Business economics is a field of applied economics that studies the financial, organizational, market-related, and environmental issues faced by corporations.
2. Course Outcomes
• The aim of the course is to build knowledge and
understanding business economics among the
student. The course seeks to give detailed
knowledge about the subject matter by instilling
them basic ideas about business economics.
• The outcome of the course will be as follows –
• To provide knowledge about business economics.
• To provide knowledge about Demand Analysis.
• To Determine Production and cost analysis.
• To Make aware with pricing and profit management.
4. Definition
• Business is defined as the organization being
engaged in commercial, industrial, or professional
activities.
• Economics is the subject of Social Science, which
deals with the studying of production, distribution,
and consumption of goods and services.
6. Definition
• The term economics comes from the Greek word oikos (house) and
nomos (custom or law).
• Economics is often defined as a body of knowledge or study that
discusses how a society tries to solve the human problems of unlimited
wants and scarce resources.
• It is the scientific study of the choices made by individuals and societies
with regard to the alternative uses of scarce resources employed to
satisfy wants.
• Adam Smith (1723–1790), hailed as the Father of Economics.
7. Introduction to Business Economics
• Managerial or Business Economics is the branch that deals with
the organization and allocation of a firm’s scarce resources to
achieve its desired goals.
• It is a link between the theory of Economics and the decision
sciences in the analysis of managerial decision-making.
8. Introduction to Business Economics
• Business Economics is a part of Applied Economics
which is concerned with the application of
economic concepts and analytical tools to the
process of decision-making for a business
enterprise.
9. Economics: Science or Art
A subject is considered science if:
It is based on systematic study of knowledge or facts;
• It is a study of the relationship between cause and effect.
• It is capable of measurable and based on facts.
• It should have the ability to forecast.
• All the laws are universally accepted
• All the laws are tested and based on experiments;
• It has a scale of measurement.
• After being analyzed, economics has all the features of
science.
10. Economics As Science
• On the basis of all these characteristics, Prof.
Robbins, Prof Jordon, Prof. Robertson etc. claimed
economics as one of the subject of science like
physics, chemistry etc. According to all these
economists, ‘economics’ has also several
characteristics similar to other science subjects.
11. Economics As Science
(i) Economics is also a systematic study of knowledge and facts. All the
theories and facts related with both micro and macro economics are
systematically collected, classified and analyzed.
(ii) Economics deals with the correlation-ship between cause and
effect. For example, supply is a positive function of price, i.e., change
in price is cause but change in supply is effect.
(iii) All the laws in economics are also universally accepted, like, law of
demand, law of supply, law of diminishing marginal utility etc.
(iv) Theories and laws of economics are based on experiments, like,
mixed economy to is an experimental outcome between capitalist
and socialist economies.
12. Economics As Science
(v) Economics has a scale of measurement. According
to Prof. Marshall, ‘money’ is used as the measuring
rod in economics.
13. Economics As Art
• According to Т.К. Mehta, ‘Knowledge is science,
action is art.’ According to Pigou, Marshall etc.,
economics is also considered as an art. In other
way, art is the practical application of knowledge
for achieving particular goals.
• Science gives us principles of any discipline
however, art turns all these principles into reality.
Therefore, considering the activities in economics,
it can claimed as an art also, because it gives
guidance to the solutions of all the economic
problems.
14. Economics is an Art
• Art tells us how to do the thing i.e. to achieve an
objective. Economics is also used for achieving a variety
of goals.
• For e.g. All policies etc made in economics has the ultimate
objective of solving economic problems.
• Art is the practical application of theoretical knowledge
Like Art, Economics also practices its theoretical laws.
• For e.g. The various policies are made only after having
theoretical knowledge of the society and country as a whole.
Hence, economics is also an art.
15. Economics As Art
• Therefore, from all the above discussions we can
conclude that economics is neither a science nor an
art only.
• However, it is a golden combination of both. Hence,
economics is considered as both a science as well
as an art.
16. Economics is an Art
• We should better consider economics as a social
science, since it deals with the society as a whole
and human behaviour in particular, and studies the
production, distribution and consumption of goods
and services.
17. Characteristics of Business Economics
• The unit of studying Business Economics is the firm.
So, Business Economics deals with the operation of
a consumer, a corporation which involves the
determination of a price of a product, revenue,
costs, profit levels etc.
• Professors H.C. Peterson and W.C. Lewis suggested
that Business Economics must be considered as a
part of applied microeconomics.
18. Characteristics of Business Economics
1. Micro Economics: Micro Economics is the study of the
behaviour and problem of individual economic unit (firm).
2. Macro Economics: Macro Economics is analysis &
understand the general business(firm) must operate
environment in which the business operate. Study the
environment of many firms.
3. Economics of firm: Managerial Economics use that body of
economics, concepts & principles which is known as the
‘Theory of firm’ or ‘Economics of the firm.’
4. Managerial Economics is Normative: It deals, with future
planning, policies making, decision making & how to make
full use of economic principles.
19. Scope of Business Economics
• Demand analyses & Demand forecasting: It is the most
important scope of Managerial Economics because all
future activities and decision depends on it, law of
demand, demand curve, elasticity of demand
determination of demand, types of demand and
demand forecasting are include in demand analyses &
demand forecasting.
Cost analyses: The knowledge of different cost element
is necessary for every successful businessman. This part
of subject includes the concept of cost, cost curves,
cost analyses under the cost analyses. We analysis the
cause of change in cost.
20. Scope of Business Economics
Output analyses: Output analysis also an important part of
Managerial Economics for the efficient organization of the
production process, output analyses is necessary for prefer
profit planning output analyses always measured in physical
unit.
Price Policies: Influence the demand conditions & earning of
a firm, price policies are necessary for every firm.
21. Scope of Business Economics
Profit Management: To earn the profit is the first object
of each firm. Profit is the measurement of success of
each firm under it profit are forecasting after taking
into consideration the various effecting factor. All the
efforts are make for maximum profit of the firm.
Capital Management: Capital is the Life power of the
business. We can’t think about any business without
capital. Capital Management of firm is a complex topic.
Stable success of the firm depends on a good capital
Management.
Macro Economics: The activity of a firm are also affected
by external forces, such as trade cycle, national income,
industrial policy, tax policy.
22. Microeconomics and Macroeconomics
• Microeconomics (“micro” meaning small) looks at the smaller picture of
the economy and is the study of the behaviour of small economic units,
such as that of an individual consumer, a seller (or a producer, or a firm),
or a product.
• It focuses on the basic theories of supply and demand in individual
markets (say of cars, food items, mobile phones, etc.), and deals with
how individual businesses decide how much of something to produce
and at what price to sell it, and how individual consumers decide on
how much of something to buy.
• In other words, microeconomics analyses the market behaviour of
individual consumers and firms, in an attempt to understand their
decision-making processes.
23. Microeconomics and Macroeconomics
• Microeconomics deals at the firm’s level and takes
into consideration the decision-making power of
individual units, whereas macroeconomics deals
with the economy level and takes into
consideration the impact of government policies on
the aggregates like national income and
employment.
26. 26
Managerial + Economics
• Managerial Economics is
economics applied in
decision-making
• Link between abstract theory
and managerial practice.
• Analysis for identifying
problems, organizing
information and evaluating
alternatives.
27. 27
Managerial Economics &
Business Decision-making
Decision Problem
Managerial Economics
Optimal Solution to Business Problems
Tools &
Techniques
of Analysis
Traditional
Economics
28. 28
Nature of Managerial Economics
Spencer and Siegelman point to the fact
that “Managerial Economics.. is the
integration of economic theory and business
practice for the purpose of facilitating
decision-making and forward planning by
management.”
29. 29
Chief Characteristics of
Managerial Economics/Nature
• Managerial economics is micro-economic in character
as it concentrates only on the study of the firm and not
on the working of the economy.
• Managerial economics takes the help of macro-
economics to understand and adjust to the environment
in which the firm operates.
• Managerial economics is normative rather than positive
in character.
• It is both conceptual (theory) and metrical
(quantitative techniques).
• The contents of managerial economics are based mainly
on the “theory-of firm’.
• Knowledge of managerial economics helps in making
wise choices.
30. 30
Significance of Managerial
Economics
• In order to enable the manager to
become a more competent model
builder,managerial economics provides a
number of tools and techniques.
• Managerial economics provides most of
the concepts that are needed for the
analysis of business problems.
• Managerial economics is helpful in
making decisions.
• Evaluating choice of alternatives.
31. 31
Scope of Managerial Economics
Following aspects constitute its subject matter:-
Objectives of a Business Firm
Demand Analysis and Demand Forecasting
Production and Cost
Competition
Pricing and Output
Profit
Investment and Capital Budgeting and
Product Policy, Sales Promotion and Market Strategy.
32. 32
Managerial Economics & Other
Disciplines
• Managerial Economics & Traditional Economics
• Managerial Economics & Operations Research
• Managerial Economics & Mathematics
• Managerial Economics & Statistics
• Managerial Economics & the Theory of
Decision-making
34. 34
Fundamental Concepts
• Incremental Reasoning
• Opportunity Cost
• Contribution
• Time Perspective
• Time Value of Money – Discounting
Principle &
• Equi-Marginal Principle
35. 35
1.Incremental Reasoning
The two basic concepts in the incremental analysis are :
incremental cost and incremental revenue.
• Incremental cost may be defined as the change in total cost as
a result of change in the level of output, investment, etc
•Incremental Revenue is change in total revenue resulting from
change in level of output , price etc.
Use of Incremental Reasoning
While taking a decision, a manager always determines the
worthwhile ness of a decision on the basis of criterion that the
incremental revenue should exceed incremental cost.
36. 36
Illustration:
The firm gets an order
which can get it an
additional revenue of Rs.
2000. The normal cost of
production of this order
is:
The addition to cost due
to new order is the
following:
• Firm would earn a net
profit of Rs 2,000 – Rs.
1400 = Rs. 600 while at
first it appeared that the
firm would make a loss of
Rs.400 by accepting the
order.
Labour Rs.600
Materials 800
Overheads 720
Selling &
administrati
on expenses
280
Full cost Rs.2400
Labour Rs.400
Materials 800
Overheads 200
Full cost Rs.1400
37. 37
A course of action should be pursued up
to the point where its incremental
benefits equal its incremental costs.
38. 38
2.Opportunity Cost
• Opportunity cost, therefore, represents the benefits of revenue
forgone by pursuing one course of action rather than another.
For e.g:
(a) The opportunity cost of the funds employed in one’s own
business is the amount of interest which could have been earned
had these funds been invested in the next best channel of
investment
(b) The opportunity cost of using an idle machine is zero, as
its use needs no sacrifice of opportunities.
39. 39
Opportunity Cost
•Opportunity cost includes both the explicit and implicit costs:-
Explicit costs are recognized in the accounts , e.g., the payments
for labour, raw materials, etc
Implicit (or imputed) costs are sacrifices that are not recorded in
accounting e.g. cost of capital supplied by owners of business.
40. 40
3.Contribution
•Contribution tells us about the contribution of a unit of output to
overheads and profit.
•It helps in determining the best product mix when allocation of
scarce resources is involved.
•It also indicates whether or not it is advantageous to accept a fresh
order, to introduce a new product, to shut down to continue with the
existing plant etc.
•Unit contribution is the per unit difference of incremental revenue
from incremental cost
41. 41
4.Time Perspective
Economists often make a distinction between short run and long run.
•Short run means that period within which some of the inputs
(called fixed inputs) cannot be altered.
•Long run means that all the inputs can be changed.
Economists try to study the effect of policy decisions on variables like
prices, costs, revenue, etc, in the light of these time distinctions.
42. 42
5.Discounting Principle
•The concept of discounting future is based on the
fundamental fact that a rupee now is worth more than a rupee
earned a year after.
•Unless these returns are discounted to find their present
worth, it is not possible to judge whether or not it is worth
undertaking the investment today.
Illustrations
Suppose a sum of Rs.100 is due after 1 year. Let the rate of
interest be 10% . We can determine the sum to be invested
now so as to produce the return (R) of Rs.100 at the end of 1
year. The present value of the discounted value of Rs. 100
will then be,
43. 43
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44. 44
6.The Equi-Marginal
Principle
•The law of equi-marginal utility states that a utility
maximizing consumer distributes his consumption expenditure
between various goods and services he/she consumes in such
a way that the marginal utility derived from each unit of
expenditure on various goods and service is the same.
•This principle suggests that available resources (inputs)
should be so allocated between the alternative options that
the marginal productivity (MP) from the various activities are
equalized.
For eg. Suppose a firm has a total capital of Rs. 100 million
which it has the option of spending on three projects, A,B, and
C. Each of these projects requires a unit expenditure of Rs.
10 million.
47. The Economic Problem
•Unlimited Wants
•Scarce Resources –
Land, Labour, Capital
•Resource Use
•Choices
A wind farm. Copyright: Getty Images,
available from Education Image Gallery
48. The Economic Problem
• What goods and services should an economy produce? –
should the emphasis be on agriculture, manufacturing or
services, should it be on sport and leisure or housing?
• How should goods and services be produced? – labour
intensive, land intensive, capital intensive? Efficiency?
• Who should get the goods and services produced? – even
distribution? more for the rich? for those who work hard?
49. Opportunity Cost
• Definition – the cost expressed in terms of the next
best alternative sacrificed
• Helps us view the true cost of decision making
• Implies valuing different choices
50. Production Possibility Frontiers
• Show the different combinations of goods and services that
can be produced with a given amount of resources
• No ‘ideal’ point on the curve
• Any point inside the curve – suggests resources are not
being utilised efficiently
• Any point outside the curve – not attainable with the
current level of resources
• Useful to demonstrate economic growth and opportunity
cost
51. Production Possibility Frontiers
Capital Goods
Consumer Goods
Yo
Xo
A
B
Y1
X1
Assume a country
can produce two
types of goods
with its resources
– capital goods
and consumer
goods
If it devotes all
resources to capital
goods it could
produce a maximum
of Ym.
If it devotes all its
resources to
consumer goods it
could produce a
maximum of Xm
Ym
Xm
If the country is
at point A on the
PPF It can
produce the
combination of Yo
capital goods and
Xo consumer
goods
If it reallocates its
resources (moving round
the PPF from A to B) it can
produce more consumer
goods but only at the
expense of fewer capital
goods. The opportunity
cost of producing an extra
Xo – X1 consumer goods
is Yo – Y1 capital goods.
52. Production Possibility
Frontiers
Capital Goods
Consumer Goods
Yo
Xo
A
.B
C
Y1
X1
Production
inside the PPF
– e.g. point B
means the
country is not
using all its
resources
It can only produce at
points outside the PPF
if it finds a way of
expanding its
resources or improves
the productivity of
those resources it
already has. This will
push the PPF further
outwards.
53. Positive and Normative
Economics
• Health care can be improved
with more tax funding
• Pollution control is effective
through a system of fines
• Society ought to provide homes
for all
• Any strategy aimed at reducing
factory closures in deprived
areas would be helpful
• Positive Statements:
• Capable of being verified or
refuted by resorting to fact
or further investigation
• Normative Statements:
• Contains a value judgement
which cannot be verified by
resort to investigation or
research
54. Microeconomics and Macroeconomics
• Macroeconomics (“macro” meaning large) is that branch
of economic analysis that deals with the study of
aggregates. As opposed to microeconomics, in macro
analysis we study the industry as a unit, and not the firm.
In macroeconomics, we talk about aggregate demand and
aggregate supply, national income, national capital
formation, employment, inflation etc.
55. Microeconomics and Macroeconomics
• However, micro and macro economics are not to be
taken as substitutes of each other; rather they
complement each other. To quote Paul Samuelson
“…if you read one branch of economics carefully,
but ignore the other, you will be half-educated”.
56. Opportunity Cost
• Opportunity cost is the benefit forgone from the
next best alternative that is not selected.
Individuals or firms give up an opportunity(s) to use
or enjoy something in order to select something
else.
57. Opportunity cost: Example
• A firm may even have to make a choice between
quantity and quality. It may commit itself to quality
(and hence, remain restricted to a small customer
base) by selling its product at high price (such a
pricing is often regarded as market skimming
pricing), or it may compromise on quality and lower
the price in order to capture a larger market (such a
pricing is often regarded as market penetration
pricing). Let us see the opportunities foregone in
each case. If the firm decides to go for the first
option, it would be targeting the “classes”.
58. Opportunity cost: Example
• This way the firm has to sacrifice the opportunity of
getting control over a large segment of market; this
becomes its opportunity cost of selling its product
at a high price. On the other hand, if it opts for
keeping the price low at the cost of quality, the firm
would be targeting the “masses”, thus, sacrificing
its image of delivering high quality product. This
loss in image would be the opportunity cost of
selling its product at a low price, against gaining of
a larger customer base. Such situations may often
put firms in an ethical dilemma.
59. Incremental Concept
• The concept of marginality deals with a unit
increase in cost or revenue or utility.
• Marginal Cost (or Revenue or Utility) is the change
in Total Cost (or Total Revenue or Total Utility) due
to a unit change in output.
• In other words, Marginal Cost (or Marginal Revenue
or Marginal Utility) is the Total Cost (or Total
Revenue or Total Utility) of the last (or nth.) unit (of
output). Thus, we may express Marginal Cost (MC)
as:
MCn = TCn – TCn–1
60. Principle of time perspective
• The principle of time perspective may be stated as
under: “A decision should take into account both
the short-run and long-run effects on revenues
and costs and maintain the right balance between
the long-run and short-run perspectives.”
61. Discounting Principle
• The core of discounting principle is that a rupee in hand
today is worth more than a rupee received tomorrow. In
other words, it refers to time value of money, i.e., the fact
that the value of money depreciates with time. One
rationale of discounting is uncertainty about tomorrow,
i.e., future. Even if there is no uncertainty, it is necessary
to discount future rupee to make it equivalent to current
day rupee.
63. Equi-Marginal Principle
• This principle is also known the principle of
maximum satisfaction - by allocating available
resource to get optimum benefit . This principle
provides a basis for maximum utilization of all the
inputs of a firm so as to maximize the profitability.
64. Equi-Marginal Principle
• The equi-marginal principle is based on the law of
diminishing marginal utility. The equi-marginal principle
states that a consumer will be maximizing his total
utility when he allocates his fixed money income in
such a way that the utility derived from the last unit
of money spent on each good is equal.
• According to Marshall, "if a person has a thing which
he can put to several uses, he will distribute it among
these uses in such a way that it has the same marginal
utility in all"
65. Importance of Managerial Economics
1. Predicting Economics quantities: A manager has
to take most of his decisions in the environment.
Economics analyses makes prediction about
economic event possible by analyzing various
economic data such as cost, profit, demand, capital,
price and output.
2. Estimating Economics relationship: Economics
analyses the estimate of relationship between
economic variables of income elasticity, price
elasticity cost elasticity.
66. Importance of Managerial Economics
3. Basic of business policies: Economics analysis on the
basis of business policy manager takes all the decision
for the firm and formulate plans for profit, capital, cost
and price.
4. To assist in planning: Business Economics helps in
decision making maximizing the profit of the firm.
5. To assist in Organization: It is the function of
organization managerial economics helps in this work
efficiently of whole firms or department can be
checked out by the calculation of rate of return. The
efficiency of department can be improved after
checking the efficiency.
67. Importance of Managerial Economics
6. To assist in controlling: For the purpose of controlling,
business activities, business unit & their actual performance
are compare with there pre-determine goal.
7. Forecasting: Forecasting is necessary for the success of the
firm.
8. To assist in understanding the effect of External Force: The
external force at the time of policies formulating of the firm,
such as business cycle, industrial policies, licensing etc.
9. Co-ordination between principle and practice: Many
schemes seems the best but these schemes cannot be
applied in practical form in the firm. Conditions of firm has
always changed so it must co-ordination between principle
and practice
68. Managerial Economics in Relation with other Disciplines /
Branches of Knowledge
• Managerial economics has a close linkage with
other disciplines and fields of study. The subject
has gained by the interaction with Economics,
Mathematics and Statistics and has drawn upon
Management theory and Accounting concepts.
Managerial economics integrates concepts and
methods from these disciplines and brings them to
bear on managerial problems
69. Managerial Economics and Operations Research
• Mathematicians, statisticians, engineers and others
join together and developed models and analytical
tools which have grown into a specialised subject
known as operation research. The basic purpose of
the approach is to develop a scientific model of the
system which may be utilised for policy making.
• The development of techniques and concepts such
as Linear Programming, Input-output Analysis,
Inventory Theory, Decision Theory.
70. MANAGERIAL ECONOMICS AND MATHEMATICS
• The major problem of a business man is how to a
minimum cost or how to maximum profit.
Mathematics concept & techniques are widely used
in finding out answer to these question
• Its main contribution to managerial economics
• Geometry, algebra and calculus
• Logarithms and exponential, vectors and
determinants, input-output tables etc.,
71. Managerial Economics and Statistics
• It provides the basis for the empirical testing of theory. It
provides the individual firm with measures of appropriate
functional relationship involved in decision making.
• Statistics supplies many tools to managerial economics.
Suppose forecasting has to be done. For this purpose, trend
projections are used. Similarly, multiple regression
technique is used. In managerial economics, measures of
central tendency like the mean, median, mode, and
measures of dispersion, correlation, regression, least
square, estimators are widely used.
72. Managerial Economics and Statistics
• Statistical tools are widely used in the solution of
managerial problems. For eg. sampling is very
useful in data collection. Managerial economics
makes use of correlation and multiple regression in
business problems involving some kind of cause
and effect relationship.
73. Managerial Economics and Accounting
• Managerial economics is closely related to accounting.
It is recording the financial operation of a business firm.
A business is started with the main aim of earning
profit. Capital is invested / employed for purchasing
properties such as building, furniture, etc and for
meeting the current expenses of the business.
• Goods are bought and sold for cash as well as credit.
Cash is paid to credit sellers. It is received from credit
buyers. Expenses are met and incomes derived. This
goes on the daily routine work of the business. The
buying of goods, sale of goods, payment of cash,
receipt of cash and similar dealings are called business
transactions.
74. Managerial Economics and Theory of Decision Making
• The theory of decision making is relatively a new subject
that has a significance for managerial economics. In the
process of management such as planning, organising,
leading and controlling, decision making is always essential.
• Decision making is an integral part of today’s business
management. A manager faces a number of problems
connected with his/her business such as production,
inventory, cost, marketing, pricing, investment and
personnel.
• Economist are interested in the efficient use of scarce
resources hence they are naturally interested in business
decision problems and they apply economics in
management of business problems. Hence managerial
economics is economics applied in decision making.
