Introduction to business economics

1. BUSINESS ECONOMICS

2. • Nature and scope of Economics
• Difference between Economics and Business
Economics
• Business Economics and other disciplines
• Fundamental concepts associated with
Business Economics
• Scope of Business Economics

3. ECONOMICS-MEANING
• The word ‘Economics’ was derived from two Greek words, oikos (a house)
and nemein (to manage) meaning ‘managing an household’ using limited
funds available.
• Economics deals with production, exchange and consumption of various
commodities in economic systems.
• The central focus of economics is on scarcity of resources and choices among
their alternative uses.
• For example, a farmer can grow paddy, sugarcane, banana, cotton etc. in his
garden land. But he has to choose a crop depending upon the availability of
irrigation water.

4. DEFINITIONS OF ECONOMICS
• ADAM SMITH –FATHER OF ECONOMICS
“Economics is the social science that examine how people choose to use
limited or scare resources attempting to satisfy their unlimited wants.”
• ALFRED MARSHALL
“Economics is a study of mankind in the ordinary business of life; it
examines that part of individual and social action which is most closely
connected with the attainment and with the use of the material requisites of
well being”.

5. NATURE OF ECONOMICS
i) Economics - A Science and an Art
ii) Positive and Normative Economics
iii) Methodology of Economics
-Deductive method
-Inductive method.
iv) Subject Matter of Economics
-Traditional approach
-Modern approach

6. i)Economics - A Science and an Art
“A science teaches us to know; an art teaches us to do”
• Science is a systematized body of knowledge which finds relationship between
cause and effect and amenable to measurement.
• Economics is a branch of knowledge where, facts have been systematically
collected, classified and analyzed.
• The motives of individuals and business firms can be measured in terms of money.
Thus, economics is a science.
• Art is a system of rules for attainment of objective. Economics offers us practical
guidance in the solution of economic problems. Thus, economics is an art.

7. ii) Positive and Normative Economics.
• Positive science does not indicate what is good or what is bad to the society.
• Normative science makes distinction between good and bad.
• For example, “12 per cent of the labor force in India was unemployed last year” is a
positive statement,
• which is verified by scientific measurement. “Twelve per cent unemployment is too
high” is normative statement comparing the fact.
iii) Methodology of Economics
Deductive method: descend from the general to particular.
Eg: Traders earn profit, if the demand for the commodity is more.
Inductive method: This method mounts up from particular to general.
Eg: Data on income of each group people are collected and analyzed to find overall
Economic condition.

8. iv) Subject Matter of Economics
a)Traditional Approach: Economics is studied under five major divisions namely
consumption, production, exchange, distribution and public finance. Matter of
Economics
b) Modern Approach: Microeconomics(analyses the economic behavior of any
particular unit such as a household or a firm) and Macroeconomics(studies the
behavior of the economic system as a whole or all the units put together.)

9. SCOPE OF ECONOMICS
Scope of economics can be classified broadly into two categories
A. Microeconomics
B. Macroeconomics
Microeconomics
• Microeconomics is the study of examining every individual
economic activity, industries, and their interaction.
• It mainly observes how a person earns and spends his
income.
Macroeconomics
• On the other hand, is the study of a national economy as a
whole.

10. Nature of microeconomics
1) Elasticity
2) Theory of production
3) Cost of production
4) Monopoly
5) Economics of Information
6) Oligopoly
Nature of macroeconomics
1) Output and income
2) Unemployment
3) Inflation and deflation

11. 1) Elasticity: Elasticity is the ratio of change in the proportion of one variable to
the change in the proportion of another variable. Eg: price increases
demand for the product decreases.
2) Theory of production: The input converted into output efficiently. including
storing, shipping, packaging, and manufacturing.
3) Cost of production: The cost can be comprised of land, labor, capital and
technology.
4) Monopoly: The state where a single firm is the only supplier of a specific
commodity.
5) Economics of Information: Information economics is a theory of how
information can affect economic decisions.
6) Oligopoly: The situation where the small numbers of sellers dominate an
industry or a market.

12. 1) Output and income: Output can be defined as the goods produced.
Total income is the income generated from the commodity sold. It is
usually measured by the Gross Domestic Product (GDP).
2) Unemployment: It is measured by overall employment rate, which
means the ratio of workers without employment in the workforce.
people pursuing education and retired are excluded from this
unemployment rate.
3) Inflation and deflation: In general terms, increase in price and
decrease in money value refers to inflation; while on the other
hand, decrease in price and increase in money value refers to
deflation in the economy.

14. Meaning of Business Economics
• Business economics is a field of
applied economics that studies the financial,
organizational, market-related, and
environmental issues faced by corporations.
• Business economics encompasses subjects
such as the concept of scarcity, product factors,
distribution, and consumption.

15. Difference Between Business Economics and Economics
Economics / Traditional
Economics
1) Character :The traditional
Economics has both micro
and macro aspects
2) Nature:
Economics is both positive and
normative science
3) Aspect
Economics deals mainly with the
theoretical aspect .
Business Economics /
Managerial Economics
Business Economics is essentially
micro aspects
Business Economics is essentially
normative in nature.
Business Economics deals with
the practical aspect.

16. 4) Analyzes
Economics analyzes problems
both from micro and macro
point of views
5) Behaviour
Economics studies human
behaviour on the basis of
certain assumptions but these
assumptions sometimes do
not hold good
6) Study
Under Economics we study
only the economic aspect of
the problems
Business Economics studies the
activities of an individual firm
or unit. Its analysis of problems
is micro in nature
Business Economics as it
concerns mainly with practical
business problems.
Business Economics we have to
study both the economic and
non-economic aspects of the
problems.

17. 7) principles
Economics studies principles
underlying rent, wages,
interest and profits
8)Decision-making
Economics it is not so.
9) Scope
Scope of Economics is wide
Business Economics we
study mainly the
principles of profit only.
• Sound decision-making in
Business Economics is
considered to be the most
important task for the
improvement of efficiency
of the business firm
• Scope of Business
Economics is limited

18. SCOPE OF BUSINESS ECONOMICS
Business economics involves the application of various economic tools, theories, and
methodologies for analyzing and solving different business problems.

19. • Demand analysis and forecasting: Demand refers to the willing-ness or capability of
individuals to buy a product at a specific price. Demand analysis is a process of
identifying potential consumers, the amount of goods they want to purchase, and the
price they are willing to pay for it.
• cost and benefit analysis (CBA): Cost analysis helps firms in determining hidden and
uncontrollable costs and taking measures for effective cost control. It further enables the
organization to determine the return on investment (ROI).
• Pricing decisions, policies, and practices: It is a process of finding the value of a
product or service that an organization receives in exchange for its product/service. The
profit of an organization depends on its pricing strategies.
• Profit maximization: In order to maximize profit, organizations need to have complete
knowledge about various economic concepts, such as profit policies and techniques,
and break-even analysis.
• capital management:. To make sound capital investment decisions, an organization
needs to determine various aspects, such as cost of capital and rate of return.

20. BUSINESS ECONOMICS AND OTHER DISCIPLINES
1. Business Economics and Economics
2. Business theory and accounting
3. Business Economics and mathematics
4. Business Economics and Statistics
5. Business Economics and Operations Research
6. Business Economics and the theory of Decision- making
7. Business Economics and Computer Science

21. 1. Business Economics and Economics.
Both Business economics and economics deal with problems of scarcity and resource
allocation and makes use to several Micro Economic concepts such
– A) As marginal cost - increase or decrease in the total cost of a production run
for making one additional unit of an item
– B) Elasticity of demand-measure of change in the quantity demanded in
response to the change in the price of the commodity.
– C) Price theory uses the concept of supply and demand to determine the
appropriate price point for a good or service
– D) Theories of market structure- Perfect competition, imperfect competition,
Monopoly and oligopoly.
2. Business Economics and Accounting
• Business Economics requires a proper knowledge of cost and revenue
information and their classification.
• The focus of accounting within the firm is fast changing from the concepts of store
keeping to that if managerial decision making, this has resulted in a new
specialized area of study called “Managerial Accounting”.

22. 3. Business Economics and Mathematics
• Mathematical symbols are more convenient to handle and understand
various concepts like incremental cost, elasticity of demand etc.,
• Geometry, Algebra and calculus are the major branches of mathematics
which are of use in managerial economics.
• linear programming, inventory models and game theory fine wide
application in Business economics.
4. Managerial Economics and Statistics
• statistical tools are used in collecting data and analyzing them to help in the
decision making process.
• The theory of probability is very useful in problems involving uncertainty
and help the firm to predict the future course of events.
• Correlation and multiple regressions in related variables like price and
demand to estimate the extent of dependence of one variable on the other.

23. 5. Managerial Economics and Operations Research
Operation research provides a scientific model of the system it helps in the field of product
development, material management, inventory control, quality control, marketing and
demand analysis
6. Managerial Economics and the theory of Decision- making
• Most of the economic theories explain a single goal for the consumer i.e., Profit
maximization for the firm.
• But the theory of decision-making is developed to explain multiplicity of goals and
lot of uncertainty.
7. Managerial Economics and Computer Science
• Computers have changes the way of the world functions and economic or business
activity is no exception.
• Computers are used in data and accounts maintenance, inventory and stock controls and
supply and demand predictions

24. FUNDAMENTAL CONCEPTS OF BUSINESS ECONOMICS
• The Incremental Concept: Incremental concept involves estimating the impact of
decision alternatives on costs and revenues, emphasizing the changes in total cost
and total revenue resulting from changes in prices, products, procedures,
investments.
• The Concept of Time Perspective: The time perspective concept states that the
decision maker must give due consideration both to the short run and long run
effects of his decisions. He must give due emphasis to the various time periods
• The Opportunity Cost Concept: The opportunity cost of anything is the
alternative that has been foregone. This implies that one commodity can be
produced only at the cost of foregoing the production of another commodity.

25. • The Discounting Concept: Discounting is the process of determining the present value of a
payment or a stream of payments that is to be received in the future. Given the time value
of money, a dollar is worth more today than it would be worth tomorrow.
• The Equi-marginal Concept: The principle of Equi-marginal utility explains the behavior of
a consumer in distributing his limited income among various goods and services. This
law states that how a consumer allocates his money income between various goods so as to
obtain maximum satisfaction.
• Risk and Uncertainty: Risk describes a situation, in which there is a chance of loss or
danger. Conversely, uncertainty refers to a condition where you are not sure about the future
outcomes.