Review of Subject
Economic fundamentals include “the basic qualitative and quantitative information that contributes to the financial or economic well-being and the subsequent financial valuation of a company, security or currency” according to Investopedia (2018). These fundamentals are useful to investors and analysts when determining whether a business, security asset or currency is a worthy investment. Fundamentals can include reasonable value and business profitability, business revenue, total assets and liabilities, and the growth potential of the business. These fundamentals are the basic qualities needed to analyze the stability of a company, security or any asset in question and can include both macroeconomic and microeconomic standards that are useful for determining the financial values attributed to an asset.
Andrew Beattie (2017) suggests that fundamental economics includes scarcity of resources, supply and demand, costs and benefits, and incentives. Baye and Prince (2014) agree and define economics as “the science of making decisions in the presence of scarce resources. (p. 3) Beattie (2017) believes that economics has a direct impact on everyday lives of consumers because it is a study of why and how we make choices concerning buying and spending. Baye and Prince (2014) suggest that a basic understanding of economic fundamentals can give a useful insight into every aspect of the business and non-business world of consumers. Beattie (2017) suggests that it all comes down to choices and the reasons behind why making those choices.
From a managerial standpoint, a basic understanding of economics is crucial because, “billions of dollars are lost each year because many existing managers fail to use basic tools from managerial economics to shape pricing and output decisions, optimize the production process and input mix, choose product quality, guide horizontal and vertical; merger decisions, or optimally design internal and external incentives.” (Baye and Prince, p. 2, (2014) Baye and Prince (2014) define managerial economics as the study of efficiently directing scarce resources to achieve a managerial goal while Gaurav Akrani (2009) defines managerial economics as “the discipline which deals with the application of economic theory to business management.” Akrani (2009) suggests that managerial economics is the borderline between economics and business management and serves as a bridge between the two.
Macroeconomics focuses on the behavior of an entire economy according to Bradley Schiller (2011) and macroeconomic fundamentals include topics such as statistics on unemployment, supply and demand, growth, and inflation, as well as considerations for monetary or fiscal policy and international trade. These categories are important when used to analyze a large-scale economy or individual business activities to make changes based on any type of macroeconomic influence. Schiller (2011) reminds readers that the essential concern of macroeconomics is to improve and understand the performance of an economy without worrying about the behavior and wellbeing of specific individuals and groups.
Macroeconomics is one major part of economics. To study the economy in totality and to have the clear knowledge of aggregate economic variable, it is necessary to study macroeconomic analysis according to Bhim Chimoriya (2015). Chimoriya (2015) writes, “It is clearly known that by generalization of behavior and characteristics of an individual nothing can be learned about the behavior and characteristics of the aggregates. But from the studies of characteristics and behavior of the aggregates some knowledge can be obtained about the individual.” The same concept is useful when studying an economy.
Marc Davis (2018) states that while macroeconomics focuses on the big picture, microeconomics looks at the little picture of the economy. Davis (2018) writes, “by contrast, microeconomics studies a limited, smaller area of economics, including the actions of individual consumers and businesses, and the processes they use to make economic decisions – buying, selling, the prices businesses charge for their goods and services and how many of these goods and services they produce and offer.” Microeconomic fundamentals look at an economic market within smaller segments of the economy and analyze associated data such as market competition data, economic formulas, and supply and demand ratios and its effect on consumer spending and business decision-making to determine how to competitively price goods and services based on individual and group consumer needs and choices. (Davis, 2018)
Business fundamentals, according to David Scott (2003); include the general background within which an economy runs including consumer earnings, sales, wage rates, taxes, and inflation or the facts that affect a company’s underlying value. (Scott, 2003) A few examples of business fundamentals include debt, cash flow, supply of and demand for the company’s products, and so forth. For example, a business must have enough products to sale or it will fail. Also, consumer demand for the product must remain at a certain level for it to be profitable. Strong business fundamentals are essential for long-term success and stability an organization. Tim Berry (2008) writes, “long-term business success is rooted in value. Businesses that offer value to customers and respect value for employees are more likely to survive. Business ethics are good business; they are like a long-term insurance policy.”
Fundamental analysis is the process of looking at a business at the most basic or fundamental financial level according to Ken Little (2018). Little writes, “this type of analysis examines the key ratios of a business to determine its financial health and it can give you an idea of the value of its stock. It takes several factors into account, including revenue, asset management, and the production of a business as well as interest rate.” (2018) Fundamental Analysis is a method of evaluating a security by trying to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. (Suresh, 2013) Analysts try to study everything that can affect the value of a company or its assets and use economy and industry conditions information and individual data such as the financial condition and management of an organization. Investors use fundamental analysis alone, but it provides an added analytical tool when used in conjunction with other tools to evaluate a business for investment purposes. (Suresh, 2013)
Economic fundamentals cover a broad spectrum of areas related to businesses and the economy. These fundamentals are useful to investors and analysts to determine whether a business, security asset or currency is a worthy investment are the basic qualities needed to analyze the stability of a company, security or any asset. A business with a strong financial structure and framework is a practical business and peaks the interest of investors while those businesses experiencing financial issues like debt management and cost control may be of little interest to most investors except in the case of bankruptcy or foreclosure.
Understanding basic economic fundamentals can be useful in household decision making because, as Andrew Beattie (2017) states, “economics has an impact on every moment of our lives because, at its heart, it is a study of choices and why and how we make them.” Issues such as scarcity of resources can affect consumers with low or limited incomes, consumers situated in rural areas where there are limited products and services for consumer use. Whether a consumer is a business owner, investor, homeowner, or just an average consumer, an understanding of basic economic fundamentals can help our decision-making process and help consumers make educated choices in terms of product, cost, and the benefits of buying a product or service.