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1. Business Economics
By Ms. DD Lokuge
Department of Management and Finance
Intake 36
30.06.2021
General Sir John Kotelawala Defence University
Ratmalana
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2. Lesson 01
Introduction to Business Economics
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3. Business Economics
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4. Economics
• The word ‘Economics’ originates from the
Greek work ‘Oikonomikos’ which can be
divided into two parts:
(a) ‘Oikos’, which means ‘House’
(b) ‘Nomos’, which means ‘Management’
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5. WHAT IS ECONOMICS???
• Economics – the study of how individuals and
societies make decisions about ways to use
scarce resources to fulfill wants and needs.
• Defining Economics
- Wealth definitions
- Welfare definitions
-Scarcity definitions
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6. Wealth definitions of Economics
• “Analyses the factors that determine the growth of the
volume of production. The object of Political Economy
of every country is to increase the riches and power of
that country” – An enquiry into the Nature and Causes
of the Wealth of Nations by Adam Smith.
• “The produce of earth – all that is derived from its
surface by the united application of labour, machinery
and capital is divided among three classes of the
community namely whose industry it is cultivated. To
determine the laws which regulate this distribution is
the principal problem in political economy.” – Principles
of political economy by Devid Ricardo
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7. Political economy???
• Political economy is how economic theories
interrelate with social system, production,
trade, law and government to implement the
public policy.
• Political economy is an interdisciplinary
branch of the social sciences that focuses on
the interrelationships among individuals,
governments, and public policy.
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8. Welfare definitions of economics
• “Economics is the study of mankind in the ordinary
business of life; it examines that part of individual and
social action which is most closely connected with the
attainment and with the use of the material requisites of
well- being” – Principles of Economics by Alfred Marshall
• The aim of economics is the explanation of the general
causes on which the material welfare of human beings
depends – Wealth by E Cannan
• The range of our enquiry becomes restricted to that part of
social welfare which can be brought directly or indirectly
into relationship with the measuring rod of money –
Economics of Welfare by A.C Pigou
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9. Scarcity definitions of Economics
• “Economics studies the problems which have arisen because of the scarcity of
resources. Nature has not provided mankind sufficient resources to satisfy all it
wants. Therefore, the people have to choose for which ends or for which wants
the resources are to be utilized.” – An Essay on the Nature and Significance of
Economic Science by Lionel Robbins.
• “Study of principles on which the resources of a community should be so
regulated and administered as to secure social ends without waste.”
Commonsense of Political Economy by Wicksteed
• Economics is a social science concerned with the administration of scarce means
among competing ends when the objective of allocation is to maximize the
attainment of the ends – The theory of Price by G.J Stigler
• The economic problem is essentially a problem arising from the necessity of choice
of the manner in which limited resources with the alternative uses are disposed of.
It is the problem of the husbandry of resources
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10. The Study of Economics
• Microeconomics
- The study of particular firms, particular households, individual
prices, wages, incomes, individual industries, particular
commodities.
- Studies the economic actions and behavior of individual
units and small groups of individual units.
– How do individuals make economic decisions
• Macroeconomics
– The big picture: growth, employment, etc.
– Choices made by large groups (like countries)
– Deals not with individual quantities but with aggregate of these
quantities, not with individual incomes but with national income;
not with individual prices but with price levels; not with individual
outputs but with the national output.
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11. Microeconomics
• Studies the economic actions and behaviour
of individual units and small groups of
individual units.
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Microeconomic theory
Theory of
Demand
Theory of
production
and cost
Factor pricing (Theory of
Distribution)
Wages Rent Interest Profits
Product pricing
Theory of
Economic Welfare

12. Macroeconomics
Deals not with individual quantities as such but
with the aggregates of these quantities; not
with individual incomes but with the national
income not with individual prices but with the
price level; not with individual output but with
the national output.
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13. 13
Macroeconomic theory
Theory of Income
and Employment
Theory of General Price
Level and Inflation
The theory of
Economic growth
Macro theory
of
Distribution
Theory of
Consumption
function
Theory of Investment
Theory of Fluctuations (or
Business Cycles)

14. BUT, there’s a
Fundamental Problem:
“Economics is a science which studies human
behavior as a relationship between ends
and scarce resources which have alternative
uses” The use and allocation of scarce
resources to produce goods and services
has to be such as would maximize
satisfaction” – Lord Robbins
SCARCITY: unlimited wants and needs but
limited resources
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15. What are resources?
• Definition: The things used to make other
goods
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16. ECONOMICS: 4 Economic Questions
Society (we) must figure out
• WHAT to produce (make) & HOW MUCH to
produce (quantity)
• HOW to Produce it (manufacture)
• FOR WHOM to Produce (who gets what)
• What would be the resource allocation for future
growth
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17. Needs and Wants
• NEEDS – “stuff” we must have to survive,
generally: food, shelter, clothing
• WANTS – “stuff” we would really like to have
(Fancy food, big screen TVs, jewelry,
conveniences . . . Also known as LUXURIES
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18. VS.
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19. Choices, Choices
• Because ALL resources, goods, and services are
limited – WE MUST MAKE CHOICES!!!!
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20. Why Choices?
We make choices about how we spend our
money, time, and energy so we can fulfill our
NEEDS and WANTS.
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21. Opportunity cost =
The Value of the Next Best Choice
“The amount of a product or service that must be
forgone (given up) in order to obtain of the next
best alternative product or service”
(Ex: Sleeping is the opportunity cost of studying for a test)
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22. Opportunity Costs
• This is really IMPORTANT – when you choose to do ONE
thing, its value (how much it is worth) is measured by the
value of the NEXT BEST CHOICE.
If I buy a
pizza…
Then I can’t
afford the
movies…
Q: What is the opportunity cost of buying pizza?
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23. Production
• So how do we get all this “stuff” that we have
to decide about?
Decisions, decisions …
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24. Production Process
Capital
Labor
Land
Entrepreneurship
Production/Manufacturing
“Factory”
Goods
Services
Consumers
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25. Factors of Production
• So, what do we need to make all of this Stuff?
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26. 4 Factors of Production
• LAND – Natural Resources
– Water, natural gas, oil, trees (all the stuff we find on, in,
and under the land)
• LABOUR – Physical and Intellectual
– Labor is manpower
• CAPITAL - Tools, Machinery, Factories
– The things we use to make things
– Human capital is brainpower, ideas, innovation
• ENTREPRENEURSHIP
– Investing time, natural resources, labor and capital are all
risks associated with production 26

27. THREE parts to the Production Process
• Factors of Production – what we need to make goods
and services
• Producer – company that makes goods and/or
delivers services
• Consumer – people who buy goods and services
(formerly known as “stuff”)
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28. Capital Goods and Consumer Goods
• Capital Goods: are used
to make other goods
• Consumer Goods: final
products that are
purchased directly by
the consumer
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29. Changes in production
• Division of Labor –
different people
perform different jobs
to achieve greater
efficiency (assembly
line).
You do your job,
and I will do my
Job and we will
be more
EFFICIENT
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30. Changes in production
• Specialization – dividing
up production so that
Goods are produced
efficiently
Nike makes shoes, not
hamburgers
Hardee’s makes
hamburgers, not
shoes!!
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31. How are the Central Problems
Solved?
• There are two main methods to solve these central
problems:
– Through market or price mechanism (that is, what goods
are to be produced and what quantities, which methods
for production are to be employed for the production of
goods and how the output is to be distributed should be
decided by the free play of the forces of demand and
supply.
– Through the adoption of economic planning. Government
sets up a central planning authority which has been called
by several names such as planning commission, planning
ministry or planning board.
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32. Business Economics
• Business economics in a study of business
decision making through applying economic
theories in the following areas since resources
that firms are having is limited:
Production decisions
Financial decisions
Human Resource related decisions
Distribution decisions
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33. Business Economics ctd…
• Integrating the economic theories and
principles to the business in order effectively
allocate resources to maximize firm’s profits or
wealth.
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34. Characteristics of Business Economics
• Applied economics
• Micro in nature –only into firms perspective
• Normative in nature – Economic theories provide
various clues but individual firms will apply according
to their requirement
• Pragmatic in approach – Ex: Theory of demand is
differently by different firms according to their need
• Conduct macro analysis throughout political,
economical, social, technological, ecological and legal
(PESTEL)
• Study of allocation of resources
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