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Introduction to Microeconomics
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 economic
theory with business practice for the purpose of
facilitating decision making and forward planning by
• Business economic meets these needs of the
business firm. This is illustrated in the following
Theory and Management
Application of Economics
to solve business problems
Optimal solutions to
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
2. Use of Economic Theories: Business Economics uses all economic
theories 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
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
NATURE AND SCOPE OF BUSINESS ECONOMICS
The scope of Business Economics consists of the
• 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 acquaints the entrepreneurs with the cost analysis of
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 management is another
topic dealt in Business Economics. It 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.
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:
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
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 through
several theories and models of Business Economics.
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.
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 citizens.
1. Useful to the Finance Minister
The study of Business Economics is highly useful to the Finance Minister and the
personnel working in the finance department. It provides a good knowledge
about public revenue, public debt and public expenditure. It helps them in
forming a sound financial policy and result oriented budget.
2. Useful to the Minister for Planning
The study of Business Economics is also useful to the Minister for planning
and his personnel. It furnishes a good knowledge about the various types of
plans, mobilisation, plan implementation, capital output ratio, investment
3. Useful to the Bankers
Business Economics is also useful to the bankers. It enables them to
understand the nature, purpose and implications of different economic
policies implemented by the business firms.
4. Trade Union Leaders
Knowledge of Business Economics is also significant for the trade union
leaders. The study of Business Economics helps the trade union leaders to
understand the nature and causes of industrial disputes, wage problem etc.
Business Economics is also useful to the businessmen. Businessmen,
with the help of Business Economics, can study the fluctuations in
business, prices, production and employment. They can adopt a proper
strategy for producing goods and services according to the changes in
Statesmen will also get benefit by studying Business Economics. It
enables them to understand the nature and causes of economic
problems. It helps them to solve the economic problems like
unemployment, inflation, scarcity of goods etc.
7. International Economic Problems
International Economics is an important branch of Economics. It deals
with matters like terms of trade, balance of payments, export and
import regulations etc. Its knowledge enables the international
agencies to determine the foreign exchange value of various national
currencies. Thus, Business Economics has both theoretical and practical
significance. Its study is useful to all sections of the people.
• 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
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 economics
help in explaining the conditions of efficiency in consumption,
production and in distribution of the rewards of factors of
Working economy without central control. The micro economics
reveals how a free enterprise economy functions without any
Study of welfare economy. Micro economic involves the study of
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
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 liaises 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.