2. Economics
The word economics has originated from a Greek word oikonomikos, which can be divided into two
parts: oikos means home and nomos means management.
Thus, in earlier times, economics was referred to as home management where the head of a family
managed the needs of family members from his limited income. However, over the years, the scope
of economics has broadened to society (that is referred to as home and how it satisfies the needs of
people by using limited resources.
3. Definition of Economics
Economics has several alternative definitions and viewpoints. One among them is:
It is a pre-Keynesian thought of economics that was given by Lionel Robins in his book ‘Essays on
the Nature and Significance of the Economic Science’ (1932).
According to Robins, “Economics is a science which studies human behavior as a relationship
between ends and scarce means which have alternative uses”.
The definition focused on human behavior in the optimum utilization of scarce resources. It
provides three basic features of human existence, which are
• unlimited wants
• limited resources
• alternative uses of limited resources.
4. Nature of Economics
Economics as a science:
Science is a branch of knowledge that defines the relationship between cause and effect.
As results observed in science are measurable and based on facts, economics also endeavors to find
a relationship between cause and effect and provides measurable results.
Similar to science, in economics, emphasis is laid on collecting relevant information, which is
categorized and analyzed to reach conclusions.
5. Nature of Economics
Economics as a social science: Economics is also considered a social science as it deals with studying
the behavior of human beings and their relationships in society.
This is because the exchange of goods takes place within the society and among different societies
to satisfy the needs and wants of people.
Economics is an art: Art is a branch of study that deals with expressing or applying the creative skills
and imagination of humans to perform a certain activity.
Similarly, economics also requires human imagination for the practical application of scientific laws,
principles, and theories to perform a particular activity.
6. Assumptions in Economics
• Consumers have rational preferences: This assumption states that consumers act in a rational
manner and focus on satisfying their needs.
It is also assumed that the tastes of consumers remain constant for a long period.
• Existence of perfect competition: According to this assumption, there is perfect competition in
an economy, wherein there are numerous buyers and sellers.
• Existence of equilibrium: As per this assumption, equilibrium exists wherein both consumers and
entrepreneurs achieve maximum satisfaction.
In a market, there can be two types of equilibrium: industry equilibrium and firm’s equilibrium. An
industry is at equilibrium if profits achieved are normal. On the other hand, a firm is at the state of
equilibrium if its profits are maximum.
7. The Economic Way of Thinking
Economists think in a certain manner. Six key ideas that define the economic way of thinking are:
• A choice is a tradeoff. (You can think about your choices as tradeoffs. A tradeoff is an exchange—
giving up one thing to get something else)
• People make rational choices by comparing benefits and costs.
– Benefit is what you gain from something.
• Cost is what you must give up to get something. (The opportunity cost of something is the
highest valued alternative that must be given up to get it.
• Most choices are “how-much” choices made at the margin.
• Choices respond to incentives.
8. Economic Model
An economic model describes some aspect of the economic world that includes only those features
needed for the purpose at hand.
• For example, an economic model of a cellphone network might include features such as the
prices of calls, the number of cellphones users, and the volume of calls.
• But the model would ignore cell phone colors and ringtones.
9. Business Economics
Business economics or managerial economics is a specialized discipline of economics that
undertakes a study of various economic theories, logics, and tools used in business decision-making.
It applies various economic concepts, such as demand and supply, competition, allocation of
resources, and economic trade-offs, to help managers in making better decisions.
According to Douglas, “Managerial economics is concerned with the application of economic
principles and methodologies to the decision-making process within the firm or organization. It seeks
to establish rules and principles to facilitate the attainment of the desired economic goals of
management”.
10. Scope of Business Economics
Business economics involves the application of various economic tools, theories, and methodologies
for analyzing and solving different business problems, such as:
Demand analysis and forecasting
Cost and benefit analysis (ROI of a project)
Pricing decisions, policies and practices
Profit maximization
Capital management
11. Characteristics of Business Economics
• New discipline and of recent origin
• It is a highly specialized and separate branch of economics
• Micro in nature
• It is normative science which is goal-oriented and prescriptive science
• It provides solutions to the problems
• It is a study of decision making
• It is a study of the allocation of resources
• It deals with the economic behaviour of the firm
• It also studies various macroeconomic concepts like GNP, GDP, NNP, inflation etc.
12. Economics
1. It is more comprehensive and wider in
scope
2. It is concerned with the body of principles
3. It includes both micro and macroeconomics
4. It is based on a number of assumptions
5. It is both positive and normative science
6. It discusses general economic problems
7. Model building is the main function of the
economist
1. It is too narrow and has limited scope
2. It deals with the application of economic
principles to the problems faced
3. It is micro in nature
4. The scope of assumptions is limited as it
is concerned with the application of
theories
5. It is mainly a normative science
6. It deals with the problems of a firm only
7. Decision making and forward planning is
the main function of the business
economist
Business Economics
13. Economics
Macroeconomics
It is a branch of economics that mainly
deals with the economic behavior of
various units combined together.
Macroeconomics focuses on the
growth of an economy as a whole by
undertaking the study of various
economic aggregates, such as
aggregate supply and demand, changes
in employment, gross domestic product
(GDP), overall price levels, and
inflation.
Microeconomics
It is a branch of economics that deals
with the study of the economic
behavior of individual organizations
or consumers in an economy.
14. Economics and Business Decision Making
Decisions taken by managers are subject to various risks and uncertainties due to changes in market
forces, business environment, business policies, level of competition, etc.
All these factors are dynamic in nature. If these factors are not properly understood by managers
before taking decisions, the business of an organization may lead to failure.
15. Caselet
As soon as the presentation was over, Ashok Kumar, the CEO of Healthy Foods Ltd, turned to his
board of directors to raise the question that he had been waiting all week to ask. ‘Well, ladies and
gentlemen, are you with me in this new venture? Is it a ‘go’? Shall we get into the ready-to-eat
snacks business?
“It’s not that easy, Mr. Kumar. We need some time to think it over. You’re asking us to endorse a very
major decision, one that will have a long-term impact on the direction of the company.”
“I appreciate your wish to deliberate further, Dr. Mukherjee,” Ashok replied, “but I would like to
reach a decision today. As the Head of the Department of Public Policy of your university, you have
been especially valuable in advising this company on matters relating to social and governmental
policies. But we must diversify our business very soon in order to maintain the steady growth in
profits that we have achieved in recent years. As my presentation showed, the manufacturing and
marketing of our own brand of ready-to-eat snacks is one of the best ways to do this. It represents a
significant diversification, yet it is very closely related to our core business: food.
16. “The economics of the snacks market tell us that we would be foolish to pass up the kind of
investment return that the market offers to those newcomers willing to take the risk. The food
business is generally a mature one. On the other hand, our forecast indicates that there is still a lot
of room for growth in the snacks market. In spite of the stiff competition from the big players, we
should be able to hold our own.
“ That’s just it, Ashok,” interjected another board member. “Are we prepared to take this risk? You
yourself mentioned that the market power wielded by the two dominant companies in this business
is not to be taken lightly. Moreover, the projections that you have shown for a growing snacks
market are based on the assumption that the growth rate will remain the same as it has been in the
past ten years or so. As we all know, the snacks market has been growing, but it has also been very
fickle. Currently, Indians are on the move and need a quick bite. So ready-to-eat snacks would be an
ideal choice here. And what about all the money that we’re going to have to spend upfront to
differentiate our product? As you well know, in the processed-food business, establishing brand
recognition-not to mention brand loyalty-can be extremely difficult and costly.”
17. “Well, ladies and gentlemen, all your concerns are legitimate ones, and believe me, I have given
much thought to these drawbacks. This is one of the biggest decisions that I will have made since
becoming CEO. My staff has spent hundreds of hours analyzing all available data to arrive at a
judgment. Our findings indicate a strong probability of earning an above-average return on an
investment in the snacks business, a return commensurate with the kind of risk we know exists in
that market. But if we could make all our decisions with 100 percent certainty simply by feeding
numbers into a computer, we’d all be out of a job. To be sure, details on production, cost, pricing,
distribution, advertising, financing, and organizational structure remain to be ironed out. However,
if we wait until all these details are worked out, we may be missing a window of opportunity that
might not appear again in this market for a long time. I say that we should go ahead with this
project as soon as possible. And unanimity among the board members will give me greater
confidence in this endeavor.”
18. Business Cycles
No era can stay forever. The economy too does not enjoy the same periods all the time. Due to its
dynamic nature, it moves through various phases.
“The change in business activities due to fluctuations in economic activities over a period of time is
known as a business cycle.”
Business cycles are also called trade cycles or economic cycles. According to Arthur F. Burns and
Wesley C. Mitchel, “Business cycles are a type of fluctuation found in the aggregate economic
activity of nations that organize their work mainly in business enterprises:
a cycle consists of expansions occurring at about the same time in many economic activities,
followed by similarly general recessions, contractions, and revivals which merge into the expansion
phase of the next cycle; in duration, business cycles vary from more than one year to ten or twelve
years; they are not divisible into shorter cycles of similar characteristics with amplitudes
approximating their own.”
19. In the expansion phase, there
is an increase in various economic factors, such as
production, employment, output, wages, profits,
demand and supply of products, and sales.
20. Inflation
Inflation can be defined as the persistent increase in the price level of goods and services in an
economy over a period of time. One of the important definitions of inflation is:
• In the words of Samuelson-Nordhaus, “Inflation is a rise in the general level of prices.”
Types of inflation are:
• Moderate/Creeping Inflation
• Galloping/Jumping Inflation
• Hyperinflation
