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CA Foundation · Business Economics · Nature and Scope of Business Economics

A firm's management wants to assess how much profit it is likely to earn in the coming year, taking account of uncertainty about future demand, costs and prices. Within the scope of Business Economics, this activity is best described as part of:

The activity is profit management. Because profit arises under uncertainty about demand, costs and prices, Business Economics covers profit planning, forecasting and measurement. Demand analysis, environmental analysis and capital budgeting each deal with only a narrower aspect and do not describe the assessment of expected profit.

  1. AProfit management, since profit is uncertain and requires planning and forecastingCorrect
  2. BDemand analysis, since it only studies consumer tastes
  3. CEnvironmental analysis, since it studies only government policy
  4. DCapital budgeting, since it only involves the selection of machinery

Explanation

Profit is the reward for uncertainty and risk bearing, so Business Economics includes profit management, covering profit planning, forecasting and measurement under uncertain conditions. Demand analysis deals with consumer behaviour and demand forecasts only. Environmental analysis looks at external policy factors, and capital budgeting concerns investment choices, so none of these captures the whole task.

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