The slide gives the basic ideas for Business Economics

1. Business Economics
- Ritesh Parajuli

2. Introduction: Business Economics
 Refers to the application of economic theories and principles along with the tools of decision sciences by
the managers
 In order to solve problems associated with business decision making.

3. Business Decision Problems
Economic Theories
Tools of Decision
Making
Micro Economics
Macro Economics
Mathematics
Statistics
Optimal Solution to the
business problems

4. Scope of Business Economics (Internal Issues)
 Demand Analysis and Forecasting- Guidance by managing market position through analyzing
influencing products.
 Cost and Production Analysis- Cost estimation from firm’s accounting records and production process
and their increment accordingly.
 Pricing Decisions, policies and practices- Success depends on how correctly the pricing decisions are
taken. (Price determination, differential pricing, price forecasting, etc.)
 Profit Management- In a world of uncertainty, it is difficult. (Profit Policies, techniques of profit
planning like Break-even analysis, share of dividend & retained earnings.)
 Capital Management- Planning and control of capital expenditure. (Cost of capital rate of return and
Selection of projects.)

5. Use of Business Economics in Decision Making
 Analysis of entire firm- Pattern of spending by some family gives idea of whole system.
 Determination of pricing factors- Emphasizes on the determination of particular products and the
pricing factors for future oriented decisions.
 Economic Welfare- Discusses about How can Individuals maximize their satisfaction.
 Evaluation of economic polices- Analysis of economic behavior (Formulation of policies related to
money, investment, productions, wages, taxes & Public spending)
 Problem of business firms- Deals with operational and environmental issues due to technical,
managerial or financial constraints for the smooth running.
 Making of Predictions- Basis for predictions about the future. Consider all factors before making
decision.

6. Basic Concept and Principles of BE
 Measuring Profit;
 Production Possibility Curve;
 Opportunity Cost; And
 Risk And Uncertainty.

7. Measuring Profit(Residual Income)
 Profit: The positive difference between total cost and total revenue. Its concept is different for
different professions.
 Explicit Cost: Cost which are used for Hiring.
 Operating Expenses: Exp. Made to factors of production which are not owned by the
entrepreneur.
 Opportunity Cost: Whatever you receive from another best alternative. Not seen in the books of
account.

8. Formulas to remember
 Accounting/Business Profit = Total Revenue – Explicit Cost
 Economic Profit = Business Profit – Implicit/Opportunity Cost
“or”
Economic Profit = Total Revenue – (Explicit Cost + Implicit Cost)

9. Examples of Accounting and Economic Profit

10. Difference between Accounting/Business Profit
& Economic Profit
Topics Business/Accounting Profit Economic Profit
Definition: Net Income earned during an accounting
period
Surplus remaining after deduction of Total Cost
from Total Revenue
Relevance: Practical from Financial Perspective Not the precise picture, some are estimated
Benefit: Reflects profitability of the firm Highlights efficiency of the firm in resource
allocation
Formula: Total Revenue – Explicit Cost Total Revenue – (Explicit + Implicit Cost i.e.
Opportunity Cost)

11. Production Possibility Curve (PPC)
0
2
4
6
8
10
12
14
16
0 1 2 3 4 5
CapitalGoods
Consumer Goods
Combination Capital Goods Consumer Goods
A 15 0
B 11 1
C 8 2
D 6 3
E 5 4
F 0 5
Assumptions:
• Economy only employ two goods i.e. Capital Goods
and Consumer Goods.
• There is full employment of resources.
• No change in the state of Technology
Definition:
It is a graphical representation of the combination of two goods that
the economy is capable of producing by full utilizing available
resources.

12. Opportunity Cost:
 Opportunity cost represents the benefits an individual, investor or business misses
out on when choosing one alternative over another.
 While financial reports do not show opportunity cost, business owners can use it
to make educated decisions when they have multiple options before them.
 Opportunity cost is regarded as the Implicit Cost.

13. Uncertainty & Risk:
Uncertainty Risk
1. One and more outcomes but cannot
be measured
One and more outcome with Probability
2. Example:- Demonetization
Consequences
Head and tail of a coin

14. Thank You