Chp -1 Introduction and scope of business economics

What is economics?
As per the opinion given by first group of economist, economics is a
science, second group states that economics is an art, third group
states that economics contain feature of science as well as arts.

Science
1. The word science is derived from Latin word “scientia”, which means
branch of knowledge.
2. Science explain cause and effect relationship between two factors.
3. Science is capable to measure the things in different unit. For e.g.
kilometer, centimeter, gram.
4. Science is capable to forecast.
5. Science have its own instrument for the purpose of study. For e.g. test
tube, beaker, microscope.
6. Science have its own method for the purpose of study.

Economics
1. The word economics is derived from Greek word Oikonomos which means
household management means how an individual use its limited resources to
get maximum satisfaction.
2. Economics also explain cause and effect relationship between two factors
for e.g. Law of demand explain cause and effect relationship between price
and demand.
3. Economics is also capable to measure the things but measurement takes
place in terms of money for e.g. National income, GDP are measured in
terms of money.
4. Economics is also capable to predict and to forecast for e.g. what will be
the GDP, National income.
5. Economics also have its own instrument in the forms of equation, curve,
schedule, and they are statical
 6. Economics also have its own method for the purpose of study which include
slicing method, lumping method, inductive method and deductive method.
Therefore, Economics is a science.

Note: It is accepted that economics is a science but it is not a

perfect science because
1. The subject matter and central aspect of economics is a study of human
behavior. Human behavior cannot remain constant it is a subject to change
from time to time, place to place, person to person, it is highly
unpredictable to study human behavior, under a given situation how
consumer, producer behave we cannot take guarantee.
2. In economics measurement take place in terms of money, money is
secondary factor, it is a dependent factor and by using dependent factor
be cannot measure the thing accurately and precisely, top of that marginal
utility of money cannot remain constant.
3. Opinion of economist are not uniform Prof. Paul Samuelson stated that out
of all social science economics is more accurate and precise that is why
economics is a queen of all social science.

Art
1. In the word of prof. J.M.
Keynes art is a set of rules
And regulation to attain a
Given goal.
2. Art provide practical solution
To a problem.
Economics
1. Economics is also a set of rules
and regulation to attend a goal
preferably Economical goal.
2. Economics also provide Practical
solution to Various problem
For e.g. How to increase tax
collection

Economics is an art.

Note: To know something is a science and to apply something is

an art, science is theoretical and art is practical. At a micro level
they are competitive at macro level they are complimentary
 science need art, art need science. Therefore, Economics is
science theoretical and it’s an art practical.
Economics

Science [T] ART [P]

Positive Normative

Science Science

Positive Science: -
1. Positive science is also explaining as pure science
2. Positive science explains cause and effect relationship between two
factors.
3. Under positive science range of enquiry start with a question what is? And
ends there only.
4. Positive science deals with facts and cannot be put to debate
5. Out of all economist prof. Robbins of London school of economics
accepted economics as a positive science only and excluded normative
aspect.

In the words of Prof. Robbins

1. We should not comment and challenge any decision taken by individual and
an economy.
2. Economics is a neutral between ends (Want)
3. It is not a duty of an economist to comment on goodness and badness of
any decision taken by an individual or by an economy.

In the words of Prof. Alfred Marshall and A.C. pikow

Complete neutrality between ends are not desirable and feasible, whatever is
good must be appreciated and whatever is bad must be criticize.

1. Under positive science we cannot pass any value judgement or we cannot

make any difference between moral and immoral.
2. We must accept the fact as it is.

Normative science
The word normative is derived from the word norm which means rules and
regulation

1. Under normative science range of enquiry start with a question what

should be? Or what ought to be.
2. Normative science is welfare oriented.
3. Under normative science we can pass value judgement.

Prof. Alfred Marshall & A.C. Pikow are of the opinion that
economics is a positive science as well as normative science it we
will accept economics as a positive science only and exclude
normative and it will be narrow down.

Definition of economics
1. Prof. Adam smith-1776
a. Wealth of nation- wealth oriented
b. An inquiry in to nature and cause of wealth of nation
2. Prof. Alfred Marshall-1980
a. Principle of economics
b. Welfare oriented
c. Economics is a study of mankind in an ordinary business of life
3. Prof. Robbins-1931-32
a. Scarcity and choice oriented
b. Economics is a science that study human being and human behavior as a
relationship between ends and scarce means which have an alternative
use.
c. Economics is a social science it is related with human being. Ends mean
wants human wants are unlimited.
d. Means every resource have an alternative use.
 4. Prof. Paul sameulson-1947-48
a. Growth and development oriented
b. It is the scarcity that creates efficiency
5. Prof. A.C. Pikow
a. Economics study economical behavior of a person as a measuring rod of
money.

Prof. Adam Smith was followed and supported by prof. Francis walker

Prof. Marshall was followed by Prof. A.C. Pikow

Note:

1. Out of all definition of Adam smith is one of the ancient

definition but definition of prof. Robbins is universally and
scientifically more affected because Robbin explained human
behavior.
2. Due to unlimited want and limited resource economical problem,
if wants will turn to limited and resource turn to unlimited then
there will be no Economical problem.
3. With reference to resource there are three type of scarcity
absolute scarcity and relative scarcity. Absolute scarcity means
resource doesn’t exist at all. Relative scarcity means compared
to demand.
4. Resource have relative scarcity.

Nature of economics
1. Micro economics
2. Macro economics
3. Business economics
1. Macro economics
The word micro economics is derived from the Greek word mikros which
means small. Micro economics uses slicing method. Micro economics was
explained by Prof. Alfred Marshall in his “Principle of economics” in 1890.
Micro economics study individual income and study of an economy at
individual level. Micro economics study behavior of particular firm, house
hold individual price, wage, individual industry and particular commodity.

2. Macro economics
The word Macro is derived from the Greek word makros which means
large. Macroeconomics is also known as aggregative economy.
Macroeconomics use lumping method to study the economy study the
economy as a whole. Macroeconomics follows income theory. It was
explained by prof. J.M. Keynes macroeconomics do not study individual
quantity but it studies aggregate of this quantity it does not study per
capita income but study national income, it does study price of commodity
but general price level it does not study individual output but study
national output.

3. Business economics

Popular by prof. Joel dean

Business + Economics = Business economics

When economical applications are used in a business it is called as business
economics. When economical theory is used in business it is business
economics.

Business is a Dynamic activity, it keeps on changing from time to time it

fluctuates and thus a business manager must have possessed all
information about internal issue and external issue, internal issue is solved
by micro economics and external issue is solved by macroeconomics.
Therefore, we can say that business economics include element of micro
as well as macroeconomics
 Internal issue
1. Demand analysis
2. Demand forecasting
3. Production analysis
4. Cost analysis
5. Study of market
6. Study of profit
7. Inventory management
8. Pricing policy
9. Resource allocation
10. Theory of capital & investment
11. Risk & uncertainty

Note: Micro economics is applied to all internal issue that is

operational issue and they are within the organization.

Macro Economics
Macroeconomics is applied to all external issue which are called as environment
issue they cannot be controlled but they can be managed and some sort of
policy intervention are needed following matter comes under macroeconomics:

1. Study of economical system

2. Business cycle
3. Trends in national income, employment, savings & investment.
4. Government policy
5. Working of central bank & commercial bank
6. Study of financial sector
7. Political environment

Explain features of business economics

1. Business economics is a science.
2. Business is based on micro economics.
 3. Business economics include macro analysis.
4. Business economics is an Art.
5. Pragmatic in approach.
6. Inter disciplinary in nature.

Note: Business economics is inter disciplinary or multidisciplinary because it

includes various other subject like mathematics, operation research, marketing,
finance, statistics, econometrics.

Note:

1. Business economics is normative in nature that is its prescriptive in nature

positive science explain what is and it is description in nature whereas
normative science involves value judgement and its prescriptive in Nature
and related with welfare aspect.
2. In the words of Prof. Joel dean business economics is essential component
of applied economics as it includes application of selected quantitative
technique such as regression analysis, capital budgeting, break-even
analysis, cost analysis. Our approach is to focus on the heart of business
economics that is Micro economics business economics is also called as
managerial economics and it is part of applied economics.

UNIT II
Basic problem of an economy & role of price mechanism

Every country across the world have different type of objectives like

1. To increase economical growth of a country

2. To increase production of goods & service
3. To control inflation
4. To improve standard of living but no country in the world is in a position to
accomplished all the objective because of quantitative and qualitative
 shortage of resource. This is a problem if scarcity it is said that there is
a relative scarcity of resource.

What do you mean by central economical problem?

1. A problem that arises due to unlimited want and limited resources is
called as central economical problem.
2. A problem that arise due to scarcity of resource.
3. A problem that arise due to several use of resource.

Explain various central economical problem

1. What to produce?
a. It is to be noted that in every economy economy there is a relative
scarcity of productive resource.
b. Every economy must decide about what to produce, if a country decides
to produce only for consumer then it will produce only final goods. Thus
want of consumer will be satisfied.
c. If a country decides to produce raw material then the want of
producer will be satisfied but this act will satisfy only 1 partner, so a
country must produce for consumer as well as for producer after
deciding what to produce it is important to decide how much to
produce.
2. How to produce?
a. This problem is related with method of production and knowledge of
technology adoption.
b. A labour surplus country must use capital intensive method because
labour is costly.
c. A capital surplus country must use capital intensive method because
labour is costly.

Note: whatever is a nature of technology cost should be minimum and

output should be maximum.

3. For whom to produce?

a. A country must produce for each and every section of society.
 b. If a country produces only of poor, it will create a problem of
deadweight loss.
4. . How to create growth & development?
a. If a country uses all its productive resource for present only then
future growth will be sacrifice.
b. Every country must use resource wisely so that present and future
growth will be maintained.
c. Country must produce more quantity of capital goods for fast growth &
development.

Economical System
A system that position solution to the problem of production, distribution,
exchange, consumption is called as economical system. A system that
provide solution to the problem of what to produce, how to produce, for
whom to produce and how to create growth & development across the
globe various country adopted different economical system to solve their
various problem.

Capitalistic Socialistic Mixed economical

economical system economical system system
1. Propounded by 1. Propounded by 1.It is an
Prof. Adam smith Karl Marx, Leo economical system
1776. Tallsty, maxim where there is a
Gorkha. co-existence of
private sector and
public sector.
2. It is an 2. Factors of 2.It is an
economical production are economical system
system were owned by that includes
factors of managed by merits of
production are government. capitalism and
owned by, socialism and
managed by, exclude demerits
controlled by of both.
Private sector.
 3. The basic 3. Importance of
objective is public sector is
profit. more.
4. All central 4. Primary objective
economical is welfare.
problem are
solved through
market force of
demand & supply
also called free
market economy
lassie faire
policy.
5. Also called as
compound
economy,
controlled
economy, planned
economy,
regulatory
economy.

Note: As on today there is no pure capitalism and no pure socialism

the book which was responsible for the emergence of socialism was
theory of prolateral by Karl Marx & Fredrick Angelis.

Features of all economical system

Capitalistic economy Socialistic economy Mixed economy
1. Right to private 1. Collective 1.Co – existence of
property. ownership. public & private
sector.
2. Freedom of 2. Economic planning 2.Private sector
enterprise.
3. Profit motive. 3. Equal income 3.Public sector.
distribution.
 4. Competition 4. Absence of 4.Joint sector.
consumer choice.
5. Absence of 5. Absence of
government competition
interference.
6. Consumer 6. Minimum role of
sovereignty market mechanism.

Demerits of all economical system

Capitalistic economy Socialistic economy Mixed economy
1. There is a vast 1. No importance is 1.Due to less
level of given to personal importance of
economic in efficiency & government private
equality & social productivity. sector is likely to
injustice. grow this
proportionately.
2. More importance 2. Labours are not 2.It is very
is given to rewarded difficult to strike
property according to a balance between
compared to their efficiency. public sector &
human being. private sector.
3. Difference in 3. Sometime 3.Poor
economical government implementation of
opportunity. monopoly is planning.
uncontrollable.
4. It ignores human 4. This system do 4.Higher rate of
welfare. not provide taxation.
incentive to
work hard in the
forms of profit.
5. Exploitation of 5. It takes away 5.Lack of
labour. the basic rights. efficiency.
6. No security of 6. Restrict the 6.Corruption
employment . freedom of
individual.
7. More production 7. More importance 7.Poor
of luxury goods, of government performance of
less of merit so it results in government unit.
goods. corruption, red
tapism,
favoritism.
8. Economical 8. No freedom of
instability choice to
fluctuation in consumer they
business cycle. accept the
things.
9. More amount on 9. Administered
advertisement & price are not
sales promotion determined on
activity. the basis of
demand & supply,
there is no
proper base for
cost calculation.
10. Formation
of private
sector monopoly.
11. Excessive
materialistic
life.
12. Consumer
are exploited.
 Merits of all economical system
Capitalism economy Socialistic economy Mixed economy
1. Capitalism is a 1. There is a 1. Existence of
self-regulating provision of social private property .
process and work security so citizen
through price are safe.
mechanism.
2. Direct relationship 2. Labors and 2.Competition
between effort consumer and force the private
and reward. protected from sector to promote
exploitation. efficient decision
making.
3. Greater efficiency 3. Minimum standard 3.Proper incentive
and incentive for of living to all. for innovation
profit motive, encourage risk
encourage the taking.
entrepreneur.
4. Fast growth in 4. Cooperative 4.Rapid economic
capitalism, investor mentality among development on the
invest in those citizen. basis of plan.
project which are
profitable.
5. Optimum allocation 5. Business 5.Government
of resource. fluctuation are participation to
minimum. reduce inequality.
6. High degree of 6. Wastage of all kind 6.Some sort of law
operative are avoided to restrict
efficiency. through planning. monopoly and
protect
environment
7. Cost of production 7. Balanced economic
is minimize. development.
8. Better quality 8. Equal distribution
goods and of income & wealth.
maximum
satisfaction to
consumer.
 9. Capitalism rewards
man of initiative
and punish
imprudent.
10. Entrepreneur
are willing to take
risk.
11. Maximum amount
of liberty and
freedom at work.
12. Incentive for
innovation and
technological
upgradation.

How capitalistic economy solve their central problems?

It is a miracle to see how capitalistic economy works but by using
impersonal force of demand and supply all central problems can be
solved.

1. What to produce: - A producer produces the goods as per demand if

the demand for goods and protect is more it is a clear signal to
producer
Demand increase supply increases = Profit
2. How to produce: - A producer under capitalism intends to reduce
cost of production so that he can adjust the price and makes profit so
producer adopts the technology where cost is less that means adoption
of modern technology.
3. Whom to produce: - Being price mechanism capitalistic produce only
for those who have buying capacity and purchasing power.
4. Decision about consumption, savings and instrument: -
capitalistic economy works on the model of consumption so more the
consumption growth will be faster.
Savings is influenced by rate of interest, nature of the person
Investment is influenced by rate of return.