. it is a step by step analysis and analyses one variable at a time other things remaining the same.
Macro economic analysis
This studies the economy as a whole. Aggregate demand, price, supply etc are its concern.
2. Partial vs. General Equilibrium Analysis
Partial Equilibrium analysis
In partial equilibrium analysis, one part of the system is being analyzed assuming other parts to be constant the interdependence is neglected and the analysis is done in isolation.
General Equilibrium analysis
When partial aquarium is done, other thing are assumed to be constant however, the other things are gradually let to be changing in order to analyze the whole. This is called generally equilibrium. It takes into account the interdependence of various variables. But the general equilibrium also, does not the scope of analysis the economic system as a whole.
3. Static, Comparative Static and Dynamic Analysis
Static analysis
It analyzes an adjustment due to one variable in a point in time, assuming other things to be constant.
Comparative Static analysis
Two or more static equilibrium situations, due to same variable are analyzed.
Dynamic Equilibrium analysis
It is the adjustment path over a period of time, such that successive changes in lengths, techniques and lessons (constant during static analysis) are taken into consideration.
4. Positive vs. Normative Economic Analysis
Positive sciences are concerned with explaining what the situation is. Whereas normative sciences are the sciences that suggest what the situation should be.
Similarly, economics analysis is that part of economics which pertains to positive economic economics or positive economics analysis. Whereas, the normative economic analysis is the policy side of economics. Positive economics explains the economics process, whereas normative economics suggest the policy measure for the betterment.
5. Temporary Run, Short Run and Long Run Analysis
Temporary run Analysis
Objectives and constraints are rigidly fixed and pegged in a temporary run analysis.
Short run Analysis
When some constraints are variable and some are fixed, the analysis is said to be short run analysis.
Long run Analysis
All the objectives and constraints are flexible and variable in long run analysis. All the constants are variable can thus in the situation of long run analysis. It is, however, too ideal.
Business Decision
Crucial business decisions like what to produce, for whom to produce, why to produce are taken after properly analyzing the economic process behind the business activity. Due consideration in gain to the impacts of economic fallacies on the process. As each and every economic agent faces scarcity of resources and has to make choices, so decision making is truly economic in nature.
1. Decision vs. Action
- Decision is a prelude to action.
- Decision is mental process and does not necessarily result in action.
- Action, on the other hand, is a physical process- execution, or implementation of decision.
- Decisions are supposed to be followed by actions.
- Actions generate reaction.
- New decision is taken on the basis of reaction thus it is an ongoing process.
2. Decision Making vs. Decision Taking
A decision is an attempt towards the solution of a problem. Decisions originate at various levels of organization. At lower level and middle level of management, decision exists in the form of rules, procedures. These are not made at this level; rather these are taken whereas at the top level management decisions are made.
Decision making is a process in which a decision maker looks at the problem, (past) then makes an attempt towards an optimistic decision cum-action (project) and reads the reaction (future) to repeat or revise a decision. Thus decision making is essentially a process of co-ordination on the time scale and involves risk. Decision taking, on the hand, is risk almost free.
3. Scientific vs. Intuitive Decision
Decision making is scientific and decision taking is intuitive. Intuition involves value judgment based on beliefs and experience. Whereas decision making is scientific on the basis that it involves analysis of problem through data, concepts, precepts and techniques.
4. General vs. Functional Decision
Management has become highly specialized. The specialization of various functions of management have resulted in the bifurcation of decision at two levels. Functions required decision making takes place at general management level, whereas the decision taking exists and functions management level.
5. Certain decision vs. Risky Decision vs. Uncertain Decision
This evolves from the decision environment following the following course:
- Changes take place every where.
- These changes may be known or unknown.
Known Changes
- If changes are known its outcome may be definite or indefinite.
- The definite outcome of changes results in certain decisions.
- But if the outcome of the changes is indefinite, they result in risky decisions.
Unknown Changes
- If the changes are unknown, they result in unpredictable results and hence the decisions will be uncertain.
- The decision taken would like to operate under certainty. However, the decision makers will like to operate under the risky and uncertainty.
