This document provides an introduction to business economics and key economic concepts. It discusses how business economics uses economic theory and quantitative methods to analyze businesses. It also defines microeconomics and macroeconomics, and explains their differences. Some key differences are that microeconomics focuses on individual units like prices and demand, while macroeconomics looks at aggregates like national income and unemployment. The document also discusses economic models, rational decision making, the fundamental economic problems, production possibility frontiers, and different types of economic systems like free markets, planned economies, and mixed economies.

1. Introduction

2. Introduction
• Business economics is a field in applied economics which uses economic
theory and quantitative methods to analyse business enterprises and the
factors contributing to the diversity of organizational structures and the
relationships of firms with labour, capital and product markets.
• Study economics for
• Understand various economic concepts
• Apply in decision making process
• Economics is the study of how societies use scarce resources to produce
valuable goods and services and distribute them among different individuals.
• Trade-off between Scarcity and efficiency

3. Microeconomics and Macroeconomics
Sr.
No.
Microeconomics Macroeconomics
1. Microeconomics deals with the individual
units of an economy.
Macroeconomics deals with the aggregate
ofindividual units or the whole economy.
2. It includes individual price, individual
demand, individual income, etc.
It includes general prices, aggregate
demand,National income, etc.
3. Price determination and allocation of
resources are the major problem studied
under microeconomics.
Determination of income and unemployment
are the major problem studied under
macroeconomics.
4. Two major tools i.e. demand and supply
of a particular commodity is used in
microeconomics.
Two major tools i.e. aggregate demand (AD)
and aggregate supply (AS) of a particular
commodity is used in macroeconomics.
5. Microeconomics solves the central
problem of what to produce, how to
produce and for whom to produce.
Macroeconomics solves the central problem
of full employment of resources in the
economy.

4. Microeconomics and Macroeconomics
Sr.
No.
Microeconomics Macroeconomics
6. It is concerned with the equilibrium of a
consumer, a producer and an industry.
It is concerned with the equilibrium of level
ofincome and employment in an economy.
7. Microeconomics uses bottom-
topapproach for analyzing the economy.
Macroeconomics uses top-bottom approach
foranalyzing the economy.
8. It assumes that all macroeconomic
variables like aggregate demand, national
income and price are constant.
It assumes that all microeconomic variables
like individual demand, individual income,
etc. are constant.
9. It is also known as price theory. It is also known as incometheory or
employment theory.
10. It believes in Laissez-faire economy. It believes in command economy.
11. It is simple to study microeconomics. It is complex process to understand
macroeconomic due to inclusion of large
numbers.

5. Market
• Place where decisions regarding consumption and production taken by
the households and enterprises
• Strong role in laissez-fair economy and no role in command economy.

6. Economic Environment
• The economic environment consists of external factors in a business
market and the broader economy that can influence a business
• Microeconomic environment – affects business decision making
• Macroeconomic environment – affects entire economy
• Many economic factors act as external constraints on the business –
have little control over them
• Examples of Macroeconomic factors
• Interest rates; Taxes; Inflation; Currency; exchange rates; Consumer
discretionary income, Savings rates, Consumer confidence;
Unemployment rate; Recession; Depression

7. Economic Environment
• Examples of Microeconomic factors
• Market size; Demand; Supply; Competitors; Suppliers; Distribution
chain, such as retail stores
• It is important because
• Determines failure/ success of the business

8. Economic Model
• Model is a theoretical construct representing economic processes by a
set of variables and a set of logical and/or quantitative relationships
between them
• Methodological use includes investigation, theorizing, and fitting
theories to the world.
• Subjective in design
• Theoretical and empirical models
• Model generally consists of set of mathematical equations
• Simplified description of reality – by assumptions
• Economic models also classified in terms of regularities

9. Economic Model
• Cobb–Douglas model of production
• Solow–Swan model of economic growth
• Lucas islands model of money supply
• Heckscher–Ohlin model of international
trade
• Black–Scholes model of option pricing
• AD–AS model a macroeconomic model
• IS–LM model the relationship between
interest rates and assets markets
• Ramsey–Cass–Koopmans model of
economic growth.

10. Economic Model
• Building empirical models
• Dependent variables; independent variables
• Endogenous variables and exogenous variables
• Coefficients
• Diverse opinion how the empirical model can be derived
• Assume maximising behaviour
• Nuanced approach – prediction

11. Economic Model
• What makes a good economic model
• Precise and verifiable implications
• Assess the ability to establish stylised facts
• Why models fail
• Prediction depends on randomness of data and validity of theory
• Example – fail of models to predict the reasons of financial crisis
• No economic model can be perfect to reality
• A process and debate for the stand

12. Rational Decision Making
• A decision-making process that results in the optimal level of benefit, or
the maximum amount of utility
• Economic actors are assumed to be self-interested and “rational,”
meaning that people generally make logical decisions that produce the
best outcomes for themselves.
• Behavioural economics – Rational choice theory
• Psychological insights while explaining economic behaviour
• Rational person has self-control and is unmoved by emotional factors

13. Rational Decision Making
• Challenges to Rational Behavior
• Individuals have limited capacity to accurately calculate the costs and
benefits of a decision.
• individuals may choose a decision that is not optimal due to social
norms.
• Individuals do not always act in their own pure self-interest.
• Individuals tend to satisfice rather than maximize decision outcomes.
• Individuals tend to have a strong bias towards maintaining the status
quo.

14. Rational Decision Making
• Bounded rationality – individuals cannot exhibit fully rational behaviour
due to a number of real-world limitations – they only satisfy
• Individuals do not exhibit fully rational behaviour when making
decisions, rather, they satisfice

15. Fundamental Economic Problems
• What commodities to produce at what quantity
• How are goods produced
• For whom goods are produced

16. Production Possibility Frontier
• Each economy has a stock of limited resources; in deciding what and
how things should be produced, the economy is in reality deciding how
to allocate its resources among the thousands of different possible
commodities and services.
• Inputs – factors of production and outputs
• Limited resources and tradeoff between use of resources
• Production possibilities
• The production-possibility frontier (or PPF) shows the maximum
quantity of goods that can be efficiently produced by an economy, given
its technological knowledge and the quantity of available inputs.

17. Production Possibility Frontier

18. Production Possibility Frontier
• Impact of economic growth

19. Production Possibility Frontier
• Choice between public goods and private goods

20. Production Possibility Frontier
• Choice between Present needs and future consequences

21. Free Market
• Price of goods and services determined by demand and supply
• No government intervention no regulated market mechanism
• Coordinated market in fields of study such as political economy, new
institutional economics, economic sociology and political science
• Economic system – Capitalism
• Private ownership of means of production and operation
• laissez-faire or free-market capitalism, state capitalism and welfare
capitalism
• Different degrees of government intervention

22. Free Market
• Economic system – Georgism
• Market free from all forms of economic privilege, monopolies and
artificial scarcities
• Returns to natural resources and land can’t be reduced due to perfect
inelastic supply
• Economic system – Laissez faire
• Absence of non-market pressures on prices and wages such as those
from discriminatory government taxes, subsidies, tariffs, regulations, or
government-granted monopolies

23. Free Market
• Economic system – Socialism
• Various forms of worker cooperatives operating in a free-market
economy such as the mutualist system to state-owned enterprises
operating in unregulated and open markets
• Free markets are not possible under conditions of private ownership of
productive property
• Class differences and inequalities in income and power
• Workers in a socialist economy based on cooperative and self-managed
enterprises have stronger incentives to maximize

24. Free Market
• Characteristics
• Economic equilibrium – market efficiency – Pareto optimum
• Low barriers to entry
• Perfect competition and market failure
• Spontaneous order – better allocation of societal resources
• Supply and demand

25. Planned Economy
• Government or ruler makes most or all of the important decisions about
the production and distribution of goods and services
• “A planned economy is a type of economic system where the
distribution of goods and services or the investment, production and the
allocation of capital goods takes place according to economic plans that
are either economy-wide or limited to a category of goods and services.”
• It may use centralized, decentralized, participatory or Soviet-type forms
of economic planning

26. Mixed Economy
• It is defined as an economic system blending elements of a market
economy with elements of a planned economy, markets with state
interventionism, or private enterprise with public enterprise.
• Combination of free market principles and socialist principles
• This can extend to a Soviet-type planned economy that has been
reformed to incorporate a greater role for markets in the allocation of
factors of production.
• Combines elements of market economies and planned economies
• Advocated by J M Keynes
• Countries like USA, UK, India, Iceland, Sweden etc.

27. Mixed Economy
• Typology
• Mix of free markets and state intervention
• Mix of private and public enterprise
• Mix of markets and economic planning
• Characteristics
• Coexistence of private and public sector
• Economic welfare
• Economic planning
• Free and controlled economic development

28. Mixed Economy
• Merits
• Adequate freedom
• Maximum welfare
• Modern technology
• Best allocation of resources
• Demerits
• Low inflow of foreign capital
• Inefficiency of public sector
• Fear of nationalization
• Problem of concentration of
economic power
• Presence of imbalance in the
economy

29. India as a Mixed Economy
• Inability of the private sector or government sector to shoulder the
burden of economic development alone is the reason
• Coexistence of public and private sector due to adoption of Industrial
Policies 1948 and 1956
• New policies to enhance economic growth thereby groundwork for
scientific, industrial and technological development
• Characteristics
• Controlled yet free economy activities
• Promoting citizen welfare
• Economic welfare
• Price regulation
• Coexistence of public and private sectors