1
Unit
Unit 2
Chapter 1 –
Nature & Scope of Business Economics
units 2x -
5
Recordings By th
:
Chapter 9
Junits one Shot -
Dec .
13-20 Dec Jan. Revision
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4th 1
Dec-Chapter
50 Chapte
I shours
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What is Economics about?
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The term Economics is derived from the Greek word ‘Oikonomia’ which means
household.
Till 19th Century, Economics was known as ‘Political Economy’.
The book named ‘An Inquiry into the nature and causes of the Wealth of Nations’
(1776) usually abbreviated as ‘The wealth of Nations’, by Adam Smith is considered as
the first modern work of Economics.
The fundamental facts:
Human beings have The means to satisfy
unlimited unlimited wants are
wants
relatively scarce
Subject matter of Economics
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We cannot have everything we want with the resources we have, we are forever
forced to make choices and therefore, we choose to satisfy only some of our wants
leaving many other wants unsatisfied.
Similar dilemma is faced by every individual, every society and every country in this
world.
Meaning of Economics
Economics is the study of the processes by which the relatively scarce resources are
allocated to satisfy the competing unlimited wants of human beings in a society.
Of course, the available resources will be efficiently used when they are allocated to
their highest valued uses. Max satisfaction
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Thus, we can say that, Economics is the study of how we work together to transform
the scarce resources into goods and services to satisfy the most pressing of our infinite
wants and how we distribute these goods and services among ourselves.
This definition of Economics is the domain of Modern neo classical micro economic
Demand &supply
analysis.
Despite being correct, it is incomplete because it brings to our mind the picture of
society with:
Fixed resources, skills and productive capacity What to produce
Deciding on what specific kind of goods and services it ought to produce with the
given resources and,
How they ought to be distributed among the members of the society.
For whome
to
produce .
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Two of the most important concerns of modern economies are not fully covered by the
basic definition. Economics also deals with:
I) Processes by which the productive capacity of these resources are increased
we find that the productive capacity of modern economies has grown tremendously.
Population and labour forces have increased
New sources of raw materials have been discovered
New and better plant & equipment have been made available on farms and in factories
and mines
Better education and newly acquired skills have raised the productivity of labour force
New kinds of natural resources have been discovered like alternative sources of energy
II) Factors which, in the past, have led to sharp fluctuations in the rate of utilizations of
resources
Resulting growth in production and income has not been smooth.
There have been periods in which output not only failed to grow, but also actually
declined sharply ( Corona Pandemic 2019).
During such period, factories, workers and other productive resources have remained
idle due to insufficient demand.
Economics, therefore, concerns itself not just with the crucial concern of how a nation
allocates its scarce productive resources to various uses; it also deals with the processes
by which the productive capacity of these resources is increased and with the factors
which, in the past, have led to sharp fluctuations in the rate of utilisation of these
resources.
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Why to study Economics?
Economics will enable us to develop an Economics would also provide us
Analytical approach that helps in with a number of models and
understanding and analyzing a wide frameworks than can be applied
range of economic issues, such as: in different situations.
Change in the prices of individual The tools of Economics assist in
commodities choosing the best course of action
Economic prosperity and higher from among the different
standards of living of some countries alternatives course of action
despite general poverty and poor available to the decision maker.
standards of living in others
Some firms making extra-ordinary
profits while others close down
However, it is necessary to remember that most economic problems are of complex
nature and are affected by several forces, some of which are rooted in Economics
and others in political set up, social norms, etc.
The study of Economics cannot ensure that all problems will be appropriately
tackled; but, without doubt, it would enable a student to examine a problem in its right
perspective and would help him in discovering suitable measures to deal with the same.
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Meaning of Business Economics
Decision Making in Business
Decision Making refers to the process of selecting an appropriate alternative that will
provide the most efficient means of attaining a desired end, from two or more alternative
courses of action.
It involves evaluation of feasible alternatives, rational judgment on the basis of
information and choice of a particular alternative which the decision maker finds as the
most suitable.
The question of choice arises because our productive resources such as land labour,
capital, and management are limited and can be employed in alternative uses.
Therefore, more efficient alternatives must be chosen and less efficient alternatives
must be rejected.
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The management of a business unit generally needs to make strategic, tactical and
operational decisions. A few examples of issues requiring decision making in the context
of businesses are illustrated below:
Should our firm be in this business?
Should the firm launch a product, given the highly competitive market environment?
If the firm decided on launching the product, which available technique of production
should be used?
From where should the firm procure the necessary inputs and at what prices so as to
have competitive edge in the market?
Should the firm make the components or buy them from other firms?
How much should be the optimum output and at what price should the firm sell?
How will the product be placed in the market? Which customer segment should we
focus on and how to improve the customer experience? Which marketing strategy
should be chosen? How much should be the marketing budget?
How to combat the risks and uncertainties involved?
Decision making on the above as well as similar issues is not simple as the economic
environment in which the firm functions is highly complex and dynamic.
The problem gets aggravated because, most of the time, decisions are to be taken
under conditions of imperfect knowledge and uncertainty.
Decision making therefore, requires that the management be equipped with proper
methodology and appropriate analytical tools and techniques.
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Business Economics meets these needs of the management by providing a huge corpus
of theory and techniques.
Briefly put, Business economics integrates economic theory with
business practice
Business Economics, also known to as Managerial Economics, generally refers to
the integrations of economic theory with business practices.
In short, we can say that Business Economics is Applied Economics that fill the
gap between economic theory and business practice.
Business Economics has close connection with Economic theory (Micro as well as
Macro- Economics), Operations Research, Statistics, Mathematics and the Theory of
Decision-Making.
A professional business economist has to integrate the concept and methods from
all these disciplines in order to understand and analyze practical managerial problems.
Business Economics is not only valuable to business decision makers, but also useful
for managers of ‘not-for-profit’ organizations such as NGO, and voluntary organization.
Definition of Business Economics
Business Economics may be defined as the use of economic analysis/theories to
make business decisions involving the best use of an organization's scarce resources.
Joel Dean defined Business Economics in terms of the use of Economic analysis in
the formulation of business policies.
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Micro & Macro Economics
Economics has been broadly divided into two major parts i.e. Micro Economics and Macro
Economics
Micro Economics:
Study of the behavior of different individuals and organizations within an economy.
Microeconomics examines how the individual units (consumers or firms) make
decisions as to how to efficiently allocate their scarce resources.
Here, the focus is on a number of a small number or group of units rather than all the
units combined, and therefore it does not explain what is happening in the wider
economic environment
We mainly study the following in Micro-economics:
● Product pricing
● Consumer behavior
Labour
● Factor pricing
● The economic conditions of a section of people
● Behavior of firms
● Location of industry
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Macro Economics:
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Study of the overall economic phenomena or the Economy as a whole, rather than
individual parts.
In Macro, we study the behavior of the large economic aggregates such as, the
overall levels of output and employment, total consumption, total savings and total
import-export, etc. GOP
It analyses the overall economic environment in which the firms, governments and
households operate and make decisions.
A few areas that come under Macro Economics are:
● National Income & National output
● The general price level and interest rates
● Balance of trade and balance of payments
● External value of currency Exchange Rote
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● The overall level of savings and investments
● The Level of employment and rate of economic growth
↓While business economics is basically concerned with Micro Economics, Macro
Economic analysis also has got an important role to play.
Macroeconomics analyzes the background of economic conditions in an economy
which will immensely influence the individual firm’s performance as well as its decisions
Business firms need a thorough understanding of the macroeconomic environment in
which they have to function.
For example, knowledge regarding conditions of inflation and interest rates will be
useful for the business economist in framing suitable policies. Moreover, the long-run
trends in the business world are determined by the prevailing macroeconomic factors
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Nature of Business Economics
Economic theories are hypothetical and simplistic in character as they are based on
economic models built on simplifying assumptions.
Therefore, usually, there is a gap between the propositions of economic theory and
happenings in the real economic world in which the managers make decisions.
Business Economics enables application of economic logic and analytical tools to
bridge the gap between theory and practice.
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1) Business Economics is a Science:
Science is a systematized body of knowledge which establishes cause and effect
relationships.
Business Economics integrates the tools such as Mathematics, Statistics with
Economic Theory to arrive at appropriate strategies for achieving the goals of the
business enterprises. It follows scientific methods and empirically tests.
the validity of
the results.
2) Based on Micro Economics: &
Business Economics is based largely on Micro-Economics.
A business manager is usually concerned about achievement of the predetermined
objectives of his organization so as to ensure the long-term survival and profitable
functioning of the organization.
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Since Business Economics is concerned more with the decision making problems of
individual establishments, it relies heavily on Microeconomics
3) Incorporates elements of Macro Analysis:
A business unit does not operate in a vacuum.
It is affected by the external environment of the economy in which it operates such
as income and employment levels in the economy and government policies with respect
to taxation, etc. All these are components of Macro economics.
4) Business Economics is an Art: Theories
As it involves practical application of rules and principles for the attainment of set
objectives.
5) Pragmatic in Nature:
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Micro-Economics is abstract and purely theoretical and analyses economic
phenomena under unrealistic assumptions.
In contrast, Business Economics is pragmatic in its approach as it tackles practical
problems which the firms face in the real world.
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6) Interdisciplinary in Nature
Business Economics is interdisciplinary in nature as it incorporates tools from other
disciplines such as Mathematics, Operations Research, Management Theory,
Accounting, marketing, Finance, Statistics and Econometrics
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7) Use of Theory of Markets & Private Enterprises:
Business Economics largely uses the theory of markets and private enterprise.
It uses the theory of the firm and resource allocation in the backdrop of a private
enterprise economy.
8) Normative in Nature
Economic theory has developed along two lines – Positive & Normative
Positive or Pure Science: Normative Science
Analyses cause and effect relationship Involves value judgements
Does not involve any value judgement It is prescriptive in nature
It states ‘what is’ of the state of affairs It suggests ‘what should be’ or ‘what
It is descriptive in nature- describes the ought be’ a particular course of action
economic behavior without prescriptions Welfare considerations are embedded
in normative science.
Business Economics is generally normative or prescriptive in nature.
It suggests the application of economic principles with regard to policy formulation,
decision making and future planning.
However, firms must thoroughly understand their environment. This requires the
study of positive or descriptive economic theory.
Thus, Business Economics combines the essentials of normative and positive economic
theory, the emphasis being more on the Normative than Positive.
Scope of Business Economics
The scope of Business Economics is quite wide. It covers most of the practical problems
a manager or a firm faces.
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The following Micro –Economic Theories deal with Internal Issues:
1) Demand Analysis & Forecasting:
Demand Analysis:
It pertains to the behaviour of consumers in the market.
It studies the nature of consumer preferences and the effect of changes in the
determinants of demand such as, price of the commodity, consumers' income, prices of
related commodities, consumer tastes and preferences etc.
Demand Forecasting:
It is the technique of predicting future demand for goods and services on the basis
of the past behaviour of factors which affect demand.
Accurate forecasting is essential for a firm to enable it to produce the required
quantities at the right time and to arrange, well in advance, for the various factors of
production viz., raw materials, labour, machines, equipment, buildings etc.
2) Production & Cost Analysis
Production Theory:
It explains the relationship between inputs and output.
A business economist has to decide on the optimum size of output and ensure that
the firm is not incurring undue costs.
Production Analysis enables the firm to decide on the choice of appropriate
technology and selection of least - cost input-mix to achieve efficient way of
producing output, given the inputs.
Cost Analysis:
It enables the firm to recognize the behaviour of costs when variables such as
output, time period and size of plant change.
The firm will be able to identify ways to maximize profits by producing output at
the minimum possible cost.
3) Inventory Management
Inventory management theories pertain to rules that firms can use to minimize the
costs associated with maintaining inventory in the form of 'work-in-process,' 'raw
materials', and "finished goods”.
Inventory policies affect the profitability of the firm. Business economists use
methods such as ABC analysis and mathematical models to help the firm maintain
optimum stock of inventories.
4) Resource Allocation
Business Economics, with the help of advanced tools such as linear programming,
enables the firm to arrive at the best course of action for optimum utilization of
available resources.
5) Market Structure & Pricing Policies
Market Theory
Analysis of the structure of the market provides information about the nature and
extent of competition which the firms have to face.
This helps in determining the degree of market power (ability to determine prices)
which the firm commands and the strategies to be followed in market management
under the given competitive conditions such as, product design and marketing.
Price Theory
Price theory explains how prices are determined under different kinds of market
conditions and assists the firm in framing suitable price policies.
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6) Theory of Capital & Investment Decisions
For maximizing its profits, the firm has to carefully evaluate its investment decisions
and carry out a sensible policy of capital allocation.
Theories related to capital and investment provides scientific criteria for choice of
investment projects and in assessment of the efficiency of capital.
Business Economics supports decision making on allocation of scarce capital among
competing uses of funds.
7) Profit Analysis
Profits are, most often, uncertain due to changing prices and market conditions.
Profit theory guides the firm in the measurement and management of profits under
conditions of uncertainty.
Profit analysis is also immensely useful in future profit planning.
8) Risk & Uncertainty Analysis
Business firms generally operate under conditions of risk and uncertainty.
Analysis of risks and uncertainties helps the business firm in arriving at efficient
decisions and in formulating plans on the basis of past data, current information and
future prediction.
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The major Macro –Economic factors which affects Business:
The Type of Economic System ( Capitalist, Socialist & Mixed Economy)
Stage of Business Cycle ( Expansion, peak, contraction & Trough)
The general trends in national income, employment, prices, saving and investment.
Government's economic policies like industrial policy, competition policy, monetary
and fiscal policy, price policy, foreign trade policy and globalization policies.
Working of financial sector and capital market
Socio-economic organizations like trade unions, producer and consumer unions and
cooperatives
Social and political environment
DIFFERENCE BETWEEN ECONOMICS AND BUSINESS ECONOMICS
Micro
