QR 1.2Micro Economics GQ 1.3 Tools for Analysis GR 1.4Goals of Firms 2 QR Introduction Business economics is a special discipline, which integrates economic theory with business practice for the purpose of decision-making and forward planning. Economics provides a strange mixture of various faults and fallacies of analysis and application. Therefore, an indiscriminate application of economics to business analysis may sometimes create confusing paradoxes. Business economics uses micro economic analysis of the business unit and macro economic analysis of the business environment. Micro economics is used to evaluate the performance of a business unit and business manager's position therein. It foresees its attention mainly on individual units like a consumer, a producer, a firm or a single commodity. It helps us to understand the behaviour of a single thing. In macro economic analysis, we study the system as a whole, not the individuals but the total. GR 1.1 Business Economics : Business Economics, also called Managerial Economics, is the application of economic theory and methodology to business. Business involves decision-making. Decision making means the process of selecting one out of two or more alternative courses of action. The question of choice arises because the basic resources such as capital, land, labour and management are limited and can be employed in alternative uses. The decision-making function thus becomes one of making choice and taking decisions that will provide the most efficient means of attaining a desired end, say, profit maximization. @3]QR Business Economics Different aspects of business need attention of the chief executive. He may be called upon to choose ion among the many that may be available to him. It would be in the interest of the tes the goal of the business firm. Ascientific equires that the business firmis a single opti business to reach an optimal decision- the one that promo! formulation of the business problem and finding its optimal solution ré he equipped with a rational methodology and appropriate tools. Business economic meets these needs of the business firm. S|] 1.1.1 Meaning : ' Business economics is an application of economic theory and methods to business decision making. Because it uses the tools and techniques ‘of economic afialysis to solve business problem, business economics links traditional economics prescribes rules for improving business decision. It tells business managers how things should be done to achieve organisational objectives efficiently. It identifies, ays.ane and means to achieve virtually any of the business organisation's goals. The business econotnt ic fortes principles which provide a framework for evaluating whether resources are being allocated efficiently: within a firm. For example, business economics can help the manager to determine if profit can be increased by reallocating labour from a marketing activity to the production line. In short, business economics artives at a set of operating rules that aid in the efficient utilization of scarce human and capital resources. Business economics is just as relevant to the management of non-business, non-profit organisations, such as government agencies, co-operatives, schools, hospitals and similar institutions as it is to the management of profit- oriented business. 1.1.2 Definition _: In simple words, business economics is the discipline which helps a business manager in decision making for achieving the desired results. n other words, it deals with the application of economic theory to business management. 1) D.C.Hague: “Business economies is a fundamental academic subject which seeks to understand and to analyses the problems of business decision-making.” 2) Joel Dean : “The purpose of business economics is to show how economic analysis can be used in formulating business policies." 3) Brigham and Pappus : ~"Business economics i icati Bu ics is the application of economic theory an i ) Secures eory and methodology to business 4) Mc Nair and Meriam : ‘Business {Manageri jerial] a y hatin rial} economies is the use of economic modes of thought to anlayse business [eeIntroduction OQ “Business (Managerial) economics is the integration of economics theory with business practice for the purpose of facilitating decision-making and forward planning by management." 6) Collberg : 5) Spencer and Slegelman : “Business economics is primarily concerned with the applicability of economic concepts, and analysis to decisions made by businesses." From the above definitions, itis evident that the different authorities on the subject project the subject- matter of business economics differently. However, the following features seem common to these view points. 1,1.3 Nature of Business Economics : Business economics links traditional economics with business decision-making. In the words of Spencer and Slegelman, "Business economics is the integration of economic theory with business . Practice for the purpose of facilitating decision making and forward planning by management." According to Normal E Duity, “Business economies includes the portion of economics known as the theory of. the firm, a body of theory which can be of considerable assistance to the businessman in his decision making." Thus, the nature of business economics may be summarised as follows: ‘The Nature of Business Economics Economic Theory] * [_Business Decision Problems ‘Analytical ero Esonomies| Mathematical, Economics, Econometrics i Business Study of rabid Economics Functional Areas Methodology = “Azsountng, Personnel ¢ Finance, Production, ‘Optimal Solution Marketing of Business Decisions The above diagram shows that the nature of business economics is that of an applied subject which uses economic concepts and decision science techniques to solve business problems. It can be explained as follows; 1) Economic Concepts: The economic concepts are studied under two branches of economics: a) Macro-Economics : ‘ The macro-economic concepts deal with aggregate economic concepts relating to the entire ‘economy. It provides the framework of economic environment in which the firm or industry operates. The main characteristics of the macro-economic environment are as follows: ‘ @3)CR Business ficonomics 1) The business operates mainly in a {roe enterprise economy, This economy uses prices and markets for resource allocation. Ii) The modern economies are characterised by rapid technological and economic changes. Ill) Free market economics are charactorised by cyclical fluctuations with periods of depression and prosporlly. ‘ Iv) The government interferes in economic affairs of the economy. The monetary and tiscal policies of the government affect business decisions. ‘Tho above characteristics of macro-economics provide the economic environment in which business, has to operate, Thus, business economics takes the help of macro-economics in understanding genoral economic anvironmant. b) Micro- economics : The micro-economic concepts deal with the economic problems of an individual units like a firm, ‘fa consumor or industry. Since micro-economic concepts are closely associated with resource allocation, it makes a major contribution to business economics. Prof. Watson believes that *ptice theory in the service of business oxecutives is known as business / managerial economics.” Some of the micro-economic concepts like demand analysis, clasticity of demand, marginal cost, opportunity cost, economies and diseconomies of scale etc. are commonly used in business economics, 2) Positive and Normative : Both macro-economnics and micro-economics may be positive or normative or both. Positive approach (Descriptive) deals with accurate description of a phenomenon. It explains ‘What is,’ ‘what was! and ‘what will be. It does not make any suggestion. On the other hand, Normative Approach (Praseriptive) is that which assists in the solution of problems. It tells ‘what ought to be". Since business economics is applied micro-economics, thus it is normative and prescriptive (having optimising models) in naturo, In the words of Haynes, “The application of business,(managerial) 6conomics Is inseparable from consideration of values or norms, for it is always concerned with eee of objectives or the optimization of goals." Within its own structure of vaneaert eae me only provides valuation and standards but also pronounce upon the ultimate lorms and enables us to conceive the far reaching implications of alternate strategies, rattan Above uy ‘ton that business economics uses scientific approach. In practice, some Ga inesier orca oe based on past experience. However, the quality of decisions made can busines peat eee approach. This is attempted in business economics. Since iho malta si araath applicd disciplina, it is less abstract compared to economic theory. In making and cabin Ne use of economics is supplemented by the use of theory of decision- ¥ ‘os¢arch, Thus, modern business economics has become juxtapositionIntroduction CX. between applied economics and applied mathematics. Itis both descriptive and analytical, positive and normative, conceptual and metrical. 1.1.4 Scope of Business Economics : The term ‘scope’ indicates the area of study, boundaries, subject matter, width of the subject. The scope of business economics is so wide that it embraces almost all the problems and areas of the manager and the firm. It deals with demand analysis and forecasting, production function, cost analysis, inventory management, advertising, price system, resource allocation, capital budgeting, profit etc. In recent years, there is a trend towards integration of business economics and operations research, statistics and decision-making. Hence, techniques such as Linear Programming, inventory Models, ‘Theory of games etc. have also come to be regarded as part of business economies. However, a short explanation of the following aspects (topics) explain the scope (or subject matter) of business economics. ‘As regards the scope of business economics, no uniformity of views exists among various authors. However, the following aspects are said to generally fall under business economics. These various aspects are also considered to be comprise the subject matter of business economic. 1) Demand Analysis and Forecasting : ‘Abusiness firm is an economic organisation which transforms productive resources into goods to be sold in the market. A major part of business decision making depends on accurate estimates of demand. A demand forecast can serve as a guide to management for maintaining and strengthening market position and enlarging profits. Demiands analysis helps to identify the various factors influencing the product demand and thus provides guidelines for manipulating demand. Demand analysis and forecasting provided the essential basis for business planning and occupies strategic place in managerial economic. The main topics covered are: Demand Determinants, Demand Distinctions and Demand Forecasting. 2) Cost and Production Analysis : Astudy of economic costs, combined withthe data drawn from the firm's accounting records, can yield significant cost estimates which are useful for management decisions. An element of cost uncertainty exists because all the factors determining costs are not known and controllable. Discovering economic costs and the ability to measure them are the necessary steps for more effective profit planning, cost control and sound pricing practices. Production analysis is narrower, in scope than cost analysis. Production analysis frequently proceeds in physical terms while cost analysis proceeds in monetary terms. The main topics covered under cost and production analysis are: Cost concepts and classification, Cost-output Relationships, Economies and Diseconomies of scale, Production function and Cost control. 3) Pricing Decisions, Policies and Practices : Pricing is an important area of business economic. In fact, price is the genesis of a firms revenue and as such its success largely depends on how correetly the pricing decisions are taken. The / @ 15GR Business Economics important aspects dealt with under pricin Pricing Method, Differential Pricing, 4) Profit Management : \g include. Price Determination in Various Market Forms, Product-line Pricing and Price Forecasting. Business firms are generally organised for the purpose of making profits and earned are taken as an important measure of the firms success. If knowle were perfect, profit analysis would have been avery easy task. However, in expeotations are not always realised so that profit planning and measurem area of business economic. The important aspects covered under this Measurement of profit, Profit policies and Technique of Profit Planning lik 5) Capital Management : in the long run profits xdge about the future aworld of uncertainty, rent constitute a difficult area are : Nature ang Break-Even Analysis, ‘Among the various types of business problems, the most complex and troublesome for the business manager are those relating o afinm's capital investments, Relatively large sums are involved and {he problems are so complex that their solution requires considerable time and labour, Otten the decision involving capital management are taken by the top management. Briefly Capital management implies planning and control of capital expenditure. The main topics dealt with are: Cost of capital Rate 6f Return and Selection of Projects. 6) Linear Programming And Theory of Games : Linear programming and theory of games have came tobe regarded as part of managerial economics recently. 7) Environmental Issues: There are certain issues of macro economics which als These issues relate to general business, social and enterprise operates. 8) Business Cycles: 0 form a part of managerial economics. Political environment in which a business Business cycles affect business decisions. They referto re: in the country. The different phases of business c} and recession. gular fluctuations in economic activities ycle are depression, recovery, prosperity, boom ‘Thus, managerial economics comprises both micro and macro-economic theories. The subject matter of managerial economics consists of all those economic concepts, theories and tools of analysis which can be used to analyse the business environment and to find out solution to Practical business problems. The various aspects outlined above represent major uncertainties which a business firm has to reckon with viz., demand uncertainty, cost uncertainty, price uncertainty, Profit uncertainty and capital uncertainty. We can therefore, conclude that the subject matter of business economic consists of applying economic principles and concepts to deal with various uncertainties faced by a business firm,Introduction CQ GR 1.2 Micro Economics : Micro economics is a branch of economics that studies the behaviour of an individual households and firms in making decisions on the allocation of limited resources. Typically, it applies to markets where goods or services are bought and sold. Micro economics examines how these decisions and behaviours affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services. This is in contrast to macro economics, which involves the" sum total of economic activity, dealing with the issues of growth, inflation and unemployment." Micro economics also deals with the effects of national economic policies (such as changing taxation levels) on the aforementioned aspects of the economy. Precisely, micro economics studies the behaviour of an individual units of an economy such as consumers, firms, and industry etc. Therefore, it is the study of a particular unit rather than all units combined together. Micro economics is called Price theory, which explains the composition, or allocation of total production. (@) 1.2.1 Meaning : The term Micro has been borrowed from the Greek word, ‘Mikros’ meaning small. But it may not be misunderstood that Micro economics refers to small or insignificant economics. As a matter of fact micro economies is as much important as macro-economics. According to Bilas, "The term micro in economics means division into small parts of such economic variables as consumption, investment, saving etc." Under Micro economics, we study individual units, like, a consumer, a firm, an industry, price determination of a particular commodity etc. we also study ‘group’ in it. For example, market demand curve, which is the aggregate of individual demand curves, is also a subject of study of Micro economics, but we do not study in it large or national-level groups. Composition and allocation of total production fall under the scope of Micro economics study, whereas under macro-economics we study level of aggregate production. 1.2.2 Definitions : i) Watson: “Micro economics is the theory of the small, of the behaviour of the consumers, producers and markets.” ii) Shapiro: “Micro economics deals with small parts of the economy.” iil) Left witch : “Micro economics is concerned with the economic activities of economic units as consumers, resource owners and business firms. * iv) Boulding: *Micro economics Is the study of particular firm, particular household, individual price, wage, income, industry and particular commodity.” a 17QR Business Economics 1.2.3 Scope of Micro Economics : ic vent of different en, Micro économics deals with the allocation of resources for the achiever ds, discusses following points : 1) Theory of Demand : It studies how the demand for a commodity is determined and what isthe law of demand. Theg, of Demand refers to the demand of the consumer and his maximum satisfaction. It studies hoy, consumer distributes his limited income on the purchase of different goods at different prices sp as to get maximum satisfaction. 2) Theory of Production : : Italso studies the theory relating to production of goods. A firm carries out production with the hel of factors of production. Under Theory of Production one studies production function and the lays geneming production of goods. 3) Theory of Price Determination : Micro economics also deals with the theory of price determination. Besides analysing ihe conditions of demand and supply, theory of price determination seeks to explain how the price o goods produced under different market conditions, such as, perfect market, monopoly ete, i determined, Condition of demand and supply are also studied in this theory. 4) Theory of Factor Pricing : Income received by the sale of goods produced with the help of different factors of Production is distributed among these factors inthe form of factor-price, viz, rent, wages, interest and prt How the price (remuneration) of each factor of production is determined is a problem that dea with distribution of income and so is studied under micro economics. 5) Optimum Allocation of Resources : Micro economics is also concemed with the optimum allocation of resources, that is how efficieny resources are distributed among the consumers and producers, A\ Consumer or a firm is in equilibrium when there is optimum allocation of resources. Micro economics therefore studies the rns necessary for achieving equilibrium. Welfare Economics : Newel producers, 1.2.4 Importance and Uses of Micro Economics 1) For Price Determination ‘ Micro economics explains price determination and the allocation of Tesources. It explains ho” tte market mechanism works in a capitalist free enterprise economy, Le 9 6)2) 3 4) 6) Introduction YQ Helps in Decision - Making : Micro economics helps in decision-making in business. The businessman can determine the cost of production and estimate the demand for his product. It helps a businessman in the attainment of maximum productivity through optimum allocation of resources. Guide for Production Plannii Micro economics serves as a guide for Production planning. It also helps in investment decisions taken by the producer. It is also useful in preparing the expansion plan of a business. Useful for Forecasting : Micro economics theory is useful to make conditional predictions. e.g., Demand forecasting rests on micro economic principles of demand. Art of Economising : Micro economics teaches the art of economising. It shows how to use the resources to gain maximum out of minimum. Useful for Government : Micro economics is useful in determining tax policy and other economic policies. Similarly, the nature of price control, administered prices, etc. can be determined on the basis of relevant micro economic analysis. Welfare - Oriented : It serves as the basis for welfare economics. It suggests how to maximize welfare of the consumers and eliminate wastages and have optimisation of resources so as to fetch maximum social welfare. Covers Issues Related to International Trade : Micro economics explains many aspects of international trade such as emergence, nature and gains of international trade, determination of exchange rate, etc. Micro economic models help to describe the actual economic situation and also suggest policies that bring about desired results.