Relationship to economics
Relationship to economics The field of finance is closely related to the economics. Since every business firm operates within the economy, the financial manager must understand the economic framework and be alert to the consequences of varying levels of economic activity changes in economic policy. The financial manager must also be able to use economic theories as guidelines for efficient business operation. Example include supply –and-demand analysis, profit-maximizing strategies, and price theory. The primary economic principle used in managerial finance is marginal analysis, the principle that financial decision should be made and actions taken only when the added benefits exceed the added costs. Nearly all financial decision ultimately come down to an assessment of their marginal benefits and costs. A basic knowledge of economics is therefore necessary to understand both the environment and the decision-making techniques of managerial finance.