Business Economics
&
Its Significance in Decision Making
of a Firm.
Economics:
The word Economics is formed from Greek
word “oikos” meaning
“family,household,estate” & “nomos” I.e
“custom,law” and hence means household
management or management of the state.
Science- Systematized body of knowledge
Natural/Physical Science & Social Science
Economics as a Social
Science
3 Basic Eco. Problems
Adam smith- “ An enquiry into nature and causes
of Wealth of Nations” Science of production &
distribution of wealth
Alfred Marshall- “ Principles of Political Economy”
A study of mankind in ordinary business of life, it
examines that part of individual & social action which
is most connected with attainment of wellbeing
Samuelson- Study of growth and development
The Economic Problem
Robbin’s Definition-
“Nature & Significance of Economics”-
Study of choice between scare means
and unlimited ends
Multiplicity of wants
Scarcity of means
Alternative uses of means
Difference in intensities of wants
Choice of competition ends
MICRO & MACRO ECONOMICS
• MICRO
• MACRO
1. Def-Deals with the aggregate
1. Def- Studies economic or behaviour of the economy as a
decision making unit & whole
considers in detail the 2. Keynes
behaviour of particular unit
3. Methodology-Aggregative
2. Adam Smith 4. Variables-Aggregate dd, national
3. Methodology- Individualistic income, inflation
4. Variables-Individual dd, mkt 5. Scope-
dd,personal income, price of a • Theory of income &
commodity employment- Theory of
consumption & Investment,
5. Scope- business cycles
• Theory of commodity pricing- • Theory of general price level &
Law of Dd & Ss inflation
• Theory of factor pricing- • Theory of economic growth
rent,wages,interest,profit • Theory of distribution
• Economics of welfare
What is Business economics?
• Mc.Nair & Meriam:The use of economic modes
of thought to analyse business situations.
• Spencer & Siegelman:Integration of economic
theory with business practice for the purpose
of facilitating decision making & forward
planning.
Relationship between Business
Economics and Related
Disciplines
Management
Decision Problems
Economic Decision Sciences
Concepts
Business
Economics
Optimal Solutions to Managerial
Decision Problems
Example-
Buying a machinery or not?
Decision to drop one product from its portfolio?
How is it related to various functional domains of management?
Positive v/s Normative
Positive- how it is?
Normative- How it ought to be?
Features of Managerial Economics/
Role of Manager
• Decision making-Product mix,Production technique,
input mix, level of output,pice of the product,
Investment decisions, fund raising, marketing,
advertising
• Forward planning- Budgeting- Production, Inventory,
RM,Labour, Overheads-Admin,Sales & mkting, pricing of
finished products
• Predicting economics quantities-Dd,Ss,Prod,cost, price,
capital
•Estimation of economic relationships-Input-output, cost-
output, elasticities of dd and ss
•Understanding external environment- Business
cycles,Govt. policies, Fiscal & Monetary policy, Labour laws
•Takes help of allied disciplines- Accounting, maths, stats,
OR
•Micro-economic in nature- Theory of firm
•Normative science- involves value judgments, tells “how it
ought to be rather than “how it is”
Scope of Managerial Economics
Managerial Decision Problems
Economic Theory Decision Sciences
Micro & Macro Mathematics Eco & Econometrics
Managerial Economics
Application of Economic Theory & Decision science tools to solve
managerial decision problems
Optimal solution to managerial decision problems
Scope & Subject matter
1.Basic problem- Scarcity of resources
2.Theory of firm- Objectives of the firm-short-
term or long-term profits, primary goal-
maximize the value of the firm
3.Demand analysis & forecasting- sales
forecast, market research, past data,
present information & future estimates-
forward planning
4.Production & Supply Analysis- Production
function, input-output relationship, supply
schedule, curves & functions
5. Cost Analysis-Accounting record, study of economic
costs, fixed & variable cost. Factors affecting variations
in the cost, CVP analysis, variance analysis, pricing done
based on full cost & marginal cost, cost control &
reduction
6.Pricing decisions- pricing under different mkt conditions,
time periods, public & pvt sector
7.Profit planning-variations in the cost & revenues, profits
under uncertainty, nature & mgt of profit, techniques
of profit planning like BEP analysis
8.Capital Mgt- planning & control of capital mgt,
expenditure, cost of capital, rate of return, NPV,IRR
methods of project selection, fund raising
Objectives of the firm
1. Profit maximization
2. Sales maximization
3. Growth of the firm
4. Welfare
5. Principle- Agent problem- Shareholder’s wealth
maximization
• Tata group and Cyrus Mistry debacle-
• Find out the real life examples of firm exhibiting different objectives
of the firm.
• Patanjali and Sri Sri Tatva.docx srisri products- Brand equity ET 4 July
2018
Analyse the news in the above
context
1. Jio ready for battle over WiFi calling- ET 5 july 18 – objectives of the
firm
2. Government provides maximum support for crops MSP-
definitions of Economics
3. M & M is likey to reap benefits of double digit increase in MSP
How this move will impact corporates? Economy?
Higher MSP for kharip crops may push up inflation
Calculation of MSP and its role
