Business Economics

Chapter 1, Introduction to Business Economics

Dr.Dimple Pandey
• Meaning of Economics

• Difference between economics and business economics

• Microeconomics and Macroeconomics

• Laws of Economics

• Role of Economics in Decision Making

• GNP

• Business Cycle

• Inflation
Why Study Economics

To Learn a Way of
Thinking

To understand Society

To understand Global
Affairs

To be an Informed Voter
Economics and Choices

Limited Unlimited
Resources Wants

Scarcity

Choice

What to Produce?
How to Produce?
For whom to Produce?
 Introduction

• Economics is a discipline that studies the behaviour patterns of human beings. It

analyses how individuals, households, organisations, and nations use their scarce
resources to achieve maximum profit.
 Meaning Of Economics

• Economics and a household: Every household needs money to meet their daily expenses. In
‰
this manner, they sell their labour to firms, producers, or government agencies and in return
they get a limited amount of money called income. Every household wants to maximise its
satisfaction by spending its limited income on various products.
• Economics and society: Economics also helps a society to ensure optimal allocation of scarce
and limited resources. If a large amount of inputs is used to produce a small amount of
output, then there will be wastage of resources. It will create imbalance for economy and the
society as a whole. Understanding economics will contribute to better planned economy.
Hence, economics provides way to ensure better government policies which affect families,
jobs and lives of residents.
• Economics and nation: Every nation engaged in three basic economic activities which are
undertaken for the monetary benefits. These economic activities are production, consumption
and distribution.
• Economics and World- At the global level, international economics provide a way to study
economic transactions among different countries.
 Assumptions in Economics

• Consumers have rational preferences: This assumption states that consumers act
in a rational manner and focus on satisfying their needs. It is also assumed that
the tastes of consumers remain constant for a long period

• Existence of perfect competition:-It is assumed that homogenous products exist in

the market and both buyers and sellers cannot affect prices.

• Existence of equilibrium:-Equilibrium is considered to be the ideal position for

decision making in which there is no deviation and it is a position where
economic forces are balanced.
 Nature Of Economics

• Economics as a science- As results observed in science are measurable and based

on facts, economics also endeavours to find a relationship between cause and
effect and provides measurable results.

• Economics as a social science: Economics is also considered as social science as it

deals with studying the behaviour of human beings and their relationships in a
society.

• Economics is an art: Economics can considered to be an art because it involves

the study of various issues related to human psychology, philosophy, history and
society. Also most concepts in economics are based on assumptions and these
assumptions cannot be considered as a rule of thumb in every scenario.
 Nature of Economic Laws

• Lack of exactness: An economist can only state the events that are likely to happen in
the future but cannot be assured of their occurrence. There are three reasons for the
lack of exactness in economic laws. Firstly, these laws are concerned with human
behaviour which is dynamic. The uncertainty of human behaviour makes it difficult to
predict the actual course of action for the future. Secondly, due to changes in human
attitudes, perceptions, and preferences, factual data is difficult to be collected, which
is the base of economic laws. Thirdly, the business environment is so dynamic that
any change in it will simply falsify the economic prediction.

• Hypothetical: Economic laws are hypothetical i.e., conclusions are drawn from certain
assumptions or hypotheses which means economic laws do not differ from other
scientific laws. The laws of science also start from certain hypotheses and deduce
certain consequences.

• Statement of propensity: Predictions are Difficult- Economic laws require certain

conditions to be fulfilled to be true. However, these conditions cannot be exactly
predicted.
 Scope Of Economics

• International Arena: With the advent of globalisation and cross-border

integration, economic concepts are applied in order to conduct successful business
dealings between countries.

• Public finance: Economic concepts are also applied to assess the government’s
collection of taxes from the users of public goods as well as expenditure on
production and distribution of these goods to the general public.

• Welfare: Economic theories and concepts are used to analyse the growth and
development of low-income countries.

• Health: Economic concepts are also applicable in assessing the problems faced in
promoting health in different countries.
 Scope Of Economics

• Environmental studies: Economic concepts are used to analyse the utilisation and
depletion of natural resources.

• Urban and rural development: In urban development, the scope of economics

covers the analysis of different urban issues such as crime, education, public
transit, housing, and local government finance. On the other hand, in rural
development, economics can be used to analyse the shortage of natural resources,
obtain the best price for production, study constraints of productivity, adapt to
climate change, etc.
 Approaches of Economics- Positive And Normative
Approach

• Positive economics means more focus on data, facts and figures rather than personal
perspectives. The statements are supported by relevant information.

• Normative economics focuses more on personal perspectives and opinion rather than
facts and figures. Here the statements are based on an individual’s point of view.

• Normative economic statements are opinion based, so they cannot be proved or

disproved. “Government should provide basic healthcare to all citizens" is a normative
economic statement. This statement is based on opinions about the role of government
in individuals' lives, the importance of healthcare, and who should pay for it.
Approaches of Economics- Positive And Normative
Approach
 Economic System
• An economic system is a means by which societies or governments organize
and distribute available resources, services, and goods across a geographic
region or country.

• The way scarce resources get distributed within an economy determines the
type of economic system.

Market Command Mixed

Economy Economy Economy
 Market economy

• A market economy is an economic system in which the decisions

regarding investment, production and distribution are guided by the
price signals created by the forces of supply and demand.
 Command Economy

• A command economy is a system where the government, rather than the

free market, determines what goods should be produced, how much
should be produced, and the price at which the goods are offered for sale
 Mixed economy

• A mixed economic system is a system that combines aspects of both

capitalism and socialism. A mixed economic system protects private
property and allows a level of economic freedom in the use of capital,
but also allows for governments to interfere in economic activities in
order to achieve social aims.
 Economic Systems-Summary

On the basis of who takes the decisions in economy, there are different types of
economic systems

1.Market economy – Demand supply forces

2.Command economy – Central authority
3.Mixed economy – Both
Recap
 Laws of Economics

Laws of Economics

Law of Demand-
Law of Supply-
Explains
Explains producer’s
consumer’s
behaviour
behaviour
 Microeconomics and Macroeconomics

Economics

Microeconomics
Macroeconomics

Deals with the behaviour of Deals with aggregate

individual economic units economic quantities
 Microeconomics vs Macroeconomics

Microeconomics

The study of decision making undertaken by individuals (or households) and by

firms

Like looking though a microscope to focus on the smaller parts of the economy
•Decision of a worker to work overtime or not
•A family’s choice of buying a television
•An individual firm advertising

1-22
Microeconomics versus Macroeconomics (cont'd)

Macroeconomics

The study of the behavior of the economy as a whole

Deals with economywide phenomena

•The national unemployment rate
•The rate of growth in the money supply

1-23
Microeconomics versus Macroeconomics (cont'd)

Macroeconomics deals with aggregates, or totals—such as total output in an

economy.

Modern economic theory blends micro and macro concepts.

1-24
 Identify Micro and Macro Economics

• What determines how households and individuals spend their budgets? What
determines what prices a firm will charge?

• What determines how many workers it will hire?

• What determines how many jobs are available in an economy?

• What causes the economy to speed up or slow down?

 Identify Micro and Macro Economics

• What determines how households and individuals spend their budgets? -Micro
Economics

• What determines what prices a firm will charge? - Micro Economics

• What determines how many workers it will hire? – Micro Economics

• What determines how many jobs are available in an economy? - Macro Economics

• What causes the economy to speed up or slow down? -Macro Economics

 Macroeconomic Concepts

• Circular Flow

• Inflation

• GDP/GNP

• Business Cycle
 Circular flow of economy

A continuous flow of production, income and expenditure is known as circular flow of

income. It is circular because it has neither any beginning nor an end. The circular
flow of income involves two basic assumptions
Two sector model
❑Refers to a simple economic
model which describes the
reciprocal circulation of income
between producers and
consumers.

❑In the circular flow model,

the inter-dependent entities of
producer and consumer are
referred to as "firms" and
"households" respectively and
provide each other with factors
in order to facilitate the flow of
income.
 Circular Flow of income and expenditure

• Economy is an integrated system of production, exchange and consumption

• Two types of economic transactions take place in the process

1. Real flows or flow of goods and services

2. Money flows or flow of money

• Entire system can be viewed as a circular flow.

• Four sectors in the economy – household, business, govt and foreign sector

• All of them are combined to have 3 models of circular flow

 Inflation

➢ Inflation is defined as a sustained increase in the price level or a fall in the value
of money.
➢ When the level of currency of a country exceeds the level of production, inflation
occurs.
➢ Value of money depreciates with the occurrence of inflation.
Types of Inflation Based on Rates of Inflation

Types of Inflation Rate of Inflation

Creeping/ Moderate Inflation Less than or equal to 3 percent

Walking Inflation More than 3 but less than 10 percent

Running Inflation 10 percent or above

Galloping Inflation Equal to 100 percent or above

Hyper Inflation Equal to 1000 percent or above

Identify the below

DEFLATION
 Deflation

• It refers to continuous fall in price level. This happens in recession period. If it

last for longer period, it harms the growth & development of the economy.

• Deflation is generally caused by reduced demand and consumption in the

economy.

• Reduced expenditure by consumers, business people and government brings

down demand and thus causes deflation.

• Lower demand means reduced takers for goods and services and in this way
prices of commodities will come down to make them saleable
Gross Domestic Product

https://www.youtube.com/watch?v=3E
H5GwItrcc
 GDP

• GDP is one of the primary indicators used to gauge the health of a country’s
economy

• GDP is the sum of money value of all goods and services produced within the
domestic territories of a country during an accounting year.
• It includes income from exports and payment made on imports during the year.

• GDP=Consumption+Investment+GovernmentExpenditure+(Exports-Imports)

• Consumption= Household final consumption expenditure-Durable goods,Non

durable, Services-Food, Medical expenses, rent
• Investment= Purchase of machinery, construction of new mine
• Government expenditure= Salaries of public servants, purchase of defence items
Gross National Product
 GDP vs GNP

• GNP measures the levels of production of all the citizens or corporations

from a particular country working or producing in any country. For
example, the American GNP measures and includes the production
levels of any American or American-owned entity, regardless of where in
the world the actual production process is taking place, and defines the
economy in terms of the citizens output.

• GNP=GDP+Net factor income from abroad

Distinction between Economics and Business Economics

• Economics is a traditional subject that has prevailed from a long time, while
business economics is a modern concept and is still developing.

• Economics mainly covers theoretical aspects, whereas business economics covers

practical aspects.

• In economics, the problems of individuals and societies are studied. On the other
hand, in business economics, the main area of study is the problems of
organisations.

• In economics, only economic factors are considered, whereas both economic and
no-economic factors are considered in business economics.

• Both microeconomics and macroeconomics fall under the scope of economics. On

the other hand, only microeconomics falls under the scope of business economics.
 Think!!

• What are the different things you need to keep in mind when starting up a new
product in the market?
 Decision Problems faced by firms

What should be the price of the product?

What should be the size of the plant to be installed?

How many workers should be employed?

What is the optimal level of inventories of finished

products, raw material, spare parts, etc.?

What should be the cost structure?

 Significance of Business Economics

With the advent of globalisation and rise in competition, it is of paramount

importance for managers to make rational decisions.

Managers should have a clear understanding of different economic concepts,

theories, and tools.

Business economics is a specialised discipline of economics that undertakes a study

of various economic theories, logics, and tools used in business decision making.

It applies various economic concepts, such as demand and supply, competition,

allocation of resources, and economic trade-offs, to help managers in making better
decisions.
 Business Cycle
Business cycle is the periodic up and down movements in economic
activities(production, employment and income)
Peak
Peak

Trough
 Business Cycles

The change in business activities due to fluctuations in economic activities over a

period of time is known as a business cycle. A business cycle comprises four phases

Peak-
Expansion- business Trou-heavy
an increase reaches at losses and
Contraction
in various the highest falls at the
-recession
economic level and lowest
factors the profits pointgh
are stable
 Lets Sum Up

• Economics can be defined as the study of optimum utilisation of scarce resources

by individuals, households, organisations, and nations to satisfy their wants and
needs

• The scope of economics includes various fields, such as public finance, health,
welfare, environmental studies, and international area.

• Business economics can be defined as an application of economic concepts,

theories, and tools for effective decision making in organisations.

• Both economics and business economics are different from each other. In
economics the focus is on the optimum utilisation of scarce resources, whereas
business economics emphasises on the managerial decision making in
organisations.
 Lets Sum Up

• Business cycles can be described as change in business activities due to

fluctuations in economic activities over a period of time. It consists of four
phases, namely expansion, peak, contraction, and trough.
 Quiz(True/False)
1. Which of the following is not an assumption of economics?
a. Consumers have rational preferences.
b. Existence of non-profitable competition
c. Existence of equilibrium
d. Existence of perfect competition

2. ___________ is that branch of economics which is objective and descriptive in

nature.
a. Positive approach
b. Normative approach
c. Management approach
d. Business approach

3. ___________ is a branch of economics that deals with the study of economic

behaviour of individual organisations or consumers in an economy.
 Quiz-Answers
1. Which of the following is not an assumption of economics?
a. Consumers have rational preferences.
b. Existence of non-profitable competition
c. Existence of equilibrium
d. Existence of perfect competition

2. ___________ is that branch of economics which is objective and descriptive in

nature.
a. Positive approach
b. Normative approach
c. Management approach
d. Business approach

3. Microeconomics is a branch of economics that deals with the study of economic

behaviour of individual organisations or consumers in an economy.