Business Economics-Introduction-UNIT-I.pptx

Business economics is a field of applied economics that studies the financial, organizational, market-related, and environmental issues faced by corporations.

1. Course Title: Business Economics

2. Course Outcomes The aim of the course is to build knowledge and understanding business economics among the student. The course seeks to give detailed knowledge about the subject matter by instilling them basic ideas about business economics. The outcome of the course will be as follows – To provide knowledge about business economics. To provide knowledge about Demand Analysis. To Determine Production and cost analysis. To Make aware with pricing and profit management.

3. Syllabus

4. Definition Business is defined as the organization being engaged in commercial, industrial, or professional activities.  Economics is the subject of Social Science, which deals with the studying of production, distribution, and consumption of goods and services.

5. Definition “Economics is concerned with the best possible use of limited resources.” Robbins

6. Definition The term economics comes from the Greek word oikos (house) and nomos (custom or law). Economics is often defined as a body of knowledge or study that discusses how a society tries to solve the human problems of unlimited wants and scarce resources. It is the scientific study of the choices made by individuals and societies with regard to the alternative uses of scarce resources employed to satisfy wants. Adam Smith (1723–1790), hailed as the Father of Economics.

7. Introduction to Business Economics Managerial or Business Economics is the branch that deals with the organization and allocation of a firm’s scarce resources to achieve its desired goals. It is a link between the theory of Economics and the decision sciences in the analysis of managerial decision-making.

8. Introduction to Business Economics Business Economics is a part of Applied Economics which is concerned with the application of economic concepts and analytical tools to the process of decision-making for a business enterprise.

9. Economics: Science or Art A subject is considered science if: It is based on systematic study of knowledge or facts; It is a study of the relationship between cause and effect. It is capable of measurable and based on facts. It should have the ability to forecast.  All the laws are universally accepted All the laws are tested and based on experiments; It has a scale of measurement. After being analyzed, economics has all the features of science.

10. Economics As Science On the basis of all these characteristics, Prof. Robbins, Prof Jordon, Prof. Robertson etc. claimed economics as one of the subject of science like physics, chemistry etc. According to all these economists, ‘economics’ has also several characteristics similar to other science subjects.

11. Economics As Science ( i ) Economics is also a systematic study of knowledge and facts. All the theories and facts related with both micro and macro economics are systematically collected, classified and analyzed. (ii) Economics deals with the correlation-ship between cause and effect. For example, supply is a positive function of price, i.e., change in price is cause but change in supply is effect. (iii) All the laws in economics are also universally accepted, like, law of demand, law of supply, law of diminishing marginal utility etc. (iv) Theories and laws of economics are based on experiments, like, mixed economy to is an experimental outcome between capitalist and socialist economies.

12. Economics As Science (v) Economics has a scale of measurement. According to Prof. Marshall, ‘money’ is used as the measuring rod in economics.

13. Economics As Art According to Т.К. Mehta, ‘Knowledge is science, action is art.’ According to Pigou , Marshall etc., economics is also considered as an art. In other way, art is the practical application of knowledge for achieving particular goals. Science gives us principles of any discipline however, art turns all these principles into reality. Therefore, considering the activities in economics, it can claimed as an art also, because it gives guidance to the solutions of all the economic problems.

14. Economics is an Art Art tells us how to do the thing i.e. to achieve an objective. Economics is also used for achieving a variety of goals. For e.g.  All policies etc made in economics has the ultimate objective of solving economic problems. Art is the practical application of theoretical knowledge Like Art, Economics also practices its theoretical laws. For e.g.  The various policies are made only after having theoretical knowledge of the society and country as a whole. Hence, economics is also an art.

15. Economics As Art Therefore, from all the above discussions we can conclude that economics is neither a science nor an art only. However, it is a golden combination of both. Hence, economics is considered as both a science as well as an art.

16. Economics is an Art We should better consider economics as a social science, since it deals with the society as a whole and human behaviour in particular, and studies the production, distribution and consumption of goods and services.

17. Characteristics of Business Economics  The unit of studying Business Economics is the firm. So, Business Economics deals with the operation of a consumer, a corporation which involves the determination of a price of a product, revenue, costs, profit levels etc.  Professors H.C. Peterson and W.C. Lewis suggested that Business Economics must be considered as a part of applied microeconomics.

18. Characteristics of Business Economics  1. Micro Economics: Micro Economics is the study of the behaviour and problem of individual economic unit (firm). 2. Macro Economics: Macro Economics is analysis & understand the general business(firm) must operate environment in which the business operate. Study the environment of many firms. 3. Economics of firm: Managerial Economics use that body of economics, concepts & principles which is known as the ‘Theory of firm’ or ‘Economics of the firm.’ 4. Managerial Economics is Normative: It deals, with future planning, policies making, decision making & how to make full use of economic principles.

19. Scope of Business Economics Demand analyses & Demand forecasting: It is the most important scope of Managerial Economics because all future activities and decision depends on it, law of demand, demand curve, elasticity of demand determination of demand, types of demand and demand forecasting are include in demand analyses & demand forecasting. Cost analyses: The knowledge of different cost element is necessary for every successful businessman. This part of subject includes the concept of cost, cost curves, cost analyses under the cost analyses. We analysis the cause of change in cost.

20. Scope of Business Economics Output analyses : Output analysis also an important part of Managerial Economics for the efficient organization of the production process, output analyses is necessary for prefer profit planning output analyses always measured in physical unit. Price Policies: Influence the demand conditions & earning of a firm, price policies are necessary for every firm.

21. Scope of Business Economics Profit Management: To earn the profit is the first object of each firm. Profit is the measurement of success of each firm under it profit are forecasting after taking into consideration the various effecting factor. All the efforts are make for maximum profit of the firm. Capital Management: Capital is the Life power of the business. We can’t think about any business without capital. Capital Management of firm is a complex topic. Stable success of the firm depends on a good capital Management. Macro Economics: The activity of a firm are also affected by external forces, such as trade cycle, national income, industrial policy, tax policy.

22. Microeconomics and Macroeconomics Microeconomics (“micro” meaning small) looks at the smaller picture of the economy and is the study of the behaviour of small economic units, such as that of an individual consumer, a seller (or a producer, or a firm), or a product. It focuses on the basic theories of supply and demand in individual markets (say of cars, food items, mobile phones, etc.), and deals with how individual businesses decide how much of something to produce and at what price to sell it, and how individual consumers decide on how much of something to buy. In other words, microeconomics analyses the market behaviour of individual consumers and firms, in an attempt to understand their decision-making processes.

23. Microeconomics and Macroeconomics Microeconomics deals at the firm’s level and takes into consideration the decision-making power of individual units, whereas macroeconomics deals with the economy level and takes into consideration the impact of government policies on the aggregates like national income and employment.

24. Introduction to Economics The Economic Problem Opportunity Cost Production Possibility Frontiers

25. MANAGERIAL ECONOMICS

26. Managerial + Economics Managerial Economics is economics applied in decision-making Link between abstract theory and managerial practice. Analysis for identifying problems, organizing information and evaluating alternatives.

27. Managerial Economics & Business Decision-making Decision Problem Managerial Economics Optimal Solution to Business Problems Tools & Techniques of Analysis Traditional Economics

28. Nature of Managerial Economics Spencer and Siegelman point to the fact that “Managerial Economics.. is the integration of economic theory and business practice for the purpose of facilitating decision-making and forward planning by management.”

29. Chief Characteristics of Managerial Economics/Nature Managerial economics is micro-economic in character as it concentrates only on the study of the firm and not on the working of the economy. Managerial economics takes the help of macro-economics to understand and adjust to the environment in which the firm operates. Managerial economics is normative rather than positive in character. It is both conceptual (theory) and metrical (quantitative techniques). The contents of managerial economics are based mainly on the “theory-of firm’. Knowledge of managerial economics helps in making wise choices.

30. Significance of Managerial Economics In order to enable the manager to become a more competent model builder,managerial economics provides a number of tools and techniques. Managerial economics provides most of the concepts that are needed for the analysis of business problems. Managerial economics is helpful in making decisions. Evaluating choice of alternatives.

31. Scope of Managerial Economics Following aspects constitute its subject matter:- Objectives of a Business Firm Demand Analysis and Demand Forecasting Production and Cost Competition Pricing and Output Profit Investment and Capital Budgeting and Product Policy, Sales Promotion and Market Strategy.

32. Managerial Economics & Other Disciplines Managerial Economics & Traditional Economics Managerial Economics & Operations Research Managerial Economics & Mathematics Managerial Economics & Statistics Managerial Economics & the Theory of Decision-making

33. FUNDAMENTAL CONCEPTS

34. Fundamental Concepts Incremental Reasoning Opportunity Cost Contribution Time Perspective Time Value of Money – Discounting Principle & Equi -Marginal Principle

35. 1.Incremental Reasoning The two basic concepts in the incremental analysis are : incremental cost and incremental revenue . Incremental cost may be defined as the change in total cost as a result of change in the level of output, investment, etc Incremental Revenue is change in total revenue resulting from change in level of output , price etc. Use of Incremental Reasoning While taking a decision, a manager always determines the worthwhile ness of a decision on the basis of criterion that the incremental revenue should exceed incremental cost.

36. Illustration: The firm gets an order which can get it an additional revenue of Rs . 2000. The normal cost of production of this order is: The addition to cost due to new order is the following : Firm would earn a net profit of Rs 2,000 – Rs . 1400 = Rs . 600 while at first it appeared that the firm would make a loss of Rs.400 by accepting the order . Labour Rs.600 Materials 800 Overheads 720 Selling & administration expenses 280 Full cost Rs.2400 Labour Rs.400 Materials 800 Overheads 200 Full cost Rs.1400

37. A course of action should be pursued up to the point where its incremental benefits equal its incremental costs.

38. 2.Opportunity Cost Opportunity cost, therefore, represents the benefits of revenue forgone by pursuing one course of action rather than another. For e.g: (a) The opportunity cost of the funds employed in one’s own business is the amount of interest which could have been earned had these funds been invested in the next best channel of investment (b) The opportunity cost of using an idle machine is zero, as its use needs no sacrifice of opportunities.

39. Opportunity Cost Opportunity cost includes both the explicit and implicit costs:- Explicit costs are recognized in the accounts , e.g., the payments for labour , raw materials, etc Implicit (or imputed) costs are sacrifices that are not recorded in accounting e.g. cost of capital supplied by owners of business.

40. 3.Contribution Contribution tells us about the contribution of a unit of output to overheads and profit. It helps in determining the best product mix when allocation of scarce resources is involved. It also indicates whether or not it is advantageous to accept a fresh order, to introduce a new product, to shut down to continue with the existing plant etc. Unit contribution is the per unit difference of incremental revenue from incremental cost

41. 4.Time Perspective Economists often make a distinction between short run and long run. Short run means that period within which some of the inputs (called fixed inputs) cannot be altered. Long run means that all the inputs can be changed. Economists try to study the effect of policy decisions on variables like prices, costs, revenue, etc, in the light of these time distinctions.

42. 5.Discounting Principle The concept of discounting future is based on the fundamental fact that a rupee now is worth more than a rupee earned a year after. Unless these returns are discounted to find their present worth, it is not possible to judge whether or not it is worth undertaking the investment today. Illustrations Suppose a sum of Rs.100 is due after 1 year. Let the rate of interest be 10% . We can determine the sum to be invested now so as to produce the return (R) of Rs.100 at the end of 1 year. The present value of the discounted value of Rs . 100 will then be,

43. 6.The Equi -Marginal Principle The law of equi -marginal utility states that a utility maximizing consumer distributes his consumption expenditure between various goods and services he/she consumes in such a way that the marginal utility derived from each unit of expenditure on various goods and service is the same. This principle suggests that available resources (inputs) should be so allocated between the alternative options that the marginal productivity (MP) from the various activities are equalized. For eg . Suppose a firm has a total capital of Rs . 100 million which it has the option of spending on three projects, A,B, and C. Each of these projects requires a unit expenditure of Rs . 10 million.

44. The Equi -Marginal Principle 35 30 20 15 12 40 30 20 10 50 45 35 20 10 1 st 2 nd 3 rd 4 th 5th Project C Project B Project A Marginal Productivity (MP) Units of Expenditure (Rs.10 million) Marginal Productivity (MP) Schedule of Projects A, B, and C

45. The Equi -Marginal Principle

46. The Economic Problem Unlimited Wants Scarce Resources – Land, Labour, Capital Resource Use Choices A wind farm. Copyright: Getty Images, available from Education Image Gallery

47. The Economic Problem What goods and services should an economy produce? – should the emphasis be on agriculture, manufacturing or services, should it be on sport and leisure or housing? How should goods and services be produced? – labour intensive, land intensive, capital intensive? Efficiency? Who should get the goods and services produced? – even distribution? more for the rich? for those who work hard?

48. Opportunity Cost Definition – the cost expressed in terms of the next best alternative sacrificed Helps us view the true cost of decision making Implies valuing different choices

49. Production Possibility Frontiers Show the different combinations of goods and services that can be produced with a given amount of resources No ‘ideal’ point on the curve Any point inside the curve – suggests resources are not being utilised efficiently Any point outside the curve – not attainable with the current level of resources Useful to demonstrate economic growth and opportunity cost

50. Production Possibility Frontiers Capital Goods Consumer Goods Yo Xo A B Y1 X1 Assume a country can produce two types of goods with its resources – capital goods and consumer goods If it devotes all resources to capital goods it could produce a maximum of Ym . If it devotes all its resources to consumer goods it could produce a maximum of Xm Ym Xm If the country is at point A on the PPF It can produce the combination of Yo capital goods and Xo consumer goods If it reallocates its resources (moving round the PPF from A to B) it can produce more consumer goods but only at the expense of fewer capital goods. The opportunity cost of producing an extra Xo – X1 consumer goods is Yo – Y1 capital goods.

51. Production Possibility Frontiers Capital Goods Consumer Goods Yo Xo A . B C Y1 X1 Production inside the PPF – e.g. point B means the country is not using all its resources It can only produce at points outside the PPF if it finds a way of expanding its resources or improves the productivity of those resources it already has. This will push the PPF further outwards.

52. Positive and Normative Economics Health care can be improved with more tax funding Pollution control is effective through a system of fines Society ought to provide homes for all Any strategy aimed at reducing factory closures in deprived areas would be helpful Positive Statements: Capable of being verified or refuted by resorting to fact or further investigation Normative Statements: Contains a value judgement which cannot be verified by resort to investigation or research

53. Microeconomics and Macroeconomics Macroeconomics (“macro” meaning large) is that branch of econ omic analysis that deals with the study of aggregate s. As opposed to microeconomics, in macro analysis we study the industry as a unit, and not the firm . In macroeconomics, we talk about aggregate demand and aggregate supply, national income, national capital formation, employment, inflation etc.

54. Microeconomics and Macroeconomics However, micro and macro economics are not to be taken as substitutes of each other; rather they complement each other. To quote Paul Samuelson “ …if you read one branch of economics carefully, but ignore the other, you will be half-educated”.

55. Opportunity Cost Opportunity cost is the benefit forgone from the next best alternative that is not selected. Individuals or firms give up an opportunity(s) to use or enjoy something in order to select something else.

56. Opportunity cost: Example A firm may even have to make a choice between quantity and quality. It may commit itself to quality (and hence, remain restricted to a small customer base) by selling its product at high price (such a pricing is often regarded as market skimming pricing), or it may compromise on quality and lower the price in order to capture a larger market (such a pricing is often regarded as market penetration pricing). Let us see the opportunities foregone in each case. If the firm decides to go for the first option, it would be targeting the “classes”.

57. Opportunity cost: Example This way the firm has to sacrifice the opportunity of getting control over a large segment of market; this becomes its opportunity cost of selling its product at a high price. On the other hand, if it opts for keeping the price low at the cost of quality, the firm would be targeting the “masses”, thus, sacrificing its image of delivering high quality product. This loss in image would be the opportunity cost of selling its product at a low price, against gaining of a larger customer base. Such situations may often put firms in an ethical dilemma.

58. Incremental Concept The concept of marginality deals with a unit increase in cost or revenue or utility. Marginal Cost (or Revenue or Utility) is the change in Total Cost (or Total Revenue or Total Utility) due to a unit change in output. In other words, Marginal Cost (or Marginal Revenue or Marginal Utility) is the Total Cost (or Total Revenue or Total Utility) of the last (or nth.) unit (of output). Thus, we may express Marginal Cost (MC) as: MCn = TCn – TCn–1

59. Principle of time perspective The principle of time perspective may be stated as under: “ A decision should take into account both the short-run and long-run effects on revenues and costs and maintain the right balance between the long-run and short-run perspectives .”

60. Discounting Principle The core of discounting principle is that a rupee in hand today is worth more than a rupee received tomorrow. In other words, it refers to time value of money, i.e., the fact that the value of money depreciates with time. One rationale of discounting is uncertainty about tomorrow, i.e., future. Even if there is no uncertainty, it is necessary to discount future rupee to make it equivalent to current day rupee.

61. Discounting Principle Discounting is: PVF = 1/(1+r) n PVF = Present Value Factor n = period (year, etc.) and r = rate of discount

62. Equi -Marginal Principle This principle is also known the principle of maximum satisfaction - by allocating available resource to get optimum benefit . This principle provides a basis for maximum utilization of all the inputs of a firm so as to maximize the profitability.

63. Equi -Marginal Principle The equi -marginal principle is based on the law of diminishing marginal utility. The equi -marginal principle states that  a consumer will be maximizing his total utility when he allocates his fixed money income in such a way that the utility derived from the last unit of money spent on each good is equal . According to  Marshall , "if a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all"

64. Importance of Managerial Economics 1. Predicting Economics quantities: A manager has to take most of his decisions in the environment. Economics analyses makes prediction about economic event possible by analyzing various economic data such as cost, profit, demand, capital, price and output. 2. Estimating Economics relationship: Economics analyses the estimate of relationship between economic variables of income elasticity, price elasticity cost elasticity.

65. Importance of Managerial Economics 3. Basic of business policies: Economics analysis on the basis of business policy manager takes all the decision for the firm and formulate plans for profit, capital, cost and price. 4. To assist in planning: Business Economics helps in decision making maximizing the profit of the firm. 5. To assist in Organization: It is the function of organization managerial economics helps in this work efficiently of whole firms or department can be checked out by the calculation of rate of return. The efficiency of department can be improved after checking the efficiency.

66. Importance of Managerial Economics 6. To assist in controlling: For the purpose of controlling, business activities, business unit & their actual performance are compare with there pre-determine goal. 7. Forecasting: Forecasting is necessary for the success of the firm. 8. To assist in understanding the effect of External Force: The external force at the time of policies formulating of the firm, such as business cycle, industrial policies, licensing etc. 9. Co-ordination between principle and practice: Many schemes seems the best but these schemes cannot be applied in practical form in the firm. Conditions of firm has always changed so it must co-ordination between principle and practice

67. Managerial Economics in Relation with other Disciplines / Branches of Knowledge Managerial economics has a close linkage with other disciplines and fields of study. The subject has gained by the interaction with Economics, Mathematics and Statistics and has drawn upon Management theory and Accounting concepts. Managerial economics integrates concepts and methods from these disciplines and brings them to bear on managerial problems

68. Managerial Economics and Operations Research Mathematicians, statisticians, engineers and others join together and developed models and analytical tools which have grown into a specialised subject known as operation research. The basic purpose of the approach is to develop a scientific model of the system which may be utilised for policy making.  The development of techniques and concepts such as Linear Programming, Input-output Analysis, Inventory Theory, Decision Theory.

69. MANAGERIAL ECONOMICS AND MATHEMATICS The major problem of a business man is how to a minimum cost or how to maximum profit. Mathematics concept & techniques are widely used in finding out answer to these question Its main contribution to managerial economics Geometry, algebra and calculus Logarithms and exponential, vectors and determinants, input-output tables etc.,

70. Managerial Economics and Statistics It provides the basis for the empirical testing of theory. It provides the individual firm with measures of appropriate functional relationship involved in decision making. Statistics supplies many tools to managerial economics. Suppose forecasting has to be done. For this purpose, trend projections are used. Similarly, multiple regression technique is used. In managerial economics, measures of central tendency like the mean, median, mode, and measures of dispersion, correlation, regression, least square, estimators are widely used. 

71. Managerial Economics and Statistics Statistical tools are widely used in the solution of managerial problems. For eg . sampling is very useful in data collection. Managerial economics makes use of correlation and multiple regression in business problems involving some kind of cause and effect relationship.

72. Managerial Economics and Accounting Managerial economics is closely related to accounting. It is recording the financial operation of a business firm. A business is started with the main aim of earning profit. Capital is invested / employed for purchasing properties such as building, furniture, etc and for meeting the current expenses of the business.  Goods are bought and sold for cash as well as credit. Cash is paid to credit sellers. It is received from credit buyers. Expenses are met and incomes derived. This goes on the daily routine work of the business. The buying of goods, sale of goods, payment of cash, receipt of cash and similar dealings are called business transactions.

73. Managerial Economics and Theory of Decision Making The theory of decision making is relatively a new subject that has a significance for managerial economics. In the process of management such as planning, organising , leading and controlling, decision making is always essential. Decision making is an integral part of today’s business management. A manager faces a number of problems connected with his/her business such as production, inventory, cost, marketing, pricing, investment and personnel. Economist are interested in the efficient use of scarce resources hence they are naturally interested in business decision problems and they apply economics in management of business problems. Hence managerial economics is economics applied in decision making.