Principles, Nature, Scope, Importants and Limitation .pptx

1. Fundamentals of economics
 Business Economics is playing an important role in our daily economic
life and business practices. As different types of business are existing
and run by people and Various new types of businesses are emerged,
 Business Economics becomes very useful for businessmen. Since the
emergence of economic reforms in Indian economy the whole
economic scenario regarding the business is changed.
 ,while taking the business decisions businessmen are using economic
tools. Economic theories, economic principles, economic laws,
equations economic concepts are used for decision making.
 On this ground students of commerce should know the importance of
basic theories in actual business application. Hence the introduction of
Business Economics becomes important to the students.

2.  In 1951 Joel Dean published a book entitled "Business
Economics." The the subject Business Economics has
gained popularity. Business Economics reveals that how
economic analysis is used to formulate the economic
policies in respect to the business firms.

3. Principles of Economics
 There are six basic principles of managerial economics.
They are:
1) The Incremental Concept
2) The Concept of Time Perspective
3) The Opportunity Cost Concept
4) The Discounting Concept
5) The Equi-marginal Concept
6) Risk and Uncertainty

4. 1.) The Incremental Concept
Incremental concept is closely related to the changes in
total marginal cost and total marginal revenues of of the
business firms.
A decision is clearly a profitable one if
 It increases revenue more than costs.
 It reduces costs more than revenues.
 It increases some revenues more than it decreases
others.
 It decreases some cost to a greater extent than it
increases others.

5. 2. Concept of Time Perspective:
In the business economics theory,
decision maker should give due
consideration to the both short run and
long run. One should not be affected by
another decision taken. Decision may be
taken regarding variable and fixed cost
or Revenue like fixing selling price,
percentage of profit etc.

6. 3. The Opportunity Cost Concept
Opportunity cost represents the benefits or revenue
forgone (sacrificed abandoned) by pursuing one
course of action rather than another.
Examples
 the loss of other alternatives when one alternative is
chosen.
 "idle cash balances represent an opportunity cost in
terms of lost interest"

7. 4. Equi-Marginal Concept:
 The principle states that an input should be allocated so
that value added by the last unit is the same in all cases.
This generalisation is popularly called the equi-marginal.
 Let us assume a case in which the firm has 100 unit of
labour at its disposal. And the firm is involved in five
activities viz., А, В, C, D and E. The firm can increase any
one of these activities by employing more labour but only
at the cost i.e., sacrifice of other activities.
Examples
Utility of first product should be the same to the last product
that we consumed at same price.- Quality and level of
Utility should be same when price is same.

8. 5. Discounting Concept:
 Since future is unknown and incalculable, there is
lot of risk and uncertainty in future. Everyone
knows that a rupee today is worth more than a
rupee will be two years from now as it has more
alternative course of action to earn more than
that.
 The concept of discounting is found most useful in
business economics and decision making is used
in investment planning or capital budgeting.

9. 6. Risk and Uncertainty
The uncertainty is due to unpredictable changes in
the business cycle, structure of the economy and
government policies.
 The management must assume the risk of making
decisions for their institution in uncertain and
unknown economic conditions in the future.
 Firms may be uncertain about production, market
prices, strategies of rivals, etc. Under uncertainty,
the consequences of an action are not known
immediately for certain.

10. Business Economics
 According to Mansfield, “Business economics is
concerned with the application of economic
concepts and economics to the problems for
formulating rational decision making”
 Spencer and Seigelman, “Business Economics is
the integration of economic theory with business
practice for the purpose of facilitating decision
making and forward planning by management.”

11. Nature of Business Economics
Business Economics is a Science - Economics integrates
the tools of decision sciences such as Mathematics,
Statistics and Econometrics with Economic Theory to
arrive at appropriate strategies for achieving the goals of
the business enterprises
It is based largely on Microeconomics - the long-term
survival and profitable functioning of the organization.
,
Incorporates elements of Macro Analysis: business
manager must consider about the general price level,
income and employment levels in the economy and
government policies with respect to taxation, interest rates,
exchange rates, industries, prices, distribution, wages and
regulation of monopolies.

12.  Business Economics is an art: it involves practical
application of rules and principles for the attainment
of set objectives.
 Use of Theory of Markets and Private Enterprises:
It uses the theory of the firm and resource allocation in
the backdrop of a private enterprise economy.
 Pragmatic in Approach: Microeconomics is abstract
and purely theoretical and analyses economic
phenomena under unrealistic assumptions.
 In contrast, Business Economics is pragmatic in its
approach as it tackles practical problems which the
firms face in the real world.


13. Interdisciplinary in nature:
Business Economics is interdisciplinary in nature as it
incorporates tools from other disciplines (such as Mathematics,
Operations Research, Management Theory, Accounting, and marketing,
Finance, Statistics and Econometrics.)
Normative in Nature:
Economic theory has developed along two lines – positive
and normative.
-A positive or pure science analyses cause and effect
relationship between variables in an objective and
scientific manner, but it does not involve any value
judgement.
-As against this, a normative science involves value
judgement. It is prescriptive in nature and suggests ‘what
should be’ a particular course of action under given
circumstances. Welfare considerations are embedded in
normative science.

14.  Business Economics covers two different
categories, macroeconomics and microeconomics.
Both the sectors cover different parts of the
business economics as:
 Microeconomics applies to internal or
operational issues that arise within the
organization and fall under the purview of
management.
 Macroeconomics focuses on external or
environmental issues that influence the
functioning and performance of the business
Scope of Economics

15. Scope
of
Business
Economics
Demand Analysis and
Forecasting
Cost and production
Analysis
Pricing Decisions,
policies and practices
Profit Management
Capital Management

16. Importance of Business Economics
 Business Economics enable the manager/Economist to
select suitable tool kit from traditional economics and to
take better decisions of Business in real life.
 business economics takes the help of other disciplines such
as psychology, sociology, etc. theories are used in the
various situation of the business.
 Competent model builder: Business economics makes a
manager a more competent model builder
 Integrating agent: Operations are conducted though
functional areas, such as finance, marketing, personnel and
production, business economics serves as an integrating
agent by coordinating the activities in these different areas.
 Cognizance: Business economics takes cognizance of the
interaction between the firm and society, and accomplishes
the key role of an agent in achieving the social and
economic welfare goals.

17. Limitation of Business Economics
Unpredictable
The combined process of producing, distributing and consuming goods
and the rendering of services is connected to human activities which
could sometimes be unpredictable.
Non-replicable
Most times predicting market behaviours is not easy. That’s why using
the same method over and over again would not work as there is no
specific solution.
No Unified Solution
Predictions about how the market will react to the problems may not
work as expected. Solutions at every situation may differs.
Open to Political Manipulation
Politicians often criticise the process of decision making andcall for
changes in policies which if closely looked at, are for their gain.
Inaccurate Conclusion
Most theories often put forward by economic experts to forecast future
policies that sometimes contradict one another.