Paper 4 Part 1
Business Economics
5 Chapters
Total 45 marks
• Chapter 1 – nature and scope of Business
Economics
Unit 1 Introduction
What is business?
Business is an economic activity connected with
production, distribution and exchange of goods and
services.
Transforming inputs into output
Both goods and services are provided
Consumer goods, capital goods, private goods, public
goods, merit goods demerit goods , durable and
non-durable goods are included.
Introduction to Economics
• Greek word “OIKONOMIA”– HOUSE HOLD
• OIKOS AND NEMEIN – LAWS OF THE HOUSEHOLD
• Till 19th CE, economics was known as ‘POLITICAL
ECONOMY’.
• IN 1776, ADAM SMITH’S BOOK ‘An Inquiry into the
Nature and Causes of the Wealth of Nations’.
• Popularly known as ‘ Father of Modern Economics’.
• It was Alfred Marshall who separated economics
from political economy.
Economics is a discipline which is helpful in
analyzing the rationality and optimality of a given
Fundamental facts in economics
• Human wants are unlimited
• The resources are limited – relative scarcity
• Resources have alternative uses – CHOICE
• ECONOMICS is the study of how we work
together to transform the scarce resources
into goods and services to satisfy the most
pressing wants and how we distribute these
goods and services among ourselves.
Business Economics /Managerial Economics is the
integration of economic theory with business practice.
While economic theories provide the tools, business
economics applies these tools in the process of business
decision making.
• BE may be defined as the use of economic analysis to
make business decisions involving the best use of an
organization’s scarce resources.
• According to JOEL DEAN “B.E is the use of economic
analysis in the formulation of business policies.
• It is part of APPLIED ECONOMICS – application of
economic principles to take business decisions.
• E.g : linear programming, regression analysis, capital
budgeting, break-even analysis and cost analysis.
Nature of Business Economics
• Micro economics • Macro economics
• Greek word MIKROS – • Greek word MAKROS –
small large.
• Study of individual units
• Study of the overall
within an economic-
system.
economic phenomena-
• Partial equilibrium
economy as a whole.
analysis. • General equilibrium.
• Prices determined are • Absolute prices.
Relative prices . • Income theory.
• Price theory.
• Central problem is price • Central problem is
determination of determination of level
commodities or factors of of income and
production employment
• Product pricing
• National income.
• Consumer behavior.
• Per capita income
• Factor pricing.
• Location of industry.
• General price level
• Classical and neo classical • BOP and BOT
economists – ALFRED • Inflation
MARSHALL. • Level of employment
• Modern economists –
JOHN MYNARD KEYNES.
BUSINESS ECONOMICS
• B.E is a science- study the cause and effect
• Based on micro economics- individual firms
• Incorporates elements of macro analysis.
• B.E is an ART – application of knowledge.
• Use of Theory of Market and Private Enterprises.
• Pragmatic in approach – practical application.
• Interdisciplinary
• Normative
Scope of Business Economics
• It covers most of the practical problems a
manager faces.
• There are two categories of business issues to
which economic theories can be directly
applied :
• Micro economics applied to operational or
internal issues.
• Macroeconomics applied to environmental or
external issues.
Micro economics applied to operational or internal issues.
• Operational issues – issues that arise within
the organization and fall within the purview
and control of the management.
• These issues are internal in nature.
• Issues related to choice of business and its
size, product decisions, technology and factor
combinations, pricing and sales combination,
financing and management of investments
and inventory…..etc…..are example.
The microeconomic theories deal with
operational issues
• Demand analysis and forecasting
• Demand analysis deals with the behavior of
consumers in the market.
• It studies the nature of consumer preferences
and the effect of changes in the determinants of
demand like income, price , taste………
• Demand forecasting is the technique of
predicting future demand for goods and services
on the basis of past behaviour of factors.
Production and cost analysis
• Production theory explains the relationship
between inputs and output.
• A Business economist has to decide on the
optimum size of output.- least cost input mix.
Inventory management
• These theories explain the rules that firms can
use to minimize the costs associated with
maintaining inventory.
Market structure and pricing policy
• This helps to provide information about the
nature and extent of competition.
• This help to determine the degree of market
power.
• Price theory explains how prices are
determine in different markets.
Resource Allocation
• B.E, with the support of tools like linear
programming, enables the firm to arrive the
best allocation of resources.
Theory of Capital and Investment Decisions
• For maximizing its profits, the firm has to
carefully evaluate its investment decision and
carry out a sensible policy of capital allocation.
• Theories related to capital and investment
provide scientific criteria for choice of
investment projects and in assessment of the
efficiency of capital.
• B.E supports decision making on allocation of
scarce capital among competing uses of funds.
Profit Analysis
• Profits are uncertain due to changing prices
and market conditions.
• Profit theory guides the firm in the
measurement and management of profit
under conditions of uncertainty.
Risk and Uncertainty Analysis
• 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.
MACRO ECONOMICS APPLIED TO
ENVIRONMENTAL OR EXTERNAL ISSUES
• THE MAJOR MACROECONOMIC FACTORS RELATE TO :
• THE TYPE OF ECONOMIC SYSTEM
• STAGES OF BUSINESS CYCLE
• THE GENERAL TRENDS IN N.I ,EMPLOYMENT, PRICES,
SAVING & INVESTMENT
• GOVT’S ECONOMIC POLICY,WORKING OF FINANCIAL
SECTOR AND CAPITAL MARKET,SOCIAL AND
POLITICAL ENVIRONMENT ETC……
Questions
1. Economics was originally developed as a science of
• Statecraft
• Business management
• Wealth management
• Resource management
2. Theory of demand is a concept of
• Micro economics
• Macro economics
• Both (a) and (b)
• None of above
3. Micro economics deals with
• Theory of production
• Theory of cost
• Factor pricing
• All the above
4. Scarcity problem arises because resources are
• Unlimited
• Limited
• Sufficient vast
• none
5. ………………of resources is necessary for the
development of the economy
• Utilization
• Growth
• Wastage
• Non-utilization
Questions – introduction
1. The term economics is derived from the Greek
word -------- means household.
2. The early form of economics was known as
3. Which is considered as the first modern work of
economics.
4. Economics deals with ---------- type of searcity.
5. -------- and --------------- are the fundamental
problems of any economy.
Questions – meaning of business economics
1. Micro economics is also known as
2. The study of per capita income of the country
micro economic approach from national angle –
true / false
3. Macro economics is also called ---- economics.
4. Which of the following does not suggest a macro
economic approach for India? A] determining
the GNP of Indiab] finding the causes of failure of
X and co. c] identifying the causes of inflation in
India d] analyze the causes of failure of
industry in providing large scale employment.
5. A study of how increase in the corporate income
tax rate will affect the national unemployment rate
is an example of ---------- economics.
6. Which of the following is a normative statement?
A] planned economies allocate resources via govt
departments b] most transitonal economies
have experienced problems of falling output and
rising prices c] there is greater degree of
consumer sovereignty in market economies than
planned economies d] reducing inequality
should be a major priority for mixed economies.
7. Who has defined business economics in terms of
the use of economic analysis in the formulation of
8. Economics as a positive science should be --------
between ends.
9. Study of national income is a part of -----economics
10.---------- issues include all those issues that arise
within the organization and fall within the purview
and control of the management.
11.-------- economic theories are applied to
operational or internal issues.
[Link] analysis, risk and uncertainty analysis etc are
13. macro economic theories are applied to
environmental or -------- issues.
[Link] branch of economic theory that deals with the
problem of allocation of resources .
