LECTURE 1: BUSINESS ECONOMICS

MEANING OF BUSINESS ECONOMICS

 Managerial economics is a science that deals with the application
of various economic theories, principles, concepts and techniques
to business management in order to solve business and
management problems. It deals with the practical application of
economic theory and methodology to decision making problems
faced by private, public and nonprofit making organizations
 • According to Lord Robins,

"Economics is the science which studies human behavior as a

relationship between ends and scarce means which have
alternative uses".
 According to SPENCER AND SIEGELMAN“

Business Economics is the integration of economictheory with

business practice for the purpose of facilitating decision making
and forward planning bymanagement".
 Economics is the study of human beings (e.g., consumers, firms) in
producing and consuming goods and services in the midst of scarcity of
resources. Managerial or business economics is an applied branch of
organising and allocating a firm’s scarce resources to achieve its
desired goals
 Managerial economics or business economics is economics applied in
decision-making. Business economics, thus, intervenes economic
principles and business. Business managers apply economic laws and
principles while presenting business problems and their ways of
solutions. Thus, business economics can be defined as the application
of economic analysis to business problems faced by an enterprise.
 Managerial economics or business economics is a ‘special branch of
economics that bridges the gap between abstract economic theory and
managerial practice. Through a process of application of the principles,
concepts and tools of economics to solve the managerial problems of a
business enterprise, business economics is used.
CHARACTERISTICS OF BUSINESS ECONOMICS

1. Micro Economic Nature:

 Business Economics is micro economic in its nature because it deals
with matters of a particular business firm only.
2. Use of Economic Theories:
 Business Economics uses all economictheories relating to the profits,
distribution of income etc.
3. Realistic One:
 Business Economics is a realistic science. It studies all matters
concerning business organization by considering the real conditions
existing in the business field.
4. Normative Science:
 Business Economics is a normative science. It studies the matters
concerning the aims and objectives of a business firm. It determines the
methods to be adopted for achieving such objectives. It also makes
enquiry into the good and bad in decision making. Hence it is a normative
science.
5. Macro-Economic Uses:
 Even though Business Economics has the nature of Micro-
Economics, it also uses Macro-Economic approaches frequently.
Certain matters in Macro-Economics like Business Cycles,
National Income, Public Finance, Foreign trade etc. are essential
for Business Economics. So, Business Economics uses the
macro-economic phenomenon for taking business decisions.
6. Economics is a science or an art.
• It is considered as science if it is a systemized body of knowledge
which studies the relationship between cause and effect.
• Art is nothing but practice of knowledge.
• Where as science teaches us to know and art teaches us to do.
• It is science in which methodology and art in its application.
NATURE AND SCOPE OF BUSINESS
ECONOMICS
The scope of Business Economics consists of the following:
1. Demand Forecasting:
 Demand forecasting is an important topic studied in Business
Economics. Every business firm initiates and continues its
production process on the basis of the anticipation of more
demand for its goods in the future. It makes research and
conducts market survey with a view to know the tastes and
fashions of the consumers. It pools up the resources and starts
production for meeting the future demand. Business
Economics analyses the demand behavior and forecasts the
quantity demanded by the consumers
2. Cost Analysis:
Business Economics deals with the analysis of different costs incurred
by the business firms. Every firm desires to minimize its costs and
increase its output by securing several economies of scale. But it does
not know in advance about the exact costs involved in production
process. Business Economics deals with the cost estimates and helps the
entrepreneurs with the cost analysis of their firm.
3. Profit Analysis: Every business firm aims to secure maximum profits.
But at the same time it faces uncertainty and risk in getting profits. It has
to make innovations in production and marketing of its goods. Business
Economics deals with the matters relating to profit analysis like profit
techniques, policies and break-even analysis.
4. Capital Management: Capital manageIt denotes planning and control
of capital expenditure in business organisation. It studies matters like
cost of capital, rate of return, selection of best project etc.ment is another
topic dealt in Business Economics.
DIFFERENCE BETWEEN ECONOMICS AND
BUSINESS ECONOMICS
Economics
 1. It is more comprehensive and
wider in scope.
 2. It is concerned with body of
principles.
 3. It includes both micro and
macro.
 4 . It is based on no. of assumption
 5. It is both positive and normative
 6. It discusses general economic
problems
 7. Model building is the main
function of the economist
Business Economics
 1. It is too narrow and has limited scope.
 2.It deals with the application of
economic principles to the problems
faced.
 3. It is micro in nature.
 4. The scope of assumptions are limited
as it is concerned with application of
theories.
 5. It is mainly a normative science
 6. It deals with the problems of a firm
only
 7. Decision making and forward planning
is the main function of the business
economist.
IMPORTANCE OF BUSINESS
ECONOMICS
Business Economics is a useful subject. In fact, it is the most significant of all social
sciences. Its study is highly useful for analysing and understanding the various
economic problems. Its study brings utility to all sections of the people. Business
Economics became the intellectual religion of the day. Business Economics is
described as both light giving and fruit bearing science. It enriches our knowledge
(light) and brings results (fruits).
The theoretical and practical utility or significance of Business Economics is explained
from the following points:
THEORETICAL SIGNIFICANCE
1. Understanding Economic Behavior:
The study of Business Economics helps us to understand the economic behavior of human
beings.
2. Working of the Economic System
Business Economics explains the conditions which influence the progress of the economy.
It makes suggestions for overcoming the complicated problems faced by the people and
the government in various economic systems. Hence it has great significance for
understanding the working of the economic system.
3. Intellectual Value
The study of Business Economics sharpens the intellectual calibers of individuals. It
imparts certain qualities like rational behavior, proper allocation of resources etc.
4. Economic Tools
Mrs. Joan Robinson described Economics as a box of economic tools. It provides a good
knowledge regarding the nature, causes and effects of various economic phenomena.
5. Economic Growth
Business Economics suggests various ways and means for maintaining the growth rates
in the developed economies. It also analyses the factors obstructing the economic
growth of these countries.
6. Economic Development
Developing countries aim at achieving economic development within a short span of
time. Business Economics enables us to understand the nature and conditions
necessary for the successful organisation of business firm.
7. Performance of the Economy
Business Economics helps us to assess the performance of the economy. We can judge
the position, progress and future of an economy.
8. Economic Planning
Economic planning is an important branch of economics. Economics
provides a good knowledge and information regarding the
techniques of Economic Planning. It sharpens our mental abilities
by clearly explaining the types, aims and objective of economic
plans.
9. Prediction
Business Economics serves as the best means for predicting the
economic events. It helps us to predict the consequence of various
economic phenomena.
10. Ethical Value
Business Economics inculcate certain ethical norms like honesty,
responsibility and adjustability etc. It upholds the moral and cultural
values of individuals. It makes them honest and dignified citizen.
ROLE OF A BUSINESS ECONOMIST
 The term role refers to the behavior and action exhibited by a
person in a given situation or environment.
 1. To identify various business problems, their causes and
suggest remedial measures.
 2. To provide a quantitative base for decision making and
forward planning.
 3. To act as a thinker.
 4. To act as economic advisor to the firm.
 5. To respond to the dynamic changes taking place in market
situation.
 6. To conduct various types of research studies.
 7. To synthesize various policies.
 8. To have complete information about the environment factors.
FUNCTIONS OF A BUSINESS ECONOMIST
Two important functions of a business economist are
1.Decision making
2.Forward Planning
Decision making is essentially a process of selecting the best
out of many alternative opportunities that are open to
management. It is a management function and part of
business activity.
Forward planning refers to planning in advance for the future
that is deciding future course of action of a firm. A business
economist must be sufficiently intelligent enough to think in
advance prepare a sound plan take all possible precautionary
measures to meet all types of challenges of the future
business.`
MICROECONOMICS

• Microeconomics is the study of the economic system

from the perspective of households and business firms. It
focuses on the nature of individual consumption and
production units within a particular market or economic
system. It is the study of decisions that people and
organizations make with regard to the allocation of
resources and prices of goods and services.
• Microeconomics also takes into account various policies
like tax policies and government regulations at the
individual level and the firm level. Thus, it encompass
demand and supply.
Explanation of Microeconomics:
 Microeconomics and allocation of resources.

 The microeconomic theory takes the total quantity of resources as

given. It seeks to explain how they are allocated to the production of
goods. The allocation of resources to the production of goods depends
upon the price of various goods and the prices of factors of production.
Microeconomics analyses how the relative prices of goods and factors
are determined. Thus, the theory of product pricing and the theory of
factor pricing (rent wages, interest and profit) fall within the domain of
micro economics.
• Microeconomics and economic efficiency.
The microeconomic theory seeks to explain whether the problems of
scarcity and allocation of resources so determined are efficient.
Economic efficiency involves (1) efficiency in consumption (2) efficiency
in production and distribution and (3) over all economic efficiency. The
price theory shows under that conditions these efficiencies are achieved.
DIFFERENCE BETWEEN MICRO AND
MACRO ECONOMICS
Micro economics Macro economics
 1. It studies the large part of
1. It studies the small
part of the economy
the economy
 2. It study the whole
2. It is a study of individual
units of the economy economy
3. Partial picture of the  3. It gives total picture of the
economy economy
4. It covers limited area of  4. It covers a wider scope.
study
 5. It gives us birds eye view
5. It gives worms eye view
of the economy of the economy
IMPORTANCE OF MICROECONOMICS
 Before Keynesian revolution, the body of economics mainly consisted of
micro economics. The classical economics as well as the neo-classical
economics belonged to the domain of micro economics. The importance
and uses of micro economics in brief are as under.Helpful in understanding
the working of private enterprise economy. The micro economics helps us
to understand the working of free market economy. It tells us as to how the
prices of the products and the factors of production are determined.
✓ Helps in knowing the conditions of efficiency. Micro economicshelp in
explaining the conditions of efficiency in consumption,production and in
distribution of the rewards of factors ofproduction.
✓ Working economy without central control. The micro economics reveals
how a free enterprise economy functions without any central control.Study
of welfare economy. Micro economic involves the study of welfare
economics.
LIMITATIONS OF MICROECONOMICS
Microeconomics despite its many advantages is not free from
limitations. They in brief are,
➤ Microeconomics deals with the individual perspective, not
the aggregate economy. Therefore, what is applicable to an
individual may not true for economy. Microeconomics uses
assumptions such as, Assumption of full employment in the
economy which is unrealistic and that other things will
remain unchanged when one particular variable is changed.
➤ Assumption of laissez fair policy which is no longer in
practice in any country of the world.
➤ It does not analyze the economy as a whole. It deals with
specific parts of the economy and tries to provide solution
to specific problems.