B.

COM 1 SEMESTER – BUSINESS ECONOMICS CHAPTER - 01

Introduction to Business Economics

EXAM QUESTIONS
No. Particulars Exam year
Oct./ Nov. 2018
Define Business Economics and explain the characteristics of Business
1. Mar./Apr. 2019
Economics.
Nov./Dec 2022
Mar./Apr. 2019
2. Explain the Scope of Business Economics Oct./Nov 2016
Oct./Nov 2017
3. Explain the significance of business economics. Mar./Apr.2017
Oct./Nov.2017
4. Explain the Objectives of Business Firms
Mar./Apr.2018
Define Micro Economics. Explain the characteristics / Features of
5.
Micro- Economics
Define Micro Economics. Explain the significance / importance of
6.
Micro- Economics
Define Macro Economics. Explain the characteristics / Features of
7 Nov./Dec 2022
Macro- Economics
Define Macro Economics. Explain the significance / importance of
8
Macro- Economics
9 Distinguish between Micro and Macro Economics

Economics - Introduction
 Economics is a social science.
 The term 'Economics' is derived from the Greek word, 'Oikonomia' which means management of the
household.
 Human Beings have unlimited wants, and
 The means of satisfying these wants are relatively scarce.
These two fundamental facts form the subject - matter of Economics.
Thus —
 Economics is concerned with the study of how effectively an individual and society uses limited (i.e.
scarce) resources, to satisfy infinite wants.

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 Economics is the study of how Individuals and society, work together to transform scarce resources into
goods and services to satisfy the most important of infinite human wants, and how these goods and
services are distributed among different sections of the society.
 Economics deals with —
a) how a nation allocates its scarce productive resources to various uses,
b) the process by which the productive capacity of these resources is increased, and
c) the factors which have led to sharp fluctuations in the rate of utilization of resources.
Q. 1 DEFINE BUSINESS ECONOMICS AND EXPLAIN THE CHARACTERISTICS OF BUSINESS ECONOMICS.
(OCT./ NOV. 2018)
 Business economics is the application of economic theory or economic analysis in business
management. It is a field that applies economic theory and analysis to business decision-making
and management.
 In Business economics, economic principles and tools are used to analyze data, forecast trends,
evaluate risks, and make informed business decisions.
 It is that body of economic knowledge which is used in analyzing business problems (internal and
external) for taking appropriate business decisions and formulating future plans.
 The goal of business economics is to help businesses optimize their resources and achieve their
financial objectives.

Business Management Economics

+

Business Economics

Definitions:
 Business Economics may be defined as the study of economic theories, logic and methodology
which are generally applied to seek solution to the practical problems of business.
 In the words of [Link], “Business Economics is concerned with application of economic
concepts and economic analysis to the problems of formulating rational Business decisions.”
 According to Joel Dean, “Use of economic analysis in formulating business policies is known as
Business Economics.”
 According to Mc Nair and Meriam, “Business economic consists of the use of economic modes of
thought to analyses business situations.”
 In simple words, Business economics is that discipline which uses economic concepts, principles
and economic analysis in taking business decisions and formulating future plans.

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FEATURES OR CHARACTERISTICS OF BUSINESS ECONOMICS

1. Micro in Nature:
 Business economics is mainly microeconomics. It is interested in the study of an individual
firm and not all the firms in the economy as a whole.
 Micro-economics is the study of the behavior and problems of individual economic unit. It
studies the problems of a business firm such as problem of forecasting demand, cost of
production, pricing. profit. planning, capital management etc.
2. Uses Macro-Economic Analysis:
 Macroeconomics deals with the external environment which includes inflation, employment
and income levels, tax policies, business cycle and foreign trade etc. All these factors affect
the smooth functioning of the firm.
 Thus, business economics incorporates these macroeconomic factors to deal with the
uncertain changing environment.
4. Pragmatic in nature:
 Business economics is pragmatic/ practical in its approach. It is concerned with practical
problem and results.
 It has nothing to do with abstract economic theory which has no practical application to
solve the problems faced by business firms.
 It considers the particular environment of decision-making and not general one.
5. Business Economic is Normative:
 Normative sciences prescribe certain norms. It means that it suggests ‘do’s’ and ‘don’t’.
 Business economics is fundamentally normative and prescriptive in nature. It is concerned
with what decisions ought to be made.
 The application of managerial economics is inseparable from consideration of values or
norms.
 In Business economics, we are interested in what should happen rather than what does
happen. Instead of explaining what a firm is doing, we explain what it should do to make
its decision effective.
6. Interdisciplinary:
 Business economics integrates all other disciplines such as mathematics, statistics,
accounting and marketing etc. to solve the problems in different fields of business.
Therefore, it is interdisciplinary in nature.
7. Business Economics is a Science:
 As science establishes a relationship between cause and effect. Business economics also
establishes a relationship between economic theories and decision sciences.

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 It also adopts scientific methods to test the validity of the results. Thus, it is science in
its methodology.
8. Business Economics is an Art:
 Art is nothing but a practical application of knowledge.
 As an art requires the practical application of rules and principles, Business economics also
uses economics rules and principles to solve various economic and business problems. Thus,
it can be said as an art in its application.
9. It is a bridge between traditional economics and business management. It is an attempt to
integrate theory with actual business practice.
Q. 2 EXPLAIN THE SCOPE OF BUSINESS ECONOMICS.
(CM OF MP3)
1) Cost and Profit Analysis:
Cost analysis enables the firm to recognize the behavior 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 the desired level of output at the minimum possible cost.
Business economics uses concepts of opportunity cost and implicit cost to determine economic
profit and differentiate it from accounting profit. This is done to determine the actual resource
utilization in businesses.
2) Market Demand Analysis:
Demand analysis is the study of the behavior of consumers in the market. It studies the nature
of consumer preferences. It also studies 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 is the technique of predicting future demand for goods and services.
Accurate forecasting is essential for a firm to enable it to produce the required quantities at the
right time. Business Economics provides the manager with the scientific tools which assist him
in forecasting demand.
3) Objectives of the Firm:
Profit is the primary objective of business firms. Business economics studies break-even analysis
and profit maximizing equilibrium of a firm. Besides, other objectives of the firm like, sales
maximization, growth maximization and satisficing behavior are also studied in business economics.
4) Forecasts and Business Policy:
Business economics uses quantitative techniques (mathematics and statistical techniques) to
study how business enterprises forecast future trends in demand, costs, revenue and profit.
Forecasting future trends is extremely important for a firm as the success of its plans

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depends on how well it can forecast the future. Demand forecasting is an applied component of
business economics.
5) Market Structures:
The study of market structures is a very important part of business economics. Understanding
competition, makes firms take better decisions about their pricing, marketing and production
strategies. The study of market structures like perfect competition, monopoly, monopolistic
competition and oligopoly form an important part of business economics.
6) Production Analysis:
Business economics analyses the process of production. A firm tries to make optimum use of the
resources available to it in order to maximize production and minimize cost. Laws of Variable
Proportions and Laws of Returns to Scale are used to understand production in the short run and
the long run, respectively.
7) Pricing:
Pricing is one of the most important business decisions that determines a firm’s revenue and
profit. Business economics deals with the analysis of different pricing practices and studies their
applications in different types of firms. For example, which pricing practice is appropriate for a
multi-product firm or a public sector enterprise?
8) Project Planning:
Project planning or capital budgeting is done by any investor to determine the criteria on which
to make investment decisions. The study of different methods of project planning is one of the
most important components of business economics. Methods like pay—back period, net present
value and internal rate of return are studied under business economics.
Q. 3 EXPLAIN THE SIGNIFICANCE OF BUSINESS ECONOMICS.
1. Business Planning:
Business economics assists business organizations in formulating plans and better decision making.
It helps in analyzing the demand and forecasting future business activities.
2. Cost Control:
Controlling the cost is another important role played by Business economics. It properly analyses
and decides production activities and the cost associated with them. Business economics ensure
that all resources are efficiently utilized which reduces the overall cost.
3. Price Determination:
Setting the right price is one of the key decisions to be taken by every business organization.
Business economics supplies all relevant data to managers for deciding the right prices for
products.

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4. Business Prediction:
Business economics through the application of various economic tools and theories helps managers
in predicting various future uncertainties. Timely detection of uncertainties helps in taking all
possible steps to avoid them.
5. Profit Planning and Control:
Business economics enables in planning and managing the profit of the business. It makes an
accurate estimate of all cost and revenue which helps in earning the desired profit.
6. Inventory Management:
Proper management of inventory is a must for ensuring the continuity of business activities. It
helps in analyzing the demand and accordingly, production activities are performed. Managers can
arrange and ensure that the proper quantity of inventory is always available within the business
organization.
7. Manages Capital:
Business economics helps in taking all decisions relating to the firm’s capital. It properly analyses
investment avenues before investing any amount into it to ensure the profitability of an
investment.
Q. 4 EXPLAIN THE OBJECTIVES OF BUSINESS FIRMS.
There are several objectives before the firm. Objectives of the firm can be classified as 1) Economic
Objectives & 2) Non- Economic objectives.
ECONOMIC OBJECTIVES (OCT/NOV.2017)
1) MAXIMIZATION OF PROFIT:
The principal objective of a business firm is profit maximization. For the survival of business
profitability is very important. The main measure of business efficiency is the profit made by it.
A firm tries to achieve it by the best combination of inputs. A firm under conditions of perfect
competition achieves this goal when it equates marginal cost with marginal revenue. (MR=MC)
But, this objective is always criticized as.
a) The studies have made it clear that the profitability alone is not the only criterion by which
shareholders appreciate the performance of a company.
b) Due to uncertainties, the firm gives far more importance to the objective of long – run
survival, instead of maximum profit earning.
c) Now-a-days profits may not be an indicator since it may be the result of imperfections of
market which have resulted in exploitation.
d) Profit maximization may require business expansion but such expansion involves additional
risk and troubles which many businessmen may not like to undertake.

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e) If profits are the means to expand business, the goals of profit maximization merges with
the goal of growth of the firms.
2) SATISFACTORY LEVEL OF PROFIT:
 Herbert Simon has presented this concept. According to him firms goal should not be
maximization of profits, but attaining a certain level of profit, holding a certain level of sales.
Firms should try ‘to satisfy’ rather than ‘to maximize.’
 But it is very difficult to distinguish between satisfactory level of profits and maximum level
of profits. Moreover, the firms which are satisfied with satisfactory level of profit may be left
behind by the profit maximizing firm in their struggle for survival.
3) SALES MAXIMIZATION:
 According to Prof. Baumol the ultimate objective of firm is sales maximization rather than the
profit maximization.
 The term ‘sales’ means total revenue earning. This sales maximization concept of Baumol
provides two goals in firm’s behavior. (i) satisfactory minimum level of profits and (ii) the
highest possible sales.
 According to critics - this theory does not explain how the firms maximize their sales volume
within a profit constraint.
4) MAXIMUM GROWTH RATE:
 According to U.S. economist [Link] managers pursue no single but multiple goals such
as sales maximization, utility maximization etc.
 Along with these objective, managers keep the prime objective to achieve the top level or the
highest possible level of growth in output.
 They also try to improve their prestige, technical superiority and market power. They take the
help of effective advertising on a large scale to influence the consumer in order to attain the
above mentioned objective.
5) DESIRE FOR LIQUIDITY:
 This objects refers to the desire of a firm to keep adequate amount of cash so that it can
avoid a liquidity crisis. This is called as ‘Bankers Mentality.’
 Fear of financial crisis and the fear of bankruptcy are very powerful factors in influencing the
firm to keep adequate cash.
NON ECONOMICS OBJECTS
1) SURVIVAL:
The main objects of any firm is survival. It is a long period objective. Profitability is a long period
objective. Profitability is required for survival. But instead of maximum profit it should be
reasonable profits it should be reasonable profits. For its survival a firm must earn good will and

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good name in society. For this it should produce and supply good and services of good quality. A
good name earned would help a firm to enjoy a bigger share of market enabling its objective of
survival over a long period to achieve.
2) SECURING PUBLIC SUPPORT:
A firm can win the confidence and support of the society by providing gods and services of high
quality having reasonable prices. This is a secondary objective to the goal of survival
3) WELFARE OF LABOUR AND SOCIETY:
Welfare of the workers must be given top priority. This labour welfare objective is very important
such type of welfare can improve the efficiency and productivity of labour for this they should
be provided with good working conditions, fair wages and other benefits increase their involvement
in the firm Patronage and support of the society is very essential for the survival of a firm. So a
firm must have the welfare of the society is as its important objective and should undertake
charitable works.
4) BUSINESS ETHICS:
This may be one of the objectives of a firm to achieve this objective a firm must adopt sound
business practices like issuing price lists, replacements or refund for defective products etc.
5) PROGRASSIVE MANAGEMENT:
For the proper growth of the firm progressive management is very vital. For achieving this
objective, polices like participation of workers in management, training programmes for workers
should be implemented.
Q. 5 DEFINE MICRO ECONOMICS. EXPLAIN THE CHARACTERISTICS / FEATURES OF MICRO-
ECONOMICS
 The word ‘Micro’ means a ‘millionth’ part. So, micro economics is the study of small segments
or a small component or a small unit.
 Micro economics is the microscopic study of the various units of the economy such as individual
commodities, firms, industries, households and consumers.
 “Micro Economics is the study of particular firms, particular households, individual prices, wages,
incomes, individual industries and particular commodity”. – K.E. Boulding.
 In simple words in micro economics, we examine the tree, not the forest.
FEATURES OF MICRO- ECONOMICS
1. PRICE THEORY:
a) Micro economics is also known as ‘Price Theory’ because the theory of product pricing and the
theory of factor pricing fall within the domain of micro economics.
b) In other words, it explains how prices of various factors of production such as rent for land,
wages for labour, interest for capital and profits for entrepreneur are determined.

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2. ANALYSIS OF MARKET STRUCTURES:

Micro Economics analyses different market structures i.e. perfect competition, monopoly oligopoly,
monopolistic competition etc. and describes how prices & quantities are determined in different
markets.
3. PARTIAL EQUILIBRIUM APPROACH:
a) Equilibrium is the balance between two factors.
b) Micro economic analysis deals with partial equilibrium which analyses equilibrium position of
an individual economic unit i.e. individual consumer, individual firm, individual industry etc.
c) It isolates an individual unit from other forces and studies its equilibrium independently.
d) This approach neglects the interdependence between economic variables.
4. USES MARGINALISM PRINCIPLE:
a) Micro economics makes use of marginalism principle as its tool of analysis.
b) Marginal refers to the change brought about in total by an additional unit (marginal unit).
c) All-important micro economic decisions are taken at the margin.
d) For example, marginal utility, marginal revenue, marginal product, marginal cot etc. this makes
the theories simple and easy to understand.
5. STUDY OF INDIVIDUAL UNITS/ INDIVIDUALISTIC:
a) Micro economics is the study of economic behavior of small individual economic units such as
individual firm, individual consumer, individual producer, price of a particular commodity or
factor etc.
b) It studies only a part of the economy and not the whole.
6. LIMITED SCOPE:
a) Micro Economics studies individual economic units & not the whole economy.
b) It does not deal with the nation-wide problems like unemployment, inflation, deflation, poverty,
balance of payment, economic growth etc. So its scope is limited.
7. BASED ON CERTAIN ASSUMPTIONS:
a) Micro Economics principles are based on certain assumptions like laissez fair policy, pure
capitalism, full employment, perfect competition etc. which do not exist in reality.
b) Also most of the theories are based on the ‘ceteris paribus’ assumption i.e. other things
being constant.
c) The assumption makes the analysis simple.
8. SLICING METHOD:
a) Micro economics uses slicing method.
b) It splits or divides the whole economy into small individual units and
then studies each unit separately in detail.

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c) For example, study of individual income out of national income, study of individual demand
out of aggregate demand etc.
Q. 6 DEFINE MICRO ECONOMICS. EXPLAIN THE IMPORTANCE / SIGNIFICANCE OF MICRO
ECONOMICS.
IMPORTANCE OF MICRO ECONIMICS:
1) TO UNDERSTAND THE WORKING OF ECONOMEY:
The basic merit of micro economics is that useful for understanding the operations of an
economy. It informs us whether the particular economics unit function optimally or not.
2) USEFUL IN PRICE DETERMINATION AND ALLOCATION OF RESOURCE:
Micro economics is also known as Price theory as it helps in explaining how the prices of
different commodities are determined. It also helps it determining the prices of various factors
of production such as rent for land, wages for labour, interest for capital and profits for
entrepreneur. Micro economics is also useful in the allocation of resource among competing ends.
3) USEFUL TO GOVERNMENT:
It is useful to government in framing economic policies such as taxation policy, public expenditure
policy, price policy etc. These policies help the government to attain its goals of efficient
allocation of resources and promoting economic welfare of the society.
4) TO ACHIEVE OPTIMUM UTILIZATION OF FACTORS:
Consumer can achieve maximum level of satisfaction with the help of micro economics. Producer
also can reap the maximum profits with its aid
5) HELPS IN TAKING BUSINESS DECISIONS:
Micro economic theories are helpful to businessmen for taking crucial business decisions. These
decisions are related to the determination of cost of production, determination of prices of goods,
maximization of output and profit etc.
6) PREDICTIONS:
Economic laws are based on predictions. This does not mean that prices theory will enable us
to predict the future. Rather it will be the possessor to make conditional predications.
7) USEFUL OR WELFARE ECONOMICES:
Micro economics explains how best results can be obtained through optimum utilization of
resources and its best allocation. It also studies how taxes affect social welfare.
8) IN THE FIELD OF INTERNATIONAL TRADE:
Micro economics helps in explaining various aspects of foreign trade like effects of tariff on a
particular commodity, determination of currency exchange rates of any two countries, gains from
international trade to a particular country etc.

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9) WORKING OF A FREE MARKET ECONOMY:

Micro economics helps in understanding the working of a free market economy. A free market
economy is that economy where the economic decisions regarding production of goods, such as
‘What to produce? How much to produce? How to produce? etc.’ are taken at individual levels.
There is no intervention by the Government or any other agency. Micro economics theory helps
in understanding the working of such free market economy.
Q. 7 DEFINE MACRO ECONOMICS. EXPLAIN THE CHARACTERISTICS / FEATURES OF MACRO-
ECONOMICS
 Macro Economics is derived from the Greek word ‘Macros’ which means large or big.
Macroeconomics is the study of economic system as a whole.
 It is not concerned with the individual units but all such units combined together. Thus
Macroeconomic is a study of aggregates like national income, total consumption, total saving,
total investment and total employment.
 According to Prof. Kenneth Boulding, “Macro Economics deals not with individual quantities as
such, but with the aggregates of these quantities, not with the individual incomes but with the
national income, not with individual prices but with the price level, not with individual output but
with the national output”.
 J.M. Keynes popularized Macro Economics. He published his book ‘General Theory of
Employment, Interest & Money’ in 1930, after which the macroeconomic theory has become
popular.
CHARACTERISTICS / FEATURES OF MACRO ECONOMICS.
1. STUDY OF AGGREGATES:
a) Macro Economics studies the nation’s economy as a whole.
b) It is a study of wide aggregate variables such as national income, national output, total
employment, aggregate demand, aggregate supply, total consumption, total investment,
general price level etc.
2. LUMPING METHOD:
a) Macroeconomics uses lumping method for the purpose of economic study.
b) Under lumping method, we study the general price level, and not prices of individual products.
c) Microeconomics analysis uses slicing method.
3. INCOME THEORY:
a) Macroeconomics studies the concept of national income, its different elements,
methods of measurement and social accounting.
b) Macroeconomics deals with aggregate demand and aggregate supply.

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c) It explains the causes of fluctuations in the national income that lead to business

cycles i.e. inflation and deflation.

4. INTERDEPENDENCE:
a) Macro analysis takes into account interdependence between aggregate economic
variables, such as income, output, employment, investments, price level etc.
b) For example, changes in the level of investment will finally result into changes in
the levels of income, levels of output, employment and eventually the level of
economic growth.
c) Thus, Macro Economics involves the study of a number of variables and their
interactions.
5. POLICY ORIENTED:
a) According to J.M. Keynes, Macroeconomics is a policy-oriented science. It analyses
economics problems and suggests policies to control them.
b) This includes providing measures to promote economic growth, generate employment, control
inflation, reduce depression, and so on.
6. GENERAL EQUILIBRIUM ANALYSIS:
a) Macro-Economic analysis is based on General Equilibrium Analysis. This analysis deals with
the entire economy in the context of equilibrium.
b) It studies the behavior of number of economic variables at a time and takes into
consideration their functional relationship and interdependence in doing so.
c) This approach follows the principle of “Everything depends on everything else”.
7. GROWTH MODELS:
a) Macroeconomics studies various factors that contribute to economic growth and
development.
b) It is useful in developing growth models. These growth models are used for studying
economic development.
c) For example, Mahalanobis growth model emphasized on basic heavy industries.
8. GENERAL PRICE LEVEL:
a) Determination and changes in general price level are studied in macroeconomics.
b) General price level is the average of all prices of goods and services currently being
produced in the economy.

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Q. 8 EXPLAIN THE IMPORTANCE / SIGNIFICANCE OF MACRO ECONOMICS.

1) Functioning of an Economy:
Macroeconomic analysis gives us an idea of the functioning of an economic system. It helps us
to understand the behaviour pattern of aggregative variables in a large and complex economic
system.
2) Economic Fluctuations:
Macroeconomics helps to analyse the causes of fluctuations in income, output and employment
and makes an attempt to control them or reduce their severity.
3) National Income:
Study of macroeconomics has brought forward the immense importance of the study of national
income and social accounts. Without a study of national income, it is not possible to formulate
correct economic policies.
4) Economic Development:
Advanced studies in macroeconomics help to understand the problems of developing countries
such as poverty, inequalities of income and wealth, differences in the standards of living of the
people etc. It suggests important steps to achieve economic development.
5) Performance of an Economy:
Macroeconomics helps us to analyse the performance of an economy. National Income
(NI) estimates are used to measure the performance of an economy over time by
comparing the production of goods and services in one period with that of the other
period.
6) Study of Macro Economic Variables:
To understand the working of the economy, study of macroeconomic variables is important. Main
economic problems are related to the economic variables such as behaviour of total income,
output, employment and general price level in the economy.
7) Level of Employment:
Macroeconomics helps to analyse the general level of employment and output in an economy.
Q. 9 DISTANCE BETWEEN MICRO AND MACRO ECONOMICES
1) OBJECTIVES
Micro economics deals primarily with the determination of relative prices and allocations of
resources among competing ends under full employment conditions.
Macroeconomics dals with the study of changes in the level of employment, aggregate income
and the general prices level and the ways of preventing such fluctuations.

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2) DIFFERENCES IN THE DEGREE OF AGGREGATION:

Micro economics deals with the behavior of individual units.
Macroeconomics deals with the whole economy. It deals with aggregate like savings and national
income.
3) DIFFERENT SUBJECT MATTER:
The subject matter of micro economics is the determination of price consumer’s equilibrium,
distribution and welfare etc.
The subject of macroeconomics is full employment, trade cycle economic growth, national
income etc.
4) TECHNIQUES OF ANALYSIS:
Micro economics uses slicing method for analysis.
Macroeconomics uses lumping method for analysis.
5) NATIONAL OUTPUT:
In micro economics the total output of an economy is a variable.
In macroeconomics the total output of the economy is given is given.
6) EQUILIBRIUM:
In micro economics, partial equilibrium approach is used.
In macroeconomics, General equilibrium approach is used.

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