Business Economics.

Answer 1-

Introduction:

Various companies face many problems such as labor problems, pricing problems, and other
problems related to Government controls and restrictions. Business economics with his vast
experience has to provide a quantitative base for decision making, policy making & planning in a
business. The business economist advises the businessman on all economic and non-economic
matters. Under business economist experience it helps to analyze various problems related to the
volume of investment, sales promotion, competitive conditions, financial positions, labor
relations, and Government policies so that it will help to secured the business while doing every
activity. To make the business more viable and profitable the business economist should have
detailed knowledge and information about the environment of a company.

Business Economist always remains in touch with all the latest economic developments and
environmental changes for informing the management. He has an efficient role in earning
reasonable profits on invested capital as it supplies all relevant information which helps in
making proper plans and strategies. Business economist has three important roles in every
business organization: Demand analysis and forecasting, capital management, and profit
management. Hence, after discussing the above aspects every organization needs to have a
Business Economist who has all the knowledge and fundamentals of economics to run a business
smoothly and efficiently.

Concepts & Application:

Let's discussed how Business Economist plays an Important Role intake Business decisions: -

The business economist is expected to play a positive & Constructive role in a modern business
setup. A business is essentially involved in the process of decision-making as well as planning. A
business decision is an integral part of management. Management and decision making is to be
considered inseparable. A business decision is the selection of a particular course of action,
based on some criteria, from two or more possible alternatives. Managerial Decision Problems
(Internal as well as external) Economic Theory (Supply, Demand, Cost. Competition)
Quantitative Techniques (Mathematical Economics) Business Economics (Quantitative
Techniques to solve business decision problems) Optimal Business Decision Making.

*Role of Business Economist:

Identifying various business problems: Various companies face many problems such as labor
problems, pricing problems, and other problems related to Government controls and restrictions.
The basic job of the business economist is to identify various problems that are uplifting a
company, find out various reasons behind these problems, analyze their effects on the
functioning of the company and finally suggest rational alternative and corrective measures to be
taken by the management. Also, he has to design various courses of action to maintain &
improve the existing systems.

*Providing a quantitative base for decision making & planning:

Business economics with his vast experience has to provide a quantitative base for decision
making, policy making & planning in a business. Business economist helps to study the in-depth
knowledge of the various factors, controllable & non-controllable which influence the working
of a business unit.

Business economist helps in planning, production & marketing planning, employing the latest
organizational model & develop management techniques to maximize output & minimize the
operating cost of the firm.

*Advisory to the company: The business economist advises the businessman on all economic
and non-economic matters. Under business economist experience it helps to analyze various
problems related to the volume of investment, sales promotion, competitive conditions, financial
positions, labor relations, and Government policies so that it will help to secured the business
while doing every activity.

Business economists must be in touch with fast-changing technological development and suggest
the most suitable information technology to be adopted by the company. *Knowledge about the
environmental factors which affect the business: To make the business more viable and
profitable the business economist should have detailed knowledge and information about the
environment of a company. Broadly speaking the environmental factors are divided into two
parts:

1. Business Environment (External Factors)

2. Business Operations (Internal Factors)

Business Environment helps to study all factors and forces and beyond the control of individual
business enterprises and its management which will help to maintain the business as stable. The
business operation helps to study those factors and forces, which operate, well within the
company and influence its operations which can minimize the cost of the business.
Conclusion:

The study of business economics helps in the development of analytical skills which helps in
rational configurations and solutions of problems as well. It helps the managers in decisions
relating to customers, competitors, suppliers, and internal parties. Thus, It enables the firm to
proper utilization of scarce resources available and also helps in achieving the predetermined
goals most efficiently and effectively. It is of great help in the decisions related to :

Price analysis

Production analysis

Risk analysis

Capital budgeting

Determination of demand.

It gives a solution to the problems faced by enterprises through economic analysis. Identification
of problems and finding the solution are the main aspects of decision-making. Business
managers can make sound decisions only if the Economic principles are followed.

It also gives information about the resources which affect productivity and efficiency. Also, It
helps in an examination of alternatives to select the best course of action. This action directly
affects the output of the business enterprise.

Answer 2-

Introduction:

The Law of Variable Proportion is regarded as an important theory in Economics. It is referred to

as the law which states that when the quantity of one factor of production is increased while
keeping all other factors constant, it will result in the decline of the marginal product of that
factor. The Law of variable proportion is also known as the Law of Proportionality. When the
variable factor becomes more, it can lead to a negative value of the marginal product. The law of
variable proportion can be understood in the following way. When a variable factor is increased
while keeping all other factors constant, the total product will increase initially at an increasing
rate, next it will be increasing at a diminishing rate and eventually there will be a decline in the
rate of production.
Concept and Application:

Law of variable proportion

The law of variable proportions states that as the quantity of one factor is increased, keeping the
other factors fixed, the marginal product of that factor will eventually decline. This means that
up to the use of a certain amount of variable factor, the marginal product of the factor may
increase and after a certain stage, it starts diminishing. When the variable factor becomes
relatively abundant, the marginal product may become negative. Assumptions: The law of
variable proportions holds good under the following conditions:

Constant State of Technology: First, the state of technology is assumed to be given and
unchanged. If there is improvement in the technology, then the marginal product may rise instead
of diminishing.

Fixed Amount of Other Factors: Secondly, there must be some inputs whose quantity is kept
fixed. It is only in this way that we can alter the factor proportions and know its effects on
output. The law does not apply if all factors are proportionately varied.

Possibility of Varying the Factor proportions: Thirdly, the law is based upon the possibility of
varying the proportions in which the various factors can be combined to produce a product. The
law does not apply if the factors must be used in fixed proportions to yield a product. Three
Stages of the Law of Variable Proportions:

These stages are illustrated in the following figure where labor is measured on the X-axis and
output on the Y-axis.

Stage 1 . Stage of Increasing Returns: In this stage, the total product increases at an increasing
rate up to a point. This is because the efficiency of the fixed factors increases as additional units
of the variable factors are added to it. In the figure, from the origin to point F, the slope of the
total product curve TP is increasing i.e. the curve TP is concave upwards up to point F, which
means that the marginal product MP of labor rises. The point F where the total product stops
increasing at an increasing rate and starts increasing at a diminishing rate is called the point of
inflection. Corresponding vertically to this point of inflection marginal product of labor is
maximum, after which it diminishes. This stage is called the stage of increasing returns because
the average product of the variable factor increases throughout this stage. This stage ends at the
point where the average product curve reaches its highest point.

Stage 2 . Stage of Diminishing Returns: In this stage, the total product continues to increase but
at a diminishing rate until reaches its maximum point H where the second stage ends. In this
stage, both the marginal product and average product of labor are diminishing but are positive.
This is because the fixed factor becomes inadequate relative to the quantity of the variable factor.
At the end of the second stage, i.e., at point M marginal product of labor is zero which
corresponds to the maximum point H of the total product curve TP. This stage is important
because the firm will seek to produce in this range.

Stage 3 . Stage of Negative Returns: In stage 3, the total product declines, and therefore the TP
curve slopes downward. As a result, the marginal product of labor is negative and the MP 12, 22
curve falls below the X-axis. In this stage, the variable factor (labor) is too much relative to the
fixed factor.

Applicability of the law of Variable Proportion

The Law of variable proportions applies to all fields of production, like agriculture, industry, etc.
This law applies to any field of production where some factors are fixed and others are variable.
That is the reason, why it is called the law of universal application.

*Application to Agriculture

*Application to Industry.

Quantity Total Product Average Product Marginal Product

1 10 10 10
2 30 15 20
3 48 16 18
4 56 14 8
5 56 11.2 0
6 52 8.6 -4

Conclusion:

→This law is based on the short production function.

→The gist of the law is that if the number of variable factors is increased keeping constant, other
factors, eventually AP and MP will decline.

→ This law is applicable in all industries, but more In agriculture.

→ Rationale producer prefers the second stage where TP reaches a maximum, MP becomes zero,
not negative. and AP decreases.

→ The third stage is unfeasible because MP is negative, so no meaning in paying additional

wages to labors.
Answer 3a-

Introduction:

Economies of scale refer to the cost advantage experienced by a firm when it increases its level
of output. The advantage arises due to the inverse relationship between the per-unit fixed cost
and the quantity produced. The greater the quantity of output produced, the lower the per-unit
fixed cost.

Economies of scale also result in a fall in average variable costs (average non-fixed costs) with
an increase in output. This is brought about by operational efficiencies and synergies as a result
of an increase in the scale of production. Economies of scale can be realized by a firm at any
stage of the production process. In this case, production refers to the economic concept of
production and involves all activities related to the commodity, not involving the final buyer.
Thus, a business can decide to implement economies of scale in its marketing division by hiring
a large number of marketing professionals. A business can also adopt the same in its input
sourcing division by moving from human labor to machine labor.

Concept and application:

Types of Economies of Scale

1. Internal Economies of Scale

This refers to economies that are unique to a firm. For instance, a firm may hold a patent over a
mass production machine, which allows it to lower its average cost of production more than
other firms in the industry.

2. External Economies of Scale

These refer to economies of scale enjoyed by an entire industry. For instance, suppose the
government wants to increase steel production. To do so, the government announces that all steel
producers who employ more than 10,000 workers will be given a 20% tax break. Thus, firms
employing less than 10,000 workers can potentially lower their average cost of production by
employing more workers. This is an example of an external economy of scale – one that affects
an entire industry or sector of the economy.

Effects of Economies of Scale on Production Costs

It reduces the per-unit fixed cost. As a result of increased production, the fixed cost gets spread
over more output than before.
It reduces per-unit variable costs. This occurs as the expanded scale of production increases the
efficiency of the production process.

The graph above plots the long-run average costs (LRAC) faced by a firm against its level of
output. When the firm expands its output from Q to Q2, its average cost falls from C to C1.
Thus, the firm can be said to experience economies of scale up to output level Q2. In economics,
a key result that emerges from the analysis of the production process is that a profit-maximizing
firm always produces that level of output which results in the least average cost per unit of
output.

Conclusion:

Importance of Economies of Scale:

Economies of scale are important because they can help provide businesses with a competitive
advantage in their industry. Companies will therefore try to realize economies of scale wherever
possible, just as investors will try to identify economies of scale when selecting investments. One
particularly famous example of an economy of scale is known as the network effect.

Answer 3b-

Introduction:

In economics, demand is defined as the quantity of a product or service, that a consumer is ready
to buy at various prices, over a period. The demand curve is a graph, indicating the quantity
demanded by the consumer at different prices. The movement in the demand curve occurs due to
the change in the price of the commodity whereas the shift in the demand curve is because of the
change in one or more factors other than the price.

Definition of Shift in Demand Curve

A shift in the demand curve displays changes in demand at each possible price, owing to changes
in one or more non-price determinants such as the price of related goods, income, taste &
preferences, and expectations of the consumer. Whenever there is a shift in the demand curve,
there is a shift in the equilibrium point also. The demand curve shifts in any of the two sides:

Rightward Shift: It represents an increase in demand, due to the favorable change in non-price
variables, at the same price.

Leftward Shift: This is an indicator of a decrease in demand when the price remains constant but
owing to unfavorable changes in determinants other than price.
Definition of Movement in Demand Curve

Movement along the demand curve depicts the change in both the factors i.e. the price and
quantity demanded, from one point to another. Other things remain unchanged when there is a
change in the quantity demanded due to the change in the price of the product or service,
resulting in the movement of the demand curve. The movement along the curve can be in any of
the two directions:

• Upward Movement: Indicates contraction of demand, in essence, a fall in demand is observed

due to price rise.

• Downward Movement: It shows expansion in demand, i.e. demand for the product or service
goes up because of the fall in prices.

Key Differences Between Movement and Shift in Demand Curve

The points given below are noteworthy so far as the difference between movement and shift in
the demand curve is concerned:

1. When the commodity experiences change in both the quantity demanded and price, causing
the curve to move in a specific direction, it is known as the movement in the demand curve. On
the other hand, When, the price of the commodity remains constant but there is a change in
quantity demanded due to some other factors, causing the curve to shift on a particular side, it is
known as a shift in the demand curve.

2. Movement in the demand curve, occurs along the curve, whereas, the shift in the demand
curve changes its position due to the change in the original demand relationship.

3. Movement along a demand curve takes place when the changes in quantity demanded are
associated with the changes in the price of the commodity. On the contrary, a shift in the demand
curve occurs due to the changes in the determinants other than price i.e. things that determine
buyer's demand for a good rather than a good's price such as Income, Taste, Expectation,
Population, Price of related goods, etc.

4. Movement along the demand curve is an indicator of overall change in the quantity demanded.
As against this, a shift in the demand curve represents a change in the demand for the
commodity.

5. Movement of the demand curve can either be upward or downward, wherein the upward
movement shows a contraction in demand, while downward movement shows expansion in
demand. Unlike, a shift in the demand curve, can either be rightward or leftward. A rightward
shift in the demand curve shows an increase in demand, whereas a leftward shift indicates a
decrease in demand.
Movement in Demand Curve.

The upward movement of the curve from A to C represents a contraction of demand due to the
increase in the price of the commodity from P to P2. The downward movement of the curve from
A to B denotes the expansion of demand due to the reduction in prices of the commodity from P
to P1.

A shift in Demand Curve

Price remains unchanged, the rightward shift of the demand curve from D to D1 is termed as an
increase in demand, as demand goes up from Q to Q1. The leftward shift of the demand curve
from D to D2 is known as a decrease in demand, as demand goes down from Q to Q2.

Conclusion:

Therefore, with the overall discussion, you might have understood, that a movement and shift in
the demand curve are two different changes. Movement in the curve is caused by the variables
present on the axis, i.e. price and quantity demanded. On the flip side, a shift in the curve is
because of the factors which are other than those present on the axis, such as competitors' prices,
tastes, expectations, and so on.