Unit 1 Introduction

1. Business Economics
Nature & Scope
of
Business Economics
Unit 1

3. Topics covered under Unit - 1
1. Meaning and Scope of Business Economics
2. Objectives of Business Firms
3. Basic Problems of an Economy and Role of Price Mechanism
4. Measuring the Value of Economic Activity: GDP and its components
5. Income – Expenditure and the Circular Flow, Stocks, and Flows

4. Business + Economics
Business Economics

5. Business
❖ Business is an economic activity, which is
related to continuous and regular production and
distribution of goods and services for satisfying
human wants.
❖ Prof. Owen defines, “A Business is an enterprise
engaged in the production and distribution of
goods for sale in the market or rendering of
services for a price”.

6. ➢ My friend Dolly works in “Ice Cream shop”
Meaning of Goods & Services
➢ The ice cream is a good.
➢ A good is something you can feel, or any
kind of merchandise.
➢ Dolly serves ice cream to me so here Dolly
is a service provider.
➢ A service is any kind of work performed for
others.
Ice-Cream shop

7. Economics
• The word ‘economics’ was derived from the Greek word oikonomia, which means
Household management or management of house affairs i.e. how people earn income and
resources and how they spend them on their necessities, comforts and luxuries.
• As we know that limited resources are on the one hand and there are unlimited wants on
the other hand.
• It basically implements and includes
economic theories and principles in
allocation of the resources in an
effective manner.
• In simple words, economics is the
study of how society uses its limited
resources to satisfy human wants.

8. Stages & Definitions of Economics
Wealth
Definition
(Adam Smith)
Welfare
Definition
(Alfred
Marshall)
Scarcity
Definition
(Lionel Robbins)
Growth
Oriented
Definition
(Samuelson)
Need
Oriented
Definition
(Jacob Viner)

9. What is Business Decision-making?
❖ Decision making is the actual selection among
alternatives of a course of action. It is at the core of
planning.
❖ Depends upon nature of the problem and nature of the
organization.

10. Types of Business Decisions
❖ Price-Output Decision:
❖ Demand Decision:
❖ Choice of a Technique of Production:
❖ Advertising Decision:
❖ Long-run Production Decisions:
❖ Investment Decisions:

11. Business Decision-making Process:
❖ Establishing the Objective
❖ Defining the Problems
❖ Identifying Possible Alternative Solutions
(i.e., Alternative Courses of Action (strategy)
❖ Evaluating Alternative Courses of Action
and choosing the Best.
❖ Implementing & Monitoring the Decision

12. What Business Economics is about?
❖ Business Economics also known as managerial economics.
❖ It is concerned with the application of economic theories and economic methods to the analyses of
decision-making problems faced by
business firms.
❖ Problems faced by business firms like:
1. Selection of product to be produced or service to
be provided
2. Price and output of the product
3. Demand and cost of product
4. Techniques/methods of production
5. Amount of advertisement expenditure

13. (i) Descriptive/positive role: (What it is)
Business economics helps to explain how various
economic forces affect the working of firm and also
predicts the consequences of the decisions made
by it.
(ii) Prescriptive/normative role: (What ought to be)
It prescribes the rules for the improvement of
decision making by firms or their managers so that
they can achieve their objectives efficiently.
Role of Business Economics

14. Microeconomics : The term micro is derived from
the Greek word “mikros” means small, thus
microeconomics deals with the analysis of small
individual units of the economy such as individual
consumers, individual firms and small groups of
individual units such as various industries and
markets.
Macroeconomics : The term macro is derived from
the Greek word “makros” means large, thus
microeconomics deals with the analysis of the
economy as a whole and its large aggregate such as
total national output and income, total employment,
total consumption, aggregate investment.
Economic Theory

15. ❖Techniques of economics used especially for business decision
making are optimization techniques, particularly differential
calculus and mathematical programming.
❖Optimization techniques are used in the analysis of alternative
course of action and the evaluation of results obtained so that
best alternative is chosen which helps the business firms in
attaining their objectives.
❖Apart from these techniques, methods of statistical estimation,
game theory of economics science are extensively used in
business economics for developing decision rules that can help
managers in achieving firm’s objectives.
Therefore, business economics can be described as the application of theories and
techniques of modern economics for decision-making problems of business firms.
Economic Methods

16. Definition of Business Economics
❖ Business Economics: “the use of economic analysis to
make business decisions involving the best use of an
organisation’s scarce resources”.
❖ Spencer and Siegelman has defined managerial or business
economics as “integration of economic theory with business
practice for the purpose of facilitating decision making and
forward planning by management.”
❖ According to Joel Dean “ Business Economics in terms of
the use of economic analysis in the formulation of business
policies. Business Economics is essentially a component of
Applied Economics as it includes application of selected
quantitative techniques such as linear programming,
regression analysis, capital budgeting, break even analysis
and cost analysis.”

17. ❖ Business economics deals with both private and public enterprises and also used in non-
profit making organizations such as colleges, universities, charitable hospitals because
managers of all types of organizations face similar problems.
❖ In the last about three decades business economics has grown rapidly because it has been
increasingly realized that economic theory and its methods and concepts can be used by
managers to achieve the desired objectives of the firm efficiently.
❖ Economics is primarily concerned with allocation of scarce resources to alternative uses so
as to satisfy wants of the people.
❖ Thus, Lord Robins defines economics as a “Science which studies human behavior as a
relationship between ends and scarce means which have alternative uses”.
❖ It is a task of a manager of a firm that it should take decisions regarding these resource
allocation problems in a way that ensures most efficient use of resources.

18. Nature of Business Economics
1. Business Economics is a Science
2. Business Economics is an Art
3. Micro in Nature
4. Macro Analysis
5. Pragmatic in Approach
6. Prescriptive/Normative in Nature
7. Interdisciplinary in Nature
8. Management Oriented

19. Nature of Managerial Economics
1. Business Economics is a Science
✓ Cause and effect relationship, Business Economics take things in logical way and also prove it
practically.
✓ It integrates the tools of decision sciences such as mathematics, statistics and econometrics with
economic theory.
2. Business Economics is an Art
✓ Managerial economics requires a lot of logical thinking and creative skills for decision making or
problem-solving.
3. Micro in Nature
✓ Business Economics generally deal with the problems related to a particular organisation instead
of the whole economy. Therefore it is considered to be a part of microeconomics.
4. Macro Analysis or Incorporates elements of Macro Economics
✓ Business unit does not operate in a vacuum.
✓ It is affected by the external factors like price level, National income, National employment, Govt.
Policies w.r.t. taxation, interest rate, exchange rates etc.

20. 5. Pragmatic in approach
✓ Using what is right for your business
✓ It is a practical and logical approach towards the day to day business problems.
6. Prescriptive / Normative in nature:
✓ It basically prescribe “what ought to be”.
✓ It provides suggestions for the business decisions and include value judgement.
7. Management Oriented:
✓ It acts as a tool in the hands of managers to deal with business-related problems and uncertainties
appropriately.
✓ It also provides for goal establishment, policy formulation and effective decision making.
8. Interdisciplinary in Nature
✓ It uses many tools and principles belonging to various disciplines such as accounting, finance,
statistics, mathematics, production, operation research, human resource, marketing, etc.

21. Scope of Business Economics
1.Microeconomics
2.Macroeconomics
1.Individual org. (small)
2.Nation (large)
Issues / Business
Problems
Economic
Theories
1.Operational & Internal Issues
2.Environmental & External Issues

22. Micro Economics Applied to Operational/Internal Issues:
❖ Demand Analysis
❖ Forecasting of Demand
❖ Production and Cost Analysis
❖ Inventory Management
❖ Market Structure and Pricing
❖ Allocation of Resources
❖ Theory of Capital and Investment Decisions
❖ Profit Analysis
❖ Risk and Uncertainty Analysis
Scope of Business Economics

23. Micro Economics Applied to Operational/Internal Issues:
❖ Demand analysis:
✓ The behaviour and preference of consumers in the market.
✓ The effect of changes in the determinants of demand such as: consumers' income,
price of the commodity, prices of related commodities, consumer tastes and
preferences etc.
❖ Demand forecasting:
✓ Technique of predicting future demand for goods and services on the basis of the
past behaviour of factors which affect demand.
✓ To able to produce required quantity at right time by proper arrangement raw
material, labour, machines, equipment.
✓ Business Economics provides the manager with the scientific tools which assist him
in forecasting demand.

24. ❖ Production and Cost Analysis:
✓ Production theory explains the relationship between inputs and output.
✓ A business economist has to decide on the optimum size of output, given the
objectives of the firm.
✓ Manager has also to ensure that the firm is not incurring undue costs(which is not
called for).
✓ Choice of appropriate technology and selection of least - cost input-mix.
✓ Ways to maximize profits by producing the desired level of output at the minimum
possible cost.
❖ Inventory Management:
✓ Firms can use to minimize the costs associated with maintaining inventory in the
form of 'raw materials', 'work-in-process,' and finished goods’. As inventory policies
affect the profitability of the firm.
✓ Business economists use methods such as FSN analysis, simple simulation exercises
and mathematical models to help the firm maintain optimum stock of inventories.

25. Mobile Phone Shop – FSN Analysis
79 80 81 80
18 17 18 17
3 3 1 3
100 100 100 100
0
20
40
60
80
100
120
2018 2019 2020 2021
Total Sales
Mi & Vivo i-phone & Oneplus Gionee Total

26. ❖ Market Structure and Pricing Policies:
✓ Information about the nature and extent of competition which the firms have to face.
✓ This helps in determining the prices under different market conditions and assists the firm in
framing suitable price policies.
❖ Resource Allocation:
✓ Business Economics, with the help of advanced tools such as linear programming, enables
the firm to arrive at the best course of action for optimum utilization of available resources.
❖ Theory of Capital and Investment Decisions:
✓ For maximizing its profits, the firm has to carefully evaluate its investment decisions and
carry out a sensible policy of capital allocation.
✓ Theories related to capital and investment provide scientific criteria for choice of investment
projects and in assessment of the efficiency of capital.
✓ Business Economics supports decision making on allocation of scarce capital among
competing uses of funds.

27. ❖ Profit Analysis:
✓Profits are most often uncertain due to changing prices and market conditions.
✓Profit theory guides the firm in the measurement and management of profits under
conditions of uncertainty.
✓Profit analysis is also immensely useful in future profit planning.
❖ Risk and Uncertainty Analysis:
✓ Business firms generally operate under conditions of risk and uncertainty.
✓ Analysis of risks and uncertainties helps the business firm in arriving at efficient
decisions and in formulating plans on the basis of past data, current information
and future prediction.

28. ❖ Environmental factors have significant influence upon the functioning and performance of
business.
❖ The major macro economic factors relate to:
✓ the type of economic system (capitalist, socialist, mixed economy)
✓ stage of business cycle (recovery, boom, recession, depression)
✓ the general trends in national income, employment, prices, saving and investment.
✓ Government's economic policies like industrial policy, competition policy, monetary and
fiscal policy, price policy, foreign trade policy and globalization policies.
Macro Economics Applied to Environmental/External Issues:

29. ✓ working of financial sector and capital market.
✓ socio-economic organizations like trade unions, producer
and consumer unions cooperatives.
✓ social and political environment.
❖ Business decisions cannot be taken without considering these present and future
environmental factors.
❖ As the management of the firm has no control over these factors, it should be
form its policies to minimize their adverse effects.

30. Objectives / goal of Business
Traditional /
conventional
Theories
Modern /
Recent
Theories
Owners & Managers
are the same
Separation between
ownership &
Management

31. 1. Profit Maximization
• Traditionally, it is assumed that in its decision making regarding fixation of output and price
of its product, a firm’s objective or goal is to maximise profits.
Objectives of Business
• It may be expected from the owner-entrepreneurs of individual
proprietorship and partnership that they will try to maximize
profits since it is in their interest to do so. But hired managers of
corporate business firm(Joint stock companies) cannot be
expected to try maximise profit since these profits for
shareholders, they go to shareholders.
• It may be true that when managers are able to earn more profits for share holders, they may be
rewarded by them in some form or the other, but there is great force and truth in the argument
regarding managers not maximizing profits.
• Profit making for shareholders may be one element among such objectives of managers and may
not be most important one for them.

32. The other objectives or goals of manager could include the following:
2. Utility Maximisation by Managers
O. E. Williamson has put forward the view that managers are motivated by their self-interest &
maximize their own utility function and utility maximization by self-seeking managers depends on
following factors:
1. Salaries and other monetary compensation received from business
firm.
2. The number of staff under the control of manager. Greater number
of staff means greater status and prestige of a manager.
3. “Management slack”, non essential managerial perquisites such as
lavishly furnished offices, luxurious company car, etc,.
4. The magnitude of discretionary investment expenditure by the
manager, this is amount of resources which the manager can spend
according to his discretion.

33. 3. Revenue and Sales maximization
• According to an American economist, W. J. Baumol, managers of corporate business firm,
especially those working in oligopolistic market structure, maximize sales revenue rather than
profit.
• Sales maximization does not mean the maximization of the physical volume but total revenue
from sales i.e. the value of sales made.
• Prof. Baumol does not ignore profit motive
altogether. He argues that there is a minimum
acceptable level of profits which must be earned
by the management so as to finance future growth
of the firm through retained profit and also to
induce the potential shareholders for subscribing
to the share capital of the company.
• Maximize total revenue to the minimum acceptable profit constraint.
• The managers fixes output and price of his product according to this sales-revenue maximization
subject to predetermine minimum profits.

34. 4. Behavioural Theory of the Firm
• An American economist, Herbert Simon, has put forward a behavioural theory of the firm,
according to which firms instead of maximizing profits normally satisfice.
• Due to imperfection of data and uncertainty prevailing in the real world.
• The term ‘satisficing’ means satisfactory overall performance. The firm wishes
1) to attain Satisfactory level of production
2) to attain a satisfactory share of market
3) To earn a satisfactory level of profit and so on
• Conclusion: The various alternative objectives or goals to the profit maximization are not free
from drawbacks and till now no comprehensive theory of the firm has been built on the basis of
non-profit maximization objective.
• Till today the theory of the firm based on profit-maximization assumption dominates the
economic theory and business economics.

35. Time Dimension
• It is important that managerial decisions and objectives are considered within a time
framework. This is because decision regarding short-run profit maximization need not ensure
maximisation of profits in the long run.
• In fact, short-run profit maximization by a firm may lead to its downfall because in its attempt to
maximize short-run profits, a firm may set such high price of product that will attract new
competitors that take away the customers or the firm compels workers to work very hard and pay
low wages which results in to future long-term losses.
• The short run represents the operating period for the firm in which its plant size, capital
equipment remain fixed and output is expanded by increasing the variable factors, such as,
labour, fuel, raw material.
• The long run represents the planning period, in which all factors of production including plant
size, capital equipment can be varied (expansion of plant or replacement). This means the size of
the firm can be changed over the long-term planning horizon. Also include choice of investment
projects which yield return in future years which involve lots of risk and uncertainty.

36. ➢ In defence of profit maximization hypothesis, it may also be noted that the managers are
not permanent in a firm and are likely to be changed by the owners (shareholders).
If they feel that managers are not providing them adequate return or profits on their
investment.
➢ If there is no control over management they may continue to behave in a non-profit
maximizing manner, in long run as a result may the prices of its shares will fall greatly and
it may be taken over by others who will change the current management and install a new
team of managers who are efficient and try to maximize profits in the long run.
➢ Finally, it may be said that no theory, nor its assumptions can be completely realistic but on
the basis of that correct predictions regarding determination of prices and outputs of
commodities have been made.
➢ In this regard we may refer to the viewpoint of Friedman who has argued that the ultimate
test of the validity of an assumption is its capability to predict correctly.
He also points out that profit maximization is valid because predictions
regarding changes in prices and output based on it have shown to be correct.

37. Thank You …….