Relationship of Corporate Finance with Economics

Finance is concerned with the acquisition and use of the firm’s financial resources. It is an integral part of the overall management. Therefore, it should be studied along with other disciplines. It is because finance derives heavily the conceptual and analytic foundations from other disciplines particularly from economics and accountancy. Corporate finance is the area of finance handling the sources of funding and also the capital structure of corporations and also the actions that managers decide to try increase the value on the firm to the shareholders.

Corporate finance is the area of finance handling the sources of funding and also the capital structure of corporations and also the actions that managers choose to use increase the value from the firm to the shareholders, as well since the tools and analysis used to allocate financial methods. The primary target of corporate finance is always to maximize or raise shareholder value.

Relationship of Corporate Finance with Economics –

The relationship between corporate finance and economics can be viewed from two basic aspects of economics macroeconomics and microeconomics. Economics is a leading species of a large genus called finance. While economics consists of consumption and production, capital and enterprise, finance deals with accountancy, business, economics, management, trade, and commerce.

Relationships to Economics: There are two important linkages between economics and finance. The macroeconomic environment defines the setting within which a firm operates and the microeconomic theory provides the conceptual underpinning for the tools of financial decision making.

Macroeconomics is concerned with broad aspects of an economy such as output, employment, and income. Every business firm operates within the economy. It is imperative for financial managers to understand the broad economic framework. He must also be alert about the consequences of varying levels of economic activities, and recognize and understand the effect of monetary policy on the cost and availability of funds. The financial managers should evaluate various financing and investment alternatives in a macroeconomic framework.

Microeconomics is concerned with the economic issues relating to individual firms operating within the economy. It deals with economic problems related to individual firms. Many principles associated with microeconomics such as demand and supply analysis, profit maximization strategies, pricing theories have practical application in finance. In this sense, finance is regarded as applied microeconomics. The principle of marginal analysis technique of microeconomics is widely used in finance for decision making.

Finance touches our daily life, whether rich or poor, literate or illiterate. Economists deal with that part of finance which deals with consumption and production in an economy. It is a study relating to the problem of choice and makes best out of a given financial position.


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