economic

1. Economic Concepts Relevant to
Business
Demand/ Supply/ Production/
Distribution/ Consumption/
Consumption function/ Cost/ Price/
Competition/ Monopoly/ Profit/
Optimisation/ Marginal-Average/
Elasticity/ Macro and Micro analysis
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2. Economic concepts
• In today’s context, can we find a business
paper/ magazine/ discussion without
economic concepts?
• Heads of governments/ business leaders are
talking primarily economic issues/
enhancing or exploring new economic areas
of cooperation
• All conflicts between men/ states/ countries
in future will be largely economic conflicts
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3. So..what?
• Business moves where economy is sound;
and economy is sound where business
happens.
• Stronger the nation economically, world
gives greater weight to it
• Large market/ cheap labour/ qualified
personnel/ stable interest rates and tax rates/
committed workforce/ low corruption/ law
and order, etc. create good business climate
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4. 1. Demand
• Most widely used/ misused/ abused word of
economics
• A person desperately needs blood/ life-saving
drug without which he is sure of getting deleted
from population list. Can we take him as a person
constituting “demand” for blood or LSD?
• Suppose there is one car agency. Can it consider
all/ most of rich persons in a given locality who do
not possess cars for “demand”?
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5. Demand…
• Two conditions must be there:
– Willingness to buy
– Ability to pay
• Both of them must exist simultaneously
– Potential demand
– Actual demand
• How accurate are demand forecasts? Reasons
• Can any firm afford NOT to forecast?
• Why recessions occur? What happens to the
output? Planned & unplanned inventory
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6. 2. Supply
• Production and supply
• Supply refers to the amount of quantity of a good/
service willing and able to offer for sale by producers
at a given price, during a given time and at a given
place.
• Supply function relates quantity supplied with own
price, related goods’ prices, Technology, input
prices, weather/ Road conditions, transportation,
movement restrictions, so on)
• Supply Curve shows a positive association between
Qs and P, ceteris paribus.
• Difference between Output and Supply
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7. Shape of Supply Curve
• The normal shape of supply curve is upward
slopping from left to right. It indicates, cost of
production remaining constant/ decreasing, higher
the price, larger is the profit. Hence, greater
incentive to raise supply.
• Based on the time period, namely Market Period,
short period, long period and secular period, shape
of supply curve may be vertical, steeper or flatter.
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8. Market Clearance
• Both demand and supply interact to
determine the market equilibrium
• Depending on which kind of market and
time period, each force has its role on
market.
• While demand and supply are influenced by
a number of factors
• In very short run, supply is given, medium
run there is some scope for increase and in
long run, it is fully flexible. 8

9. 3. Consumption
• An unavoidable human activity which
satisfies individuals by fulfilling wants-both
economic and non-economic
• Goods and services possess utility or want
satisfying quality in them
• Since goods and services cost us, we
COMPARE the benefit (utility) and costs
(price)
• Two laws of consumption
– Diminishing utility
– Equi-marginal utility 9

10. Consumption function
• An algebraic relationship between national
income and consumption spending that tells
us what, for each possible level of national
income, the level of consumption spending
will be.
• What will be the level of consumption if
income is zero?
• (Income on X axis, Consumption on Y axis
and the linear curve has a positive intercept)
– Marginal propensity to consume (MPC)
– Psychological law of consumption 10

11. 4. Production
• Conversion of inputs into output (Ag/ Ind/
Mfg)
• Creation of utility (services)
• Controversy to exclude/include services in
GDP
• Traditional factors of production (L, L, C, O)
• How can production be increased?
– Increasing one input keeping others same
– Increasing all inputs
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12. Production..contd
• Law of variable proportions (TP, AP, MP)
• Law of returns to scale (only MP)
• Quantitative example/ diagrams
• Applicability of these laws
• Assumptions:
– State of technology remains constant
– At least one factor must be kept constant
– Contribution of fixed input does not get
influenced by varying factor
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13. How to interpret phases in law of
variable proportions
• Increasing returns is the first phase
• Diminishing marginal returns
• Diminishing average returns
• Do we see the third stage in practice?
– Reason-Technological improvement
• Measurement of factor efficiency in
practice
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14. 5. Distribution
• What is the value of our GDP in rupees terms
at current prices for the year 2010-11?
• How to interpret that value?
• Distribution refers to sharing of the national
product among the groups of individuals as
factors of production.
• Factors of production/ factor payments
• Land, labour, capital, organization (features)
• Wages, rent, interest, and profit
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15. How payments get determined?
• The criteria are ideal (based on marginal
product) / legal (wages determined as per
laws in organized sector) / demand-supply
factors (higher demand for labour provides
it higher wage, vice versa)
• Profits get determined only towards the end.
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16. 6. Cost
• Cost in accounting sense is different from
cost in economic sense.
• Money costs and real costs
• Opportunity cost
• Implicit cost & explicit cost
• Short run versus long run
• fixed Vs Variable Costs
• Total/ Marginal/ Average cost and their
significance in subsequent analysis
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17. 7. Price
• Money value of all economic goods/
services. What are non-economic goods?
• What is the basis for some goods to have a
price?
• Factors that determine price
– Cost of production (all material inputs, other
factors like transportation, tax, climate, etc)
– Demand (why gold price shot up to 6-year
high?)
• Who monitors price level and why inflation
is a major macro variable?
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18. 8. Competition
• In economics, competition is judged on the
basis of number of sellers in the market for
a product or service
• A continuum from Monopoly to perfect
competition
• Worldwide, the trend is to ensure greater
competition
• What are merits and limitations of
competition?
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19. 9. Monopoly
• In Greek, ‘Mono’ means single, ‘Poly’
means seller.
• In contrast to PC, Monopoly is an
extremely imperfect competition
• Monopoly is a market form in which a
single producer/ firm supplies a good/
service which has no close substitute.
• The monopolist is a price-maker
• He can virtually decide to fix any price/
supply but not both of them simultaneously
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20. Features of Monopoly
1. Single seller
2. No close substitutes
3. No variation between firm and industry
4. Entry is fully restricted
5. Product is unique
6. Huge profits is common phenomenon in
LR.
7. But, Normal Profits/ occasionally even
losses are not ruled out in short run 20

21. 10. Profit
• Difference between total revenue and Total cost
• Profit is reward for organizing other factors of
production and also for taking business risks
• Profits arise in a dynamic world due to the
presence of uncertainty.
• Do profits conflict with societal interest?
• No. Primary responsibility of a business firm is to
ensure its own economic performance which is to
utilize resources optimally.
• If a firm does not do so, no only it collapses, in the
process, it ruins society also by adding to
unemployment/ low demand for material inputs/
fall in investments, etc. 21

22. 11. Optimization
• Fundamental rule of economics is to conserve
resources which are all scarce.
• “Optimum” utilization is a relative term. It
depends on the existing know-how at a point in
time.
• For instance, when the 2-stroke engines alone
were there, a mileage of about 40-45 kmpl was a
better utilization.
• Faster trains/ data transmission rates/ search
engines on Internet, etc. are optimizing out time
and cost.
• Division of labour and specialization lead to
optimum use of resources 22

23. 12. Marginal and Average
concepts
• The rate of increase matters to make some
judgments about inputs
• Marginal product is the change in total
product for a unit change in one input
• Average product talk about how efficiency
in inputs is varying as one input gets added
• Declining average cost is good/ increasing
average product is preferred
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24. 13. Elasticity
• Degree of responsiveness of some
dependent variable like demand/ supply/
output given some change in one of the
variable input.
• It could be positive/ negative
– Example of price elasticity of demand
• This concept is used in managerial
economics to give us hint as to when the
price needs to be reduced.
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25. 14. Micro and Macro Analysis
• Microeconomics deals with constituent
units of an economic system like
– Consumer/ One firm/ price of a product/ wage
paid to workers in a firm/ etc.
• Macroeconomics deals with the aggregates
like
– National income, money supply, level of
employment, inflation, trade balance, public
debt, etc.
• Both are complimentary and can not be
substituted one for the other
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26. To sum up..
• Good business climate is essential for economy to
flourish
• Some economic concepts were discussed to
highlight their role in business
• A business analysis remains incomplete without
proper use of relevant economic concepts
• Economic activities/ Costs/ optimization/
elasticity/ micro and macro analyses were some
concepts covered here that give enough clarity for
the topics to be covered, and improve
understanding of business in general.
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