This document provides an overview of Business Economics as a course. It outlines 5 units that will be covered: 1) nature and scope of business economics, 2) demand concepts and elasticity of demand, 3) production and cost concepts, 4) budget line, and 5) market structures and pricing. Key concepts from Unit 2 on demand include the law of demand, determinants of demand, elasticity of demand including types and uses, the concept of supply, determinants of supply, and the law of supply. Elasticity of supply is also briefly discussed including different types.

1. Business
Economics
UNIT - 2
PRESENTED BY
K.BALASRI PRASAD
B.Sc(KU), M.B.A(OU), NET(UGC), (Ph.D)(MGU)
ASSISTANT PROFESSOR IN MANAGEMENT
VISHWA VISHWANI GROUP OF INSTITUTIONS 5-Apr-22
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2. COURSE NO. DSC – 102
BUSINESS ECONOMICS
COURSE OBJECTIVES : 1. The purpose of this course is to apply micro economic concepts and tools for analyzing business problems. 2. To make
students aware of cost concepts. 3. To make accurate decision pertaining to individual firms. 4. To understand tools and techniques of micro
economics. 5. To make the student understand market structure and dynamics.
UNIT - I : BUSINESS ECONOMICS NATURE AND SCOPE :
Introduction to Business Economics-Characteristics-Nature and scope, concept of opportunities
Cost- Incremental Cost- Time perspective-Discounting and Equi-Marginal Principle.
UNIT – II : DEMAND CONCEPTS & ELASTICITY OF DEMAND :
Concept of Demand, Determinants of Demand- Law of Demand- Exception to the law of demand-
Elasticity of Demand- Types of demand elasticity- Uses of demand elasticity-Concept of Supply-
Determinants of Supply-Law of Supply-Elasticity of Supply.
UNIT – III : PRODUCTION AND COST CONCEPTS :
Theory of production- Production function- Input output combination-Short run production laws,
Law of diminishing marginal returns to scale- ISO-quant curves, ISO-cost curves
UNIT – IV : BUDGET LINE :
Cost concepts- Cost classification-CVP Analysis-short run cost curves and long run cost curves
Experience curve-Economies and diseconomies to the scale- Economies of scope.
UNIT – V : MARKET STRUCTURES AND PRICING :
Concept of market structures- Perfect competition market and price determination- Monopoly and
abnormal profits- Monopolistic Competition-Price Discrimination-Oligopoly-Features of oligopoly-
Syndicating in oligopoly - Kinked demand curve- Price leadership and market positioning.
SUGGESTED BOOKS :
1. Dominik Salvotore, “(2015) Principal of Micro Economics 7th Ed. oxford University Press.
2. Dr. D N Mithani, (2018) Managerial Economics Theory and Appliocation, HPH
3. Varshiney & Maheswari, Managerial Economics, Juptan Publication, New Delhi
4. Lipsey and Crystal (2008) Economics International 15th Ed.Oxford University Press.
5. Kutosynnis (1979) Modern Micro Economics 5th Ed Mac Millan Publishers 6. Rubin field and Mehathe (Micro Economics 7th Ed. Pearson
Publishers.
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3. UNIT – II :
DEMAND CONCEPTS & ELASTICITY OF
DEMAND :
Concept of Demand
Determinants of Demand
Law of Demand
Exception to the law of demand
Elasticity of Demand
Types of demand elasticity
Uses of demand elasticity
Concept of Supply
Determinants of Supply
Law of Supply

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Demand is an economic principle referring to a
consumer's desire to purchase goods and services
and willingness to pay a price for a specific good or
service.
Holding all other factors constant, an increase in the
price of a good or service will decrease the quantity
demanded, and vice versa.
An effective demand has three characteristics
namely, desire, willingness, and ability of an
individual to pay for a product.
Concept of Demand

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Consumers may exhaust the available supply of a
good by purchasing a given good or service at a
high volume. This leads to an increase in demand.
Supply and demand have an important relationship
because together they determine the prices and
quantities of most goods and services available in a
given market.
In 1890, Alfred Marshall's Principles of Economics
developed a supply-and-demand curve

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Market demand is the total quantity demanded
across all consumers in a market for a given good.
Aggregate demand is the total demand for all
goods and services in an economy.
Some factors affecting demand include the appeal
of a good or service, the availability of competing
goods, the availability of financing and
the perceived availability of a good or service.
The point where supply and demand curves
intersect represents the market clearing or market
equilibrium price.

7. Determinants of Demand
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1] Price of the Product.
2] Income of the Consumers.
3] Prices of related goods or services.
4] Consumer Expectations.
5] Number of Buyers in the Market.
1. Price of the Product
People use price as a parameter to make decisions if all other
factors remain constant or equal. An elastic demand implies a
robust change quantity accompanied by a change in price.
2. Income of the Consumers
Rising incomes lead to a rise in the number of goods demanded
by consumers. Rising incomes lead to a rise in the number of
goods demanded by consumers.

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3. Prices of related goods or services
a. Complementary products: An increase in the price of
one product will cause a decrease in the quantity
demanded of a complementary product.
Example: Rise in the price of bread will reduce the demand
for butter. This arises because the products are
complementary in nature.
b. Substitute Product: An increase in the price of one
product will cause an increase in the demand for a
substitute product.
Example: Rise in price of tea will increase the demand for
coffee and decrease the demand for tea.

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4. Consumer Expectations
Expectations of a higher income or expecting an increase
in prices of goods will lead to an increase the quantity
demanded. Similarly, expectations of a reduced income or
a lowering in prices of goods will decrease the quantity
demanded.
5. Number of Buyers in the Market
The number of buyers has a major effect on the total or
net demand. As the number increases, the demand rises.
Furthermore, this is true irrespective of changes in the
price of commodities.
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10. Law of Demand
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The law of demand states that quantity purchased
varies inversely with price. In other words, the higher
the price, the lower the quantity demanded.
This occurs because of diminishing marginal utility.
That is, consumers use the first units of an
economic good they purchase to serve their most
urgent needs first, and use each additional unit of
the good to serve successively lower-valued ends.
Consumers use economic goods to satisfy their most
urgent needs first.

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Naturally, people prioritize more urgent wants
and needs over less urgent ones.
It expresses the relationship between the urgency of
consumer wants and the number of units of the economic
good at hand.

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qD = f (price, income, prices of related goods,
tastes, expectations)
The quantity demanded (qD) is a function of five
factors—price, buyer income, the price of related
goods, consumer tastes, and any consumer
expectations of future supply and price.

13. Exception to the law of demand
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The laws of economics are not universal.
Some goods do not show an inverse relationship between the
price and the quantity.
Therefore, the demand curve for these goods is upward-sloping.
1. Giffen goods
These are inferior goods that lack close substitutes that represent a large portion of
the consumer’s income.
Rise in price of these goods does not change the demand for these goods.
Scottish economist Sir Robert Giffen proposed the existence of
such goods in the 19th century.
Giffen goods violate the law of demand because the prices of
these goods increase with the increase in the quantity
demanded. Example: Salt

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2. Veblen goods
Certain types of luxury goods violate the law of
demand.
Veblen goods are named after American
economist Thorstein Veblen.
Generally, luxury goods indicate the economic
and social status of the owner.
Consumers are willing to consume Veblen goods
even more when the price increases.
Some examples of Veblen goods include luxury cars,
expensive bikes, designer clothes etc.

15. Elasticity of Demand
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The quantity demanded of a good or service
depends on multiple factors, such as price, income,
and preference.
Price elasticity of demand is an economic measure
of the sensitivity of demand relative to a change in
price.
The measure of the change in the quantity
demanded due to the change in the price of a good
or service is known as price elasticity of demand.

16. Types of demand elasticity
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Income elasticity of demand refers to the
sensitivity of the quantity demanded for a certain
good to a change in real income of consumers who
buy this good, keeping all other things constant.
The formula for calculating income elasticity of
demand is the percent change in quantity demanded
divided by the percent change in income.
YED = %Change in Quantity Demanded/ %Change in
Income

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The cross elasticity of demand is an economic
concept that measures the responsiveness in the
quantity demanded of one good when the price for
another good changes.
Price elasticity of demand measures the
responsiveness to the demand of a good or service
after a change in its market price.
According to basic economic theory, the Demand of
a good will decrease when its price rises.
PED = % Change in Quantity Demanded/% Change in Price

18. Factors Affecting Demand Elasticity
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Availability of Substitutes: The more good
substitutes there are, the more elastic the
demand will be.
Necessity: If something is needed for
survival or comfort, people will continue to
pay higher prices for it.
Time: The change in price will not have a
significant influence on the quantity demanded,
when time of consumption is more important.

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Nature of commodity: A commodity for a person may
be a necessity, a comfort or a luxury.
Income Level: Elasticity of demand for any commodity
is generally less for higher income level groups in
comparison to people with low incomes.
Postponement of Consumption: Commodities whose demand is
not urgent, have highly elastic demand as their consumption can
be postponed in case of an increase in their prices.
Number of Uses: If the commodity under consideration has
several uses, then its demand will be elastic. When price of such
a commodity increases, then it is generally put to only more
urgent uses and, as a result, its demand falls. When the prices
fall, then it is used for satisfying even less urgent needs and
demand rises.

20. Uses of Demand Elasticity
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Economists use price elasticity to explain how supply or
demand changes and understand the workings of the real
economy, despite price changes.
Use # 1. Wage Bargaining:
The capacity of trade unions to raise wages depends on the elasticity
of demand for the product in which labour is used as a major input. If
wages are permitted to rise cost and prices will also rise.
Use # 2. Automation:
The effect of the use of machinery or employment largely depends
on the elasticity of demand for the commodity produced by the firm
under consideration. If the demand for the product is elastic, a small
price cut will lead to more than proportionate increase in demand.

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Use # 3. Pricing Policy: When a firm considers changing the
prices of its product, it has to take account of the effect of
the proposed price change on consumer’s spending.
Use # 4. Excise Duty:
The government takes account of elasticity when selecting
goods and services upon which to impose excise duty.
Use # 5. Devaluation:
A country often devalues its currency to improve its
balance of trade position. Devaluation refers to the
reduction in the external value of a country’s currency in
terms of another currency. However, the extent to which
devaluation will succeed in improving a country’s balance
of trade depends on the fulfilment of a condition which is
known as the Maschall — Lerner condition.

22. Concept of Supply
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Total amount of a specific good or service that
is available to consumers.
Supply and demand trends form the basis of the
modern economy. Each specific good or service will
have its own supply and demand patterns based on
price, utility and personal preference.
If people demand a good and are willing to pay
more for it, producers will add to the supply. As the
supply increases, the price will fall given the same
level of demand.

23. Determinants of Supply
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1. Production cost: Since most private companies’ goal is profit
maximization. Higher production cost will lower profit, thus hinder supply.
Factors affecting production cost are: input prices, wage rate, government
regulation and taxes, etc.
2. Technology: Technological improvements help reduce
production cost and increase profit, thus stimulate higher supply.
3. Number of sellers: More sellers in the market increase the
market supply.
4. Expectation for future prices:
If producers expect future price to be higher, they will try to
hold on to their inventories and offer the products to the
buyers in the future, thus they can capture the higher price.

24. Determinants of Supply (Cont..)
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Aside from prices, other determinants of supply
are resource prices, technology, taxes and subsidies,
prices of other goods, price expectations, and the
number of sellers in the market.
Increased prices usually increases profits, which
is the main incentive for sellers to produce
more.
If resource prices increase faster than supply
prices, then producers will have less incentive
to produce more.

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Taxes and Subsidies: If taxes decrease and
subsidies increase, the profits of suppliers
increases.
Improvements in technology can reduce the need for
factors of production in supplying a product. For instance,
robotics have greatly reduced the need for labor.
Prices of other goods will also affect the production of
any one good.
If a business can produce more than one type of
product with its equipment and labor, then it tends to
produce more higher-profit products and less of other
products.

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Expected prices can also change the present supply,
because if suppliers believe that prices will decline in the
near future, they may try to sell all that they have
presently. Likewise, if prices are expected to rise in the
future, then suppliers may hold onto their supply until
prices rise.
The number of sellers will have an effect on the market
supply, since the market supply is simply the sum of the
supply of each individual seller — more sellers entering the
market increases supplies while departing sellers
decreases supply.
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27. Law of Supply
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The law of supply states that, all other factors being equal, as
the price of a good or service increases, the quantity of goods or
services that suppliers offer will increase, and vice versa.
The law of supply says that as the price of an item goes up,
suppliers will attempt to maximize their profits by increasing the
quantity offered for sale.

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The supply curve is upward sloping because,
over time, suppliers can choose how much of
their goods to produce
A business will make more of a good (such as
TVs or cars) if the price of that product
increases.

29. Elasticity of Supply
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The elasticity of supply establishes a
quantitative relationship between the supply of
a commodity and it’s price.
the major factor controlling the supply of a commodity is its
price. Therefore, we generally talk about the price elasticity of
supply. The price elasticity of supply is the ratio of
the percentage change in the price to the percentage change in
quantity supplied of a commodity.
Es= [(Δq/q)×100] ÷ [(Δp/p)×100] = (Δq/q) ÷ (Δp/p)
Δq= The change in quantity supplied
q= The quantity supplied
Δp= The change in price
p= The price

30. Types of Elasticity of Supply
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1. Perfectly Inelastic Supply
A service or commodity has a perfectly inelastic supply if a given
quantity of it can be supplied whatever might be the price. The
elasticity of supply for such a service or commodity is zero. A
perfectly inelastic supply curve is a straight line parallel to the Y-axis.

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2. Relatively Less-Elastic Supply
When the change in supply is relatively less when compared to the
change in price, we say that the commodity has a relatively-less
elastic supply. In such a case, the price elasticity of supply assumes a
value less than 1.
3. Relatively Greater-Elastic Supply
When the change in supply is relatively more when compared to the
change in price, we say that the commodity has a relatively greater-
elastic supply. In such a case, the price elasticity of supply assumes a
value greater than 1.
4. Unitary Elastic
For a commodity with a unit elasticity of supply, the change in quantity
supplied of a commodity is exactly equal to the change in its price. In other
words, the change in both price and supply of the commodity are
proportionately equal to each other. To point out, the elasticity of supply in
such a case is equal to one. Further, a unitary elastic supply curve passes
through the origin.

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5. Perfectly Elastic supply
A commodity with a perfectly elastic supply has an infinite
elasticity. In such a case the supply becomes zero with even
a slight fall in the price and becomes infinite with a slight
rise in price.
This is indicative of the fact that the suppliers of such a
commodity are willing to supply any quantity of the
commodity at a higher price. A perfectly elastic supply
curve is a straight line parallel to the X-axis.
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