• AN INTRODUCTION TO BUSINESS ECONOMICS

Course: BBA-I
Faculty: Dr. Priya Sharma

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 Objectives

• To introduce key economic concepts like scarcity, rationality,

equilibrium, time perspective and opportunity cost.
• To explain the basic difference between microeconomics and
macroeconomics.
• To help the reader analyze how decisions are made about
what, how and for whom to produce.
• To define businee economics and demonstrate its importance
in managerial decision making.
• To discuss the scope of managerial economics and its
relationship with various other disciplines and functional areas.

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 What is Economics?

• Discusses how a society tries to solve the human problems of unlimited wants and scarce
resources.
• Scientific study of the choices made by individuals and societies with regard to the
alternative uses of scarce resources employed to satisfy wants.
• Theoretical aspect and an applied science in its practical aspects.
• Not an exact science; An “art” as well (Nature of economics)
• A social science
• Deals with the society as a whole and human behaviour in particular
• Studies the production, distribution, and consumption of goods and services.
• A science in its methodology, and art in its application.

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 Types of Economic Analysis

• Positive and Normative

• Positive economics: “what is” in economic matters
• Establishes a cause and effect relationship between variables.
• Analyzes problems on the basis of facts.

• Normative economics: “what ought to be” in economic

matters.
• Incorporates value judgments about what the economy
should be like.

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 Types of Economic Analysis

• Micro and Macro

• Microeconomics (“micro” meaning small): study of the behaviour
of small economic units
• An individual consumer, a seller/ a producer/ a firm, or a product.
• Focus on basic theories of supply and demand in individual
markets
• Macroeconomics (“macro” meaning large): study of
aggregates.
• Industry as a unit, and not the firm.
• Focus on aggregate demand and aggregate supply, national
income, employment, inflation, etc.

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 Types of Economic Analysis
contd..

• Short Run and Long Run

• Short run: Time period not enough for consumers and
producers to adjust completely to any new situation.
• Some inputs are fixed and others are variable

• Long run: Time period long enough for consumers and

producers to adjust to any new situation.
• All inputs are variable
• Decisions to adjust capacity, to introduce a larger plant or
continue with the existing one.
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 Types of Economic Analysis

• Partial and General Equilibrium

• Partial equilibrium analysis: Related to micro analysis
• Studies the outcome of any policy action in a single market only.
• Equilibrium of one firm or few firms and not necessarily the industry or
economy.

• General equilibrium: explains economic phenomena in an economy

as a whole.
• State in which all the industries in an economy are in equilibrium.
• State of full employment

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Why Assumptions
• What are assumptions in economics?
• Assumptions are initial conditions made before a
micro or macroeconomic analysis is built.
• Sometimes assumptions are used for simplification
• Assumptions can be used to isolate the effects of a
change in one variable on another
• Many assumptions are criticised for being
unrealistic

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 Business Economics

• Application of economic theory and the tools of analysis of decision science

to examine how an organisation can achieve its objectives most effectively
• Study of allocation of the limited resources available to a firm or other unit
of management among the various possible activities of that unit
• Applies economic theory and methods to business and administrative
decision-making
• Application of economic principles and methodologies to the decision-
making process within the firm or organization

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 Business Economics and
Functions of Management

• All functional areas have to find the most efficient

way of allocating scarce organizational resources
• Managerial economics:
• Facilitates the process of evaluating relationships
between functional areas
• Helps in making rational decisions across managerial
functions.

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 Business Economics and
Functions of Management

• Financial Management
• From where to collect resources
• Equity
• Debt
• How to allocate resources
• How much profit to be retained/distributed
• Human Resource Management
• Recruitment
• Wage and Salary
• Training and development
• Retirement

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 Business Economics and
Functions of Management

• Marketing Management
• Which product
• For whom
• What price
• How to sell
• Operations Management
• Which technology
• Inputs
• Processing
• Information System Management
• Communication channels
• Use of information Technology

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 Relationship with Other Disciplines

Economic Theory
Microeconomics Quantitative Analysis
·Theory of firm ·Numeric and algebraic analysis
·Theory of consumer behaviour (demand) ·Optimization
·Production and cost theory (supply) ·Discounting and time value of money
·Market structure and competition techniques
·Price theory ·Statistical estimation and forecasting
Macroeconomics
·Game theory
·National income and output
·Business cycle
·Inflation

Business Economics

Solutions to Business Decision Making

·Quantity and quality of product
·Price of product
·Marketing Management
·Financial Management
·Human Resource Management
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·Research and Development
 Difference between economics and business economics
Economics Business

Business is a subset of Economics and is a narrow concept when compared to

Economics is a wider concept.
Economics.

All the Economics activities need not be a profit motive. All Business has an objective to earn a profit.

Economics is the study of how participants use the limited resource to meet Business is an economic activity where goods and services are exchanged for
their unlimited needs. money.

Key metrics of an Economics are Percapita Income, Exchange rate of Key metrics for business are Gross profit margin, Net Profit Margin, Asset
currencies, GDP growth rate, Fiscal Deficit, Repo rate etc. turnover ratio,etc.

Economics tries to maximize the welfare of society. Business tries to maximize the wealth of its shareholders.

Economics addresses key issues such as Poverty, Taxation, Unemployment, Business addresses issues such as product positioning, profit maximization,
Interest rates, Government expenditure etc. Cost minimization, product differentiation etc.

Economics emphasizes on how scarce resource can be put for best use. 14
Business need not always emphasize on the best use of scarce resources.
 Nature of Business Economics
• Micro as well as Macro
• Applied microeconomics: demand analysis, cost and production analysis,
pricing and output decisions
• Macroeconomic: national income, inflation and stages of recession and
expansion
• Normative
• Prescriptive: States what firms should do in order to reach certain objectives.
• Decides on whether or not the probable outcome of a managerial decision
is desirable.
• Decisions Resulting in Partial Equilibrium
• Decisions taken by any firm would relate to the equilibrium of that particular
firm.
• Deals with partial equilibrium analysis

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Scope of Business Economics

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 Summary

 Economics studies the choices made by individuals and societies in regard

to the alternative uses of scarce resources which are employed to satisfy
unlimited wants.

 Microeconomics is the study of the behaviour of individual economic

units, such as an individual consumer, a seller, a producer, a firm, or a
product.

 Macroeconomics deals with the study of aggregates, the economy as a

whole.

 Ceteris paribus is a Latin phrase, literally translated as “with other things

(being) the same”.

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 Summary

 The assumption of rationality means that

consumers and firms measure and compare
the costs and benefits of a decision before
going ahead for that decision.

 Partial equilibrium analysis studies the

outcome of any policy action in a single
market only, while general equilibrium
analysis seeks to explain economic
phenomena in an economy as a whole.

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 Summary

 Concept of Time value of money tells that Value of money

depreciates with time.

 Business economics is a means to finding the most efficient

way of allocating scarce organizational resources and
reaching stated objectives. It is micro as well as macro in
nature; it has a normative and deals with partial
equilibrium.

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 Summary

• The knowledge of business economics helps to understand the

interrelationships among the various functional units of any firm
(namely production, marketing, HR, finance, IT and legal)

• Decision sciences provide the tools and techniques of analysis used in

managerial economics, in particular numerical and algebraic analysis,
optimization, statistical estimation and forecasting.

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