1.3.ppt-Contribution and Application of Business Economics to Business

Contribution and Application of Business Economics to Business

1. BUSINESS ECONOMICS
107
UNIT- 1
Faculty Name: Dr. Shuchi Singhal
Designation: Associate Professor
School/Dept: Management
Email address of Faculty Member: [email protected]

2. Programme Outcomes
2
PO1: Apply knowledge of various functional areas of business
PO2: Develop communication and professional presentation skills
PO3: Demonstrate critical thinking and Analytical skills for business
decision making
PO4: Illustrate leadership abilities to make effective and productive
teams
PO5: Explore the implications and understanding of the process of
starting a new venture
PO6: Imbibe responsible citizenship towards a sustainable society
and ecological environment
PO7: Appreciate inclusivity towards diverse cultures and imbibe
universal values
PO8: Foster Creative thinking to find innovative solutions for
various business situations

3. Course Outcomes
3
CO1:Understand the fundamental concepts of Business
Economics.
CO2:Analyze the relationship between consumer behaviour
and demand.
CO3:Explore the theory of production through the use of
ISO-QUANTS.
CO4:Understand the concept and relevance of short-term
and long-term cost.
CO5:Examine pricing decisions under various market
conditions.
CO6:Analyse economic challenges posed to businesses

4. Syllabus

5. Unit 1- Introduction to Business Economics and
Fundamental Concepts
1.1 Nature, Scope, Definitions of Business Economics- Part 1
1.2 Nature, Scope, Definitions of Business Economics-Part 2
1.3 Difference Between Business Economics and Economics
1.4 Contribution and Application of Business Economics to Economics
1.5 Micro vs. Macro Economics
1.6 Opportunity Costs
1.7 Time Value of Money
1.8 Marginalism
1.9 Incrementalism
1.10 Market Forces and Equilibrium
1.11 Risk, Return and Profits
1.12 Introduction to Behavioural Economics: Nudge Theory

6. 1.3
•Contribution and
Application of
Business Economics
to Business

6

7. 1.3 Contribution and Application of
Business Economics to Business
7

8. Suggested Readings
1. Author: Christopher R. Thomas & S. Charles Maurice
Title of the Book: Managerial Economics-Foundations of
Business Analysis and Strategy
Chapter’s Name: Managers, Profits and Markets
2. Author: N. Gregory Mankiw
Title of the Book: Principles of Microeconomics
Chapter’s Name: Introduction
https://bizfluent.com/list-6765209-uses-managerial-economics.html
8

9. 1.3 Contribution and Application of Business Economics
to Business:
Managerial economics helps the decision-making process in the following ways:
1.Managerial economics presents those
 aspects of traditional economics, which
are relevant for business decision-making in real life. It culls from economic
theory the concepts, principles and techniques of analysis, which have a bearing
on the decision-making process. These are, if necessary, adopted or modified with
a view to enable the manager take better decisions..
2.Managerial economics also incorporates useful ideas from other disciplines such
as psychology, sociology, etc; if they are found relevant for decision-making. In
fact, managerial economics takes the
 aid of other academic disciplines having a
bearing upon the business decisions of a manager in view of the various explicit
and implicit
 constraints subject to which resource allocation is to be optimized.
3.Managerial economics helps in reaching a variety of business decisions in a
complicated environment such as what products and services should be produced?
What inputs and production techniques should be used? How much
 output should
be produced and at what prices it should be sold? What are the best sizes and
locations of new plants? When should equipment be replaced? And how should
the available capital be allocated?
9

10. 4. Managerial economics makes a manager a more competent model builder.
Thus, he can capture the essential relationship, which characterizes a situation
while leaving out the cluttering details and peripheral relationships.
5. At the level of the firm, where for various functional areas, functional
specialists or functional departments exist, such as finance, marketing, personal,
production, etc, Managerial economics serves as an integrating agent by
coordinating the different areas and bringing to bear on the decisions of each
department or specialist the implications pertaining to other functional areas. It
thus, enables business decision-making not in watertight
 compartments but in an
integrated perspective, the significance of which lies in the fact that the
functional departments or specialists often enjoy considerable autonomy and
achieve conflicting goals.
6. Managerial economics takes cognizance of the interaction between the firm and
society and accomplishes the key role of business as an agent in the attainment
of social and economic welfare. It has come to be raised that business, apart
from its obligations to shareholders, has certain social obligations. Managerial
economics focuses attention on those social obligations as
 constraints subject to
10

11. which business decisions are to be taken. It serves as an instrument in furthering
the economic welfare of the society through socially oriented business decisions.
7. Managerial economics is helpful in making decisions such as the following:
What should be the product-mix? Which is the production technique and the
input-mix that is least costly? What should be the level of
 output and price for the
product? How to take investment decisions? How much should the firm advertise
and how to allocate an advertisement fund between different media? It has to
concede that good decisions require ability to analyze problems logically and
clearly.
11

12. Business Economics is useful in the following six decision areas:
1.Demand Forecasting:
•A firm has to rely on demand forecasting for making future plans for
production.
•To the extent forecast is wrong, planning exercise becomes futile.
•These forecasts are based on the past data and whatever current
information is available. As more information gets available, the
forecasts are revised.
•The aim of forecasting is to reduce the risk that the firm faces in its
short-term operational decision-making and in planning for its long-
term growth.
•Modern management employs a number of demand forecasting
techniques to cope with the real world business problems. (Cont..)
By: Shuchi Goel 12

13. •They can be broadly classified under two heads. For new products and
for those products for which long historical data is not available,
survey methods of forecasting are used. In case, long historical data is
available, then one can use statistical methods of forecasting.
•There are two types of forecasts- qualitative and quantitative. Some
firms use one type, while some use the other. But, in practice, a
combination or blending of the two styles is usually most effective.
•Qualitative forecasts incorporate important factors such as decision
maker’s intuition, emotions, personal experiences, and value system in
reaching forecast. While quantitative forecasts employ a variety of
mathematical models that use historical data and/or casual variables to
forecast demand.
2. Production Planning and Cost Revenue Decision:
•The production function shows the relationship between various inputs
used in production and the output.
•The inputs used in production could be land, labour, capital, etc.
By: Shuchi Goel 13

14. •The output depends on the factor inputs.
•The production function gives the maximum output which can be
obtained from a given amount of input. Alternatively, it indicates the
minimum amount of various inputs which are required to produce a given
level of output.
•All the factor inputs are not equally important in different cases. For
example, in the case of agriculture production function, land is very
important factor input. On the other hand, in the case of industrial
production function, labour or technology may be important.
•Therefore, the problem before a manager is to choose various
combinations of inputs in such way so as to produce the maximum
possible output with a given budget constraint or to choose factors of
production in such a way so as to minimise the cost of producing a given
level of output.
•Cost and revenue are the two major factors with which the profit
maximising firms need to deal wisely. They jointly determine the overall
profitability.
By: Shuchi Goel 14

15. •From the decision making point of view, cost is more important than
revenue because the firm can influence cost more easily than revenue.
Cost is one of the most important factors, which is also considered for
future decisions.
•Managerial economics uses quantitative methods to analyze production
and operational efficiency through schedule optimization, economies of
scale and resource analyses. Additional analysis methods include marginal
cost, marginal revenue and operating leverage. Through tweaking the
operations and production of a company, profits rise as costs decline.
3.Study of Economic Environment:
• Economic environment is the most significant component of the business
environment. It affects the survival of a business organization as well as its
success.
•The economic environment of industry can be studied under three broad
categories:
a)General Economic Conditions: are influenced by various factors like
agriculture trends, industrial output trends, per capita income trends,
pattern of income distribution, pattern of saving and expenditure, price
levels, employment trends, impact of Government policies, and economic
systems.
By: Shuchi Goel 15

16. b)Industrial Conditions: Economic environment of a country is
influenced by the prevalent industrial conditions as well as industrial
policies of a country. An economy needs to pay attention to the market
growth of the industry, demand patterns of the industry, and its stage in
product life cycle.
c)Stage of Supply of Resources of Production: Supply of resources
required for production determines inputs, which are available for
product. Land, labour, capital, and entrepreneur are the most important
resources required for production. These factors determine the
economic environment of a country.
•To sum up, economic environment describes the overall economic
situation in a country and helps in analyzing GNP per capita, rate
of economic growth, inflation rate, interest rates, unemployment
problems, etc. Therefore, it is necessary to examine carefully the
economic environment of the country.
4.Pricing and Related Decisions:
•The price-output decisions are taken under various market structure.
•The structure of a market refers to the degree of competition in the
market for the firm’s goods and services, where the market consists of
all the firms and individuals, who are willing and able to sell or buy
particular product.
By: Shuchi Goel 16

17. •There are four important market structures, namely, perfect competition,
monopoly, monopolistic competition and oligopoly.
•Cost plus pricing, marginal cost pricing, price discrimination, etc.,
pricing practices are followed in these market forms.
•Managerial economics assists businesses in determining pricing
strategies and appropriate pricing levels for their products and
services.
•Some common analysis methods are price discrimination, value-based
pricing and cost-plus pricing.
•Economists can determine price sensitivity of products through a price
elasticity analysis.
•Some products, such as milk, are considered a necessity rather than a
luxury and will be purchased at most price points. This type of product
is considered inelastic.
•When a business knows they are selling an inelastic good, they can
make marketing and pricing decisions easier.
•Investment Decisions:
•The capital expenditure decisions are important as they are not easily
reversible.
By: Shuchi Goel 17

18. •They generally involve large sums of money, they are highly
futuristic (an we all know that future is full of uncertainties), and
they have long gestation periods. It is, therefore, essential that
careful financial appraisal of each and every project involving
large investments is carried out before acceptance or execution of
the project.
•Thus, capital expenditure decisions fall in the category of
decisions which are generally reserved for consideration by the
highest level of management.
•These investment decisions of a firm are popularly known as
capital budgeting decisions, though alternative terms like
investment analysis, analysis of capital expenditure or
equipment replacement policy can also be used.
•Many managerial economic tools and analysis models are used
to help make investing decisions both for corporations and
savvy individual investors. These tools are used to make stock
market investing decisions and decisions on capital investments
for a business. For example, managerial economic theory can be
used to help a company decide between purchasing, building or
leasing operational equipment.
18

19. 6. Risk
•Uncertainty exits in every business and managerial economics can
help reduce risk through uncertainty model analysis and decision-
theory analysis.
•Heavy use of statistical probability theory helps provide potential
scenarios for businesses to use when making decisions.
19

20. Conclusion
•Business Economics is useful in the following six decision areas:
1.Demand Forecasting
2.Production Planning and Cost Revenue Decision
3.Study of Economic Environment
4.Pricing and Related Decisions
5.Investment Decisions
6.Risk
20