BE Unit-1 Part-1 (Nature, Scope & Objectives).pdf

Unit 1 Introduction

1. Business Economics
Nature & Scope
of
Business Economics
Unit 1

3. Topics covered under Unit -1
1.MeaningandScopeofBusinessEconomics
2.ObjectivesofBusinessFirms
3.BasicProblemsofanEconomyandRoleofPriceMechanism
4.MeasuringtheValueofEconomicActivity:GDPanditscomponents
5.Income–ExpenditureandtheCircularFlow,Stocks,andFlows

4. Business + Economics
Business Economics

5. Business
❖Businessisaneconomicactivity,whichis
relatedtocontinuousandregularproductionand
distributionofgoodsandservicesforsatisfying
humanwants.
❖Prof.Owendefines,“ABusinessisanenterprise
engagedintheproductionanddistributionof
goodsforsaleinthemarketorrenderingof
servicesforaprice”.

6. ➢My friend Dolly works in “Ice Cream shop”
Meaning of Goods & Services
➢The ice cream is a good.
➢A goodis something you can feel, or any
kind of merchandise.
➢Dolly serves ice cream to me so here Dolly
is a service provider.
➢A serviceis any kind of work performed for
others.
Ice-Cream shop

7. Economics
•Theword‘economics’wasderivedfromtheGreekwordoikonomia,whichmeans
Householdmanagementormanagementofhouseaffairsi.e.howpeopleearnincomeand
resourcesandhowtheyspendthemontheirnecessities,comfortsandluxuries.
•Asweknowthatlimitedresourcesareontheonehandandthereareunlimitedwantson
theotherhand.
•Itbasicallyimplementsandincludes
economictheoriesandprinciplesin
allocationoftheresourcesinan
effectivemanner.
•Insimplewords,economicsisthe
studyofhowsocietyusesitslimited
resourcestosatisfyhumanwants.

8. Stages & Definitions of Economics
Wealth
Definition
(Adam Smith)
Welfare
Definition
(Alfred
Marshall)
Scarcity
Definition
(Lionel Robbins)
Growth
Oriented
Definition
(Samuelson)
Need
Oriented
Definition
(Jacob Viner)

9. WhatisBusinessDecision-making?
❖Decisionmakingistheactualselectionamong
alternativesofacourseofaction.Itisatthecoreof
planning.
❖Dependsuponnatureoftheproblemandnatureofthe
organization.

10. TypesofBusinessDecisions
❖Price-OutputDecision:
❖DemandDecision:
❖ChoiceofaTechniqueofProduction:
❖AdvertisingDecision:
❖Long-runProductionDecisions:
❖InvestmentDecisions:

11. BusinessDecision-makingProcess:
❖EstablishingtheObjective
❖DefiningtheProblems
❖IdentifyingPossibleAlternativeSolutions
(i.e.,AlternativeCoursesofAction(strategy)
❖EvaluatingAlternativeCoursesofAction
andchoosingtheBest.
❖Implementing&MonitoringtheDecision

12. What Business Economics is about?
❖BusinessEconomicsalsoknownasmanagerialeconomics.
❖Itisconcernedwiththeapplicationofeconomictheoriesandeconomicmethodstotheanalysesof
decision-makingproblemsfacedby
businessfirms.
❖Problemsfacedbybusinessfirmslike:
1.Selectionofproducttobeproducedorserviceto
beprovided
2.Priceandoutputoftheproduct
3.Demandandcostofproduct
4.Techniques/methodsofproduction
5.Amountofadvertisementexpenditure

13. (i)Descriptive/positiverole:(Whatitis)
Businesseconomicshelpstoexplainhowvarious
economicforcesaffecttheworkingoffirmandalso
predictstheconsequencesofthedecisionsmade
byit.
(ii)Prescriptive/normativerole:(Whatoughttobe)
Itprescribestherulesfortheimprovementof
decisionmakingbyfirmsortheirmanagerssothat
theycanachievetheirobjectivesefficiently.
Role of Business Economics

14. Microeconomics:Thetermmicroisderivedfrom
theGreekword“mikros”meanssmall,thus
microeconomicsdealswiththeanalysisofsmall
individualunitsoftheeconomysuchasindividual
consumers,individualfirmsandsmallgroupsof
individualunitssuchasvariousindustriesand
markets.
Macroeconomics:Thetermmacroisderivedfrom
theGreekword“makros”meanslarge,thus
microeconomicsdealswiththeanalysisofthe
economyasawholeanditslargeaggregatesuchas
totalnationaloutputandincome,totalemployment,
totalconsumption,aggregateinvestment.
Economic Theory

15. ❖Techniquesofeconomicsusedespeciallyforbusinessdecision
makingareoptimizationtechniques,particularlydifferential
calculusandmathematicalprogramming.
❖Optimizationtechniquesareusedintheanalysisofalternative
courseofactionandtheevaluationofresultsobtainedsothat
bestalternativeischosenwhichhelpsthebusinessfirmsin
attainingtheirobjectives.
❖Apartfromthesetechniques,methodsofstatisticalestimation,
gametheoryofeconomicsscienceareextensivelyusedin
businesseconomicsfordevelopingdecisionrulesthatcanhelp
managersinachievingfirm’sobjectives.
Therefore, business economics can be described as the application of theories and
techniques of modern economics for decision-making problems of business firms.
Economic Methods

16. DefinitionofBusinessEconomics
❖BusinessEconomics:“theuseofeconomicanalysisto
makebusinessdecisionsinvolvingthebestuseofan
organisation’sscarceresources”.
❖SpencerandSiegelmanhasdefinedmanagerialorbusiness
economicsas“integrationofeconomictheorywithbusiness
practiceforthepurposeoffacilitatingdecisionmakingand
forwardplanningbymanagement.”
❖AccordingtoJoelDean“BusinessEconomicsintermsof
theuseofeconomicanalysisintheformulationofbusiness
policies.BusinessEconomicsisessentiallyacomponentof
AppliedEconomicsasitincludesapplicationofselected
quantitativetechniquessuchaslinearprogramming,
regressionanalysis,capitalbudgeting,breakevenanalysis
andcostanalysis.”

17. ❖Businesseconomicsdealswithbothprivateandpublicenterprisesandalsousedinnon-
profitmakingorganizationssuchascolleges,universities,charitablehospitalsbecause
managersofalltypesoforganizationsfacesimilarproblems.
❖Inthelastaboutthreedecadesbusinesseconomicshasgrownrapidlybecauseithasbeen
increasinglyrealizedthateconomictheoryanditsmethodsandconceptscanbeusedby
managerstoachievethedesiredobjectivesofthefirmefficiently.
❖Economicsisprimarilyconcernedwithallocationofscarceresourcestoalternativeusesso
astosatisfywantsofthepeople.
❖Thus,LordRobinsdefineseconomicsasa“Sciencewhichstudieshumanbehaviorasa
relationshipbetweenendsandscarcemeanswhichhavealternativeuses”.
❖Itisataskofamanagerofafirmthatitshouldtakedecisionsregardingtheseresource
allocationproblemsinawaythatensuresmostefficientuseofresources.

18. Nature of Business Economics
1.BusinessEconomicsisaScience
2.BusinessEconomicsisanArt
3.MicroinNature
4.MacroAnalysis
5.PragmaticinApproach
6.Prescriptive/NormativeinNature
7.InterdisciplinaryinNature
8.ManagementOriented

19. Nature of Managerial Economics
1.BusinessEconomicsisaScience
✓Causeandeffectrelationship,BusinessEconomicstakethingsinlogicalwayandalsoproveit
practically.
✓Itintegratesthetoolsofdecisionsciencessuchasmathematics,statisticsandeconometricswith
economictheory.
2.BusinessEconomicsisanArt
✓Managerialeconomicsrequiresalotoflogicalthinkingandcreativeskillsfordecisionmakingor
problem-solving.
3.MicroinNature
✓BusinessEconomicsgenerallydealwiththeproblemsrelatedtoaparticularorganisationinstead
ofthewholeeconomy.Thereforeitisconsideredtobeapartofmicroeconomics.
4.MacroAnalysisorIncorporateselementsofMacroEconomics
✓Businessunitdoesnotoperateinavacuum.
✓Itisaffectedbytheexternalfactorslikepricelevel,Nationalincome,Nationalemployment,Govt.
Policiesw.r.t.taxation,interestrate,exchangeratesetc.

20. 5.Pragmaticinapproach
✓Usingwhatisrightforyourbusiness
✓Itisapracticalandlogicalapproachtowardsthedaytodaybusinessproblems.
6.Prescriptive/Normativeinnature:
✓Itbasicallyprescribe“whatoughttobe”.
✓Itprovidessuggestionsforthebusinessdecisionsandincludevaluejudgement.
7.ManagementOriented:
✓Itactsasatoolinthehandsofmanagerstodealwithbusiness-relatedproblemsanduncertainties
appropriately.
✓Italsoprovidesforgoalestablishment,policyformulationandeffectivedecisionmaking.
8.InterdisciplinaryinNature
✓Itusesmanytoolsandprinciplesbelongingtovariousdisciplinessuchasaccounting,finance,
statistics,mathematics,production,operationresearch,humanresource,marketing,etc.

21. Scope of Business Economics
1.Microeconomics
2.Macroeconomics
1.Individual org. (small)
2.Nation (large)
Issues / Business
Problems
Economic
Theories
1.Operational & Internal Issues
2.Environmental & External Issues

22. MicroEconomicsAppliedtoOperational/InternalIssues:
❖DemandAnalysis
❖ForecastingofDemand
❖ProductionandCostAnalysis
❖InventoryManagement
❖MarketStructureandPricing
❖AllocationofResources
❖TheoryofCapitalandInvestmentDecisions
❖ProfitAnalysis
❖RiskandUncertaintyAnalysis
Scope of Business Economics

23. MicroEconomicsAppliedtoOperational/InternalIssues:
❖Demandanalysis:
✓Thebehaviourandpreferenceofconsumersinthemarket.
✓Theeffectofchangesinthedeterminantsofdemandsuchas:consumers'income,
priceofthecommodity,pricesofrelatedcommodities,consumertastesand
preferencesetc.
❖Demandforecasting:
✓Techniqueofpredictingfuturedemandforgoodsandservicesonthebasisofthe
pastbehaviouroffactorswhichaffectdemand.
✓Toabletoproducerequiredquantityatrighttimebyproperarrangementraw
material,labour,machines,equipment.
✓BusinessEconomicsprovidesthemanagerwiththescientifictoolswhichassisthim
inforecastingdemand.

24. ❖ProductionandCostAnalysis:
✓Productiontheoryexplainstherelationshipbetweeninputsandoutput.
✓Abusinesseconomisthastodecideontheoptimumsizeofoutput,giventhe
objectivesofthefirm.
✓Managerhasalsotoensurethatthefirmisnotincurringunduecosts(whichisnot
calledfor).
✓Choiceofappropriatetechnologyandselectionofleast-costinput-mix.
✓Waystomaximizeprofitsbyproducingthedesiredlevelofoutputattheminimum
possiblecost.
❖InventoryManagement:
✓Firmscanusetominimizethecostsassociatedwithmaintaininginventoryinthe
formof'rawmaterials','work-in-process,'andfinishedgoods’.Asinventorypolicies
affecttheprofitabilityofthefirm.
✓BusinesseconomistsusemethodssuchasFSNanalysis,simplesimulationexercises
andmathematicalmodelstohelpthefirmmaintainoptimumstockofinventories.

25. Mobile Phone Shop –FSN Analysis
79 80 81 80
18 17 18 17
3 3
1
3
100 100 100 100
0
20
40
60
80
100
120
2018 2019 2020 2021
Total Sales
Mi & Vivo i-phone & Oneplus Gionee Total

26. ❖MarketStructureandPricingPolicies:
✓Informationaboutthenatureandextentofcompetitionwhichthefirmshavetoface.
✓Thishelpsindeterminingthepricesunderdifferentmarketconditionsandassiststhefirmin
framingsuitablepricepolicies.
❖ResourceAllocation:
✓BusinessEconomics,withthehelpofadvancedtoolssuchaslinearprogramming,enables
thefirmtoarriveatthebestcourseofactionforoptimumutilizationofavailableresources.
❖TheoryofCapitalandInvestmentDecisions:
✓Formaximizingitsprofits,thefirmhastocarefullyevaluateitsinvestmentdecisionsand
carryoutasensiblepolicyofcapitalallocation.
✓Theoriesrelatedtocapitalandinvestmentprovidescientificcriteriaforchoiceofinvestment
projectsandinassessmentoftheefficiencyofcapital.
✓BusinessEconomicssupportsdecisionmakingonallocationofscarcecapitalamong
competingusesoffunds.

27. ❖ProfitAnalysis:
✓Profitsaremostoftenuncertainduetochangingpricesandmarketconditions.
✓Profittheoryguidesthefirminthemeasurementandmanagementofprofitsunder
conditionsofuncertainty.
✓Profitanalysisisalsoimmenselyusefulinfutureprofitplanning.
❖RiskandUncertaintyAnalysis:
✓Businessfirmsgenerallyoperateunderconditionsofriskanduncertainty.
✓Analysisofrisksanduncertaintieshelpsthebusinessfirminarrivingatefficient
decisionsandinformulatingplansonthebasisofpastdata,currentinformation
andfutureprediction.

28. ❖Environmentalfactorshavesignificantinfluenceuponthefunctioningandperformanceof
business.
❖Themajormacroeconomicfactorsrelateto:
✓thetypeofeconomicsystem(capitalist,socialist,mixedeconomy)
✓stageofbusinesscycle(recovery,boom,recession,depression)
✓thegeneraltrendsinnationalincome,employment,prices,savingandinvestment.
✓Government'seconomicpolicieslikeindustrialpolicy,competitionpolicy,monetaryand
fiscalpolicy,pricepolicy,foreigntradepolicyandglobalizationpolicies.
MacroEconomicsAppliedtoEnvironmental/ExternalIssues:

29. ✓workingoffinancialsectorandcapitalmarket.
✓socio-economicorganizationsliketradeunions,producer
andconsumerunionscooperatives.
✓socialandpoliticalenvironment.
❖Businessdecisionscannotbetakenwithoutconsideringthesepresentandfuture
environmentalfactors.
❖Asthemanagementofthefirmhasnocontroloverthesefactors,itshouldbe
formitspoliciestominimizetheiradverseeffects.

30. Objectives / goal of Business
Traditional /
conventional
Theories
Modern /
Recent
Theories
Owners & Managers
are the same
Separation between
ownership &
Management

31. 1. Profit Maximization
•Traditionally,itisassumedthatinitsdecisionmakingregardingfixationofoutputandprice
ofitsproduct,afirm’sobjectiveorgoalistomaximiseprofits.
Objectives of Business
•Itmaybeexpectedfromtheowner-entrepreneursofindividual
proprietorshipandpartnershipthattheywilltrytomaximize
profitssinceitisintheirinteresttodoso.Buthiredmanagersof
corporatebusinessfirm(Jointstockcompanies)cannotbe
expectedtotrymaximiseprofitsincetheseprofitsfor
shareholders,theygotoshareholders.
•Itmaybetruethatwhenmanagersareabletoearnmoreprofitsforshareholders,theymaybe
rewardedbytheminsomeformortheother,butthereisgreatforceandtruthintheargument
regardingmanagersnotmaximizingprofits.
•Profitmakingforshareholdersmaybeoneelementamongsuchobjectivesofmanagersandmay
notbemostimportantoneforthem.

32. The other objectives or goals of manager could include the following:
2. Utility Maximisation by Managers
O.E.Williamsonhasputforwardtheviewthatmanagersaremotivatedbytheirself-interest&
maximizetheirownutilityfunctionandutilitymaximizationbyself-seekingmanagersdependson
followingfactors:
1.Salariesandothermonetarycompensationreceivedfrombusiness
firm.
2.Thenumberofstaffunderthecontrolofmanager.Greaternumber
ofstaffmeansgreaterstatusandprestigeofamanager.
3.“Managementslack”,nonessentialmanagerialperquisitessuchas
lavishlyfurnishedoffices,luxuriouscompanycar,etc,.
4.Themagnitudeofdiscretionaryinvestmentexpenditurebythe
manager,thisisamountofresourceswhichthemanagercanspend
accordingtohisdiscretion.

33. 3. Revenue and Sales maximization
•AccordingtoanAmericaneconomist,W.J.Baumol,managersofcorporatebusinessfirm,
especiallythoseworkinginoligopolisticmarketstructure,maximizesalesrevenueratherthan
profit.
•Salesmaximizationdoesnotmeanthemaximizationofthephysicalvolumebuttotalrevenue
fromsalesi.e.thevalueofsalesmade.
•Prof.Baumoldoesnotignoreprofitmotive
altogether.Hearguesthatthereisaminimum
acceptablelevelofprofitswhichmustbeearned
bythemanagementsoastofinancefuturegrowth
ofthefirmthroughretainedprofitandalsoto
inducethepotentialshareholdersforsubscribing
tothesharecapitalofthecompany.
•Maximizetotalrevenuetotheminimumacceptableprofitconstraint.
•Themanagersfixesoutputandpriceofhisproductaccordingtothissales-revenuemaximization
subjecttopredetermineminimumprofits.

34. 4.Behavioural Theory of the Firm
•AnAmericaneconomist,HerbertSimon,hasputforwardabehaviouraltheoryofthefirm,
accordingtowhichfirmsinsteadofmaximizingprofitsnormallysatisfice.
•Duetoimperfectionofdataanduncertaintyprevailingintherealworld.
•Theterm‘satisficing’meanssatisfactoryoverallperformance.Thefirmwishes
1)toattainSatisfactorylevelofproduction
2)toattainasatisfactoryshareofmarket
3)Toearnasatisfactorylevelofprofitandsoon
•Conclusion:Thevariousalternativeobjectivesorgoalstotheprofitmaximizationarenotfree
fromdrawbacksandtillnownocomprehensivetheoryofthefirmhasbeenbuiltonthebasisof
non-profitmaximizationobjective.
•Tilltodaythetheoryofthefirmbasedonprofit-maximizationassumptiondominatesthe
economictheoryandbusinesseconomics.

35. TimeDimension
•Itisimportantthatmanagerialdecisionsandobjectivesareconsideredwithinatime
framework.Thisisbecausedecisionregardingshort-runprofitmaximizationneednotensure
maximisationofprofitsinthelongrun.
•Infact,short-runprofitmaximizationbyafirmmayleadtoitsdownfallbecauseinitsattemptto
maximizeshort-runprofits,afirmmaysetsuchhighpriceofproductthatwillattractnew
competitorsthattakeawaythecustomersorthefirmcompelsworkerstoworkveryhardandpay
lowwageswhichresultsintofuturelong-termlosses.
•Theshortrunrepresentstheoperatingperiodforthefirminwhichitsplantsize,capital
equipmentremainfixedandoutputisexpandedbyincreasingthevariablefactors,suchas,
labour,fuel,rawmaterial.
•Thelongrunrepresentstheplanningperiod,inwhichallfactorsofproductionincludingplant
size,capitalequipmentcanbevaried(expansionofplantorreplacement).Thismeansthesizeof
thefirmcanbechangedoverthelong-termplanninghorizon.Alsoincludechoiceofinvestment
projectswhichyieldreturninfutureyearswhichinvolvelotsofriskanduncertainty.

36. ➢Indefenceofprofitmaximizationhypothesis,itmayalsobenotedthatthemanagersare
notpermanentinafirmandarelikelytobechangedbytheowners(shareholders).
Iftheyfeelthatmanagersarenotprovidingthemadequatereturnorprofitsontheir
investment.
➢Ifthereisnocontrolovermanagementtheymaycontinuetobehaveinanon-profit
maximizingmanner,inlongrunasaresultmaythepricesofitsshareswillfallgreatlyand
itmaybetakenoverbyotherswhowillchangethecurrentmanagementandinstallanew
teamofmanagerswhoareefficientandtrytomaximizeprofitsinthelongrun.
➢Finally,itmaybesaidthatnotheory,noritsassumptionscanbecompletelyrealisticbuton
thebasisofthatcorrectpredictionsregardingdeterminationofpricesandoutputsof
commoditieshavebeenmade.
➢InthisregardwemayrefertotheviewpointofFriedmanwhohasarguedthattheultimate
testofthevalidityofanassumptionisitscapabilitytopredictcorrectly.
Healsopointsoutthatprofitmaximizationisvalidbecausepredictions
regardingchangesinpricesandoutputbasedonithaveshowntobecorrect.

37. Thank You …….