Business Economics

Chanderprabhu Jain College of Higher Studies & School of Law
Plot No. OCF, Sector A-8, Narela, New Delhi – 110040
(Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India)
Semester: First Semester
Name of the Subject:
Business Economics

Business Economics
• According to Mc Nair and Meriam, Business
economic consists of the use of economic modes of
thought to analyse business situations.
• Siegel man has defined business economic (or
business economic) as the integration of economic
theory with business practice for the purpose of
facilitating decision-making and forward planning by
management.

Scope of Business Economics
As regards the scope of business economics, no uniformity of
views exists among various authors. However, the following
aspects are said to generally fall under business economics.
• 1. Demand Analysis and Forecasting
• 2. Cost and production Analysis.
• 3. Pricing Decisions, policies and practices.
• 4. Profit Management.
• 5. Capital Management.

Application of business economics
• Specific Decisions : There are several specific decisions that business economist
might have to take. Specific decisions relate to :
– Demand forecasting
– Market research
– Economic analysis of the industry
– Investment appraisal
– Security management analysis
– Advice on foreign exchange management, etc .
• General Decisions : Business is influenced not only by what decisions are taken
within the firm but also by the general business environment. General decisions
are based on two factors :
– External Factors : This includes all those factors which are outside the control of business. The firm
can only make timely adjustment to these external factors.
– Internal Factors : This includes all those factors which are within the control.

Various economics concepts
• Opportunity Costs
• Time Value Of Money
• Marginalism and Incrementalism
• Risk, Return And Profit

Consumer Behaviour
• The theory of consumer s behaviour seeks to explain the
determination of consumer s equilibrium. Consumer s
equilibrium refers to a situation when a consumer gets
maximum satisfaction out of his given resources. A consumer
spends his money income on different goods and services in
such a manner as to derive maximum satisfaction. Once a
consumer attains equilibrium position, he would not like to
deviate from it. Economic theory has approached the problem
of determination of consumer s equilibrium in two different
ways: (1) Cardinal Utility Analysis and (2) Ordinal Utility
Analysis

Utility Analysis or Cardinal
Approach
• The Cardinal Approach to the theory of consumer behaviour is
based upon the concept of utility. It assumes that utility is
capable of measurement. It can be added, subtracted,
multiplied, and so on. According to this approach, utility can
be measured in cardinal numbers, like 1,2,3,4 etc. Fisher has
used the term Util as a measure of utility. Thus in terms of
cardinal approach it can be said that one gets from a cup of
tea 5 utils, from a cup of coffee 10 utils, and from a rasgulla 15
utils worth of utility.

Meaning of Utility
The term utility in Economics is used to denote that quality in a good or
service by virtue of which our wants are satisfied. In, other words utility is
defined as the want satisfying power of a commodity. According to, Mrs.
Robinson, Utility is the quality in commodities that makes individuals want to
buy them.
Utility has the following main features
• Utility is Subjective
• Utility is Relative
• Utility and usefulness
• Utility and Morality

Utility (cont…)
There are three concepts of utility
• Initial Utility
• Total Utility
• Marginal Utility

Relationship between total utility
and Marginal Utility
The relationship between total utility and marginal utility can be
explained as:
• Total utility, initially, increases with the consumption of
successive units of a commodity. Ultimately, it begins to fall.
• Marginal Utility continuously diminishes.
• As long as marginal utility is more than zero or positive, total
utility increases, total utility is maximum when marginal utility
is zero. It falls when marginal utility is negative.
• When marginal utility is zero or total utility is maximum, a
point of saturation is obtained.

Indifference Curve Approach
• According to ferguson, An indifference curve is a
combination of goods, each of which yield the same
level of total utility to which the consumer is
indifferent.
• According to leftwitch, A single indifference curve
shows the different combinations of X and y that
yield equal satisfaction to the consumer.

Budget line
• A budget line shows the combination of goods that
can be afforded with your current income

Law of Demand And Elasticity Of
Demand
• MEANING OF DEMAND - The term demand refers to
a desire for a commodity backed by ability and
willingness to pay for it
• LAW OF DEMAND - introduces an inverse
relationship between price and demand for a good
or service. It simply states that as price of a
commodity increases, demand decreases, provided
other factors remain constant. Also, as prices
decrease, demand increases

Factors behind the Law of Demand
The factors that make the law of demand operate are
following.
• Substitution Effect
• Income Effect

Exceptions to the Law of Demand
The law of demand does not apply to the following
cases
• Expectations regarding further prices
• Status Goods
• Giffen Goods

Demand Elasticity
• The demand elasticity (elasticity of demand) refers to
how sensitive the demand for a good is to changes in
other economic variables, such as prices and
consumer income

Degrees of Elasticity of Demand
• Infinite or Perfect Elasticity of Demand
• Perfectly Inelastic Demand
• Very Elastic Demand
• Less Elastic Demand
• Unitary Elastic Demand

Factors Affecting Elasticity of
Demand
• Nature of commodity
• Availability of substitutes
• Income Level
• Level of price
• Postponement of Consumption
• Number of Uses
• Share in Total Expenditure
• Time Period
• Habits

Types of Elasticity of Demand
According to the source of the change, the following types of elasticity of demand can
be mentioned:
• Price Elasticity of Demand
• Cross Elasticity of Demand (the elasticity in relation to the change of the price of
other goods and services)
• Income Elasticity of Demand
• Advertisement Elasticity of Demand (the elasticity in relation to the
advertisement expenditure)
According to the degree of the change in the demand, the elasticity can be
classified in:
• Perfectly Elastic
• Relatively Elastic
• Unit Elasticity
• Relatively Inelastic
• Perfect Inelasticity

Demand forecasting
• Demand forecasting is predicting future demand for
the product. In other words, it refers to the
prediction of a future demand for a product or a
service on the basis of the past events and prevailing
trends in the present

Objectives of Demand Forecasting

Theory of Production
• Production refers to the transformation of inputs or
resources into outputs of goods and services
Factors of Production
• Inputs are the resources used in the production of
goods and services. As a convenient way to analysis,
inputs are classified into labour, capital, land and
entrepreneur. Each of these broad categories,
however, includes a great variety of basic input.

Production Function
Mathematically, a basic relationship between inputs
and outputs may be expressed as:
• Q = f( L, C, N )
• Where Q = Quantity of output
• L = Labour
• C = Capital
• N = Land.

Law of Variable Proportion
• “As the proportion of the
factor in a combination of
factors is increased after a
point, first the marginal
and then the average
product of that factor will
diminish.”
Benham

Law of Returns to Scale
• In the long run all factors
of production are
variable. No factor is
fixed. Accordingly, the
scale of production can
be changed by changing
the quantity of all factors
of production.

Cost - Meaning
Cost denotes the amount of money that a company
spends on the creation or production of goods or
services

Type of Cost
• Short Run and Long Run Costs
• EXPLICIT COST
• IMPLICIT COST
• PRIVATE AND SOCIAL COST

PERFECT COMETITION
perfect competition also referred to as a pure competition, exists
when there is no direct competition between the rivals and all
sell identically the same products at a single price. The features
of Perfect Competition:
• Large number of buyers and sellers
• Homogeneous Product
• Free Entry and Exit
• Perfect knowledge of prices and technology
• No transportation cost
• Absence of Government and Artificial Restrictions

Pricing under various Markets
• Perfect Competition
• Monopoly Competition
• Monopolistic Competition
• Oligopoly Competition

Business Economics

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