The fields of business and economics are known to be two highly correlated fields, but with different objectives of operations or analysis. To put it simply, economics largely involves analyzing statistical data in order to understand patterns of consumer behavior and its impacts on the economic processes and conditions of the world, or of a specific market. Meanwhile, business makes use of economic analysis to tackle a wide range of concepts and ideas needed to establish and efficiently maintain a company. The concepts discussed are largely related to operational, financial, and managerial aspects, focusing on how to increase production and service efficiency for maximum profitability.
Before diving into the different concepts and theories of business and economics, it is important to understand the basic concepts of both fields. This article will introduce you to the different branches of analysis in economics and the different types of legal structures a business can have.
Economic Branches of Analysis
There are two different branches of economic analysis, depending on the scope and target audience of focus. Although the two branches have different focuses, they are interdependent and often complement each other or have overlapping issues.
Macroeconomic: uses a top-down approach, which takes a general concept to find an analysis focused on a specific area. It analyzes how a country’s economic condition is affected by changes of trends within the workforce. These trends are mainly focused on employment, inflation, and gross domestic product (GPD). A country’s GDP represents the economic activity and economic output of the country. An increased GDP represents growth in economic activity within the country, which also represents increased earnings for the average person. Macroeconomic analysis is often used by the government to create and/or revise economic and fiscal policies (the usage of government assets to influence the country’s economy). An example of macroeconomic analysis is how a country’s GDP heavily declines due to a mass laying off of employees during the pandemic.
Microeconomic: uses a bottom-up approach, which takes a focused or specific concept and analyzes its effects on the general concept. It focuses on how different forces (such as the supply and demand of a market) affect the price levels of a product or service within that market. Investors would often use microeconomic analysis to make assessments on a company before deciding to invest in it. An example of microeconomic analysis would be how a company can maximize their production efficiency in order to lower prices, increasing its competitiveness.
Types of Legal Business Structures
(Also known as the type of business ownership) the type of ownership a business has determines its legal responsibilities, amount of control, and the level of relation the business has to its owner’s personal assets. Often, the type of ownership a business adopts is related to the size and nature of the business. Throughout time, it is common for businesses to shift from one type of ownership to another for the purpose of expanding their business.
Sole Proprietorships (Sole Traders) are businesses that are owned by a single individual and are commonly used for small scale businesses. Sole Traders can choose to work alone or employ people to help run the business. This type of ownership recognizes the business’ assets and liabilities (what a company owes) as the owner’s own assets and liabilities. Examples of sole proprietorship businesses are freelance occupations (writers, photographers, designers, etc), self-employed decorators, or even small family-run businesses.
Partnerships are the most simple structure used by businesses with two or more owners. Similar to sole traders, the owners are fully responsible for the business’ assets and liabilities. The level of responsibility each owner holds depends on the prior agreements amongst owners regarding asset division, which is often (although not mandatory) decided on with a legal agreement or contract, often known as the deed of partnership or partnership deed.
Types of partnerships include:
- Limited Partnerships (LP): where only one owner has an unlimited liability in relation to the business, while others have limited liabilities (which also limits their level of control within the company).
- Limited Liability Partnerships (LLP): where each owner has a limited liability in relation to the business. This type of partnership protects the owners from being responsible for the actions of the other owners.
Often, partnership business structures are adopted by business owners who want to try out their business ideas before forming a large scale, or formal business entity. Examples of companies that started out as partnerships include Warner Bros, McDonalds, Twitter, and Ben & Jerry’s.
Companies (Corporations) are recognized as a separate legal entity, which means that the company’s assets and liabilities are not directly associated with the owner’s personal assets and liabilities (limited liability). A company can make profit and it will be held legally responsible for taxes and liabilities. The owners of a company are called shareholders, which are people or businesses that invest in a company by purchasing the company’s stocks, providing capital/assets for the company (more information on how you can invest can be found in our previous investing articles!). A company is run by a board of directors (BOD), who are selected by the majority shareholders to run the company.
Types of limited liability companies include:
- Private Limited Companies are companies that cannot raise capital by selling their shares to the general public. The company shares can only be sold to family members, friends, and/or sometimes employees; with the approval of the BOD. Private limited businesses commonly have the word “limited” or “Ltd.” following the company name. Examples of private limited companies include IKEA, Dell, and PricewaterhouseCoopers.
- Public Limited Companies can choose to raise capital by selling their shares to the general public through a stock exchange. Examples of public limited companies include Discord, Apple, Nike, and Tesla.
There is no set formula to choosing a type of business ownership, but it is important to take into account the nature of the business, possible future plans, and country regulations. For larger scale business structures, the legal requirements and regulations regarding tax and sales of stocks may vary depending on the different country regulations.
In conclusion, business and economics are different fields with different purposes, but are interdependent. On a small scale, the different innovations and/or impacts, brought by businesses, can affect the results of the microeconomic analysis of a market. Likewise, the results of a microeconomic analysis of a market can affect the decisions and/or amendments made within a business. On a larger scale, the different changes and/or improvements that collectively occur within a large group of businesses (which can happen because of similar responses to the microeconomic analysis of a market) will affect the results of the macroeconomic analysis in a country.
This article was written by Gwyneth Isman currently based in Jakarta, Indonesia. Please send an email to firstname.lastname@example.org to get in touch.
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