BUSINESS ECONOMICS

INTRODUCTION, NATURE, SCOPE

Ms. SHEETAL GERA

 MEANING OF ECONOMICS

❏ The word Economics was derived from the two

Greek words oikou (a house) and nomos (to
manage).
❏ Robbins defines it as a science of scarcity.
❏ Paul A. Samuelson defines it as, “the study of how
men and society choose among the various scarce
resources to produce various commodities and its
distribution among society.”
 SCOPE OF ECONOMICS
❏ Scope includes its 2 branches:
1. Micro economics
2. Macro economics

❏ Microeconomics is the study of behavior of

individual decision making units. It solves the three
central problems of an economy, i.e. what, how and
for whom to produce.
❏ Macroeconomics is defined as the study of overall
economic phenomena, such as problem of full
employment, GDP etc.
 DIFFERENCE BETWEEN MICRO
AND MACRO ECONOMICS
▣ It is the study of individual ▣ It is the study of economy as a
economic units of an whole and its aggregates.
economy ▣ It deals with aggregates like
▣ It deals with individual national income, general price
income, individual prices and level and national output, etc.
individual output, etc. ▣ Its central problem is
▣ Its Central problem is price determination of level of
determination and allocation income and employment.
of resources. ▣ Its main tools are aggregate
▣ Its main tools are demand demand and aggregate supply
and supply of a particular of economy as a whole.
commodity factor. ▣ Income is the major
▣ Price is the main determinant determinant of macroeconomic
of microeconomic problems problems.
 ECONOMICS – POSITIVE OR
NORMATIVE
❏ Economics as Positive economics – positive
economics deals with what is or how an economic
problem facing a society is actually solved.
❏ It is the study of human decisions as facts which can
be verified with actual data.
❏ Ex: India is an overpopulated country.
❏ Prices have been rising in India.
❏ Economics as Normative economics – It deals with
what ought to be or how an economic problem
should be solved.
❏ It prescribes that course of action which is desirable
and necessary to achieve social goals.
❏ Ex: government should guarantee a minimum wage
for every worker.
 BUSINESS ECONOMICS

▣ Business economics is the study of the financial issues and

challenges faced by corporations operating in a specified
marketplace or economy.
▣ It deals with issues such as business organization,
management, expansion and strategy.
▣ Studies might include how and why corporations expand,
the impact of entrepreneurs, the interactions between
corporations, and the role of governments in regulation.
▣ Business firm’s decision making includes:
a. Elasticity of demand
b. Economies and diseconomies of scale
c. Opportunity cost
d. Net present value

e. Different market structures

DIFFERENCE BETWEEN BUSINESS
ECONOMICS AND ECONOMICS
NATURE OF BUSINESS ECONOMICS
NATURE OF BUSINESS ECONOMICS
1. Business economics is micro-economic in character, where the unit
of study is a firm;
2. Business economics is concerned with normative micro-economics
and not with positive micro-economics. business economics tells us
that what objectives a business firm should pursue and how they
should be set.
3. Business economics concentrates on making economic theory
more application-oriented. Thus business economics is more
pragmatic.
4. Business economics takes the help of macro-economics also so as
to understand the external conditions which are relevant to the
business.
 SCOPE OF BUSINESS ECONOMICS

1) Demand Analysis and Forecasting

2) Theory of Production and Production Analysis
3) Market Structure and Pricing Policies
4) Cost Analysis
5) Profit Analysis and Profit Management
6) Capital and Investment Decisions
7) Inventory Management
 RESPONSIBILITIES OF A BUSINESS
ECONOMIST
1. Better Management of Resources
2. Decision-making and Forward Planning
3. Economic Forecast
4. Goal of Maximum Profit
5. Challenging Tasks
6. Researcher and Philosopher
7. Additional Information
 ESSENTIAL QUALIFICATIONS OF A
BUSINESS ECONOMIST
1. Diplomacy

2. Thorough knowledge

3. Conceptual and metrical behavior

4. Creativity

5. Initiative

6. Intuitive ability.
 CLASSIFICATION OF BUSINESS
DECISIONS
Business decisions can be classified into various categories depending
upon the functional areas of the managers.
1. Financial Decision
2. Production Decisions
3. Personnel Decisions
4. Marketing Decisions
5. Miscellaneous Decisions
 FUNDAMENTAL CONCEPTS IN
BUSINESS ECONOMICS
1. Opportunity Cost Principle:
▣ It is the cost of next best alternative.
▣ In other words, an opportunity cost refers to a benefit that a person
could have received, but gave up, to take another course of action.
▣ Stated differently, an opportunity cost represents an alternative given
up when a decision is made.
▣ The opportunity cost of a decision is therefore the cost of sacrificing
the alternatives to that decision.
▣ Assuming the best choice is made, it is the “cost” incurred by not
enjoying the benefit that would have been had by taking the second
best available choice. It is “the loss of potential gain from other
alternatives when one alternative is chosen.”
2. MARGINAL ANALYSIS OR INCREMENTAL PRINCIPLE
▣ Marginal analysis helps to assess the impact of a unit change in one
variable on the other.
▣ For example, a firm’s decision to change prices would depend on
the resulting change in marginal revenue and marginal cost.
▣ Changes in these variables would, in turn, depend on the units sold
as a result of a change in price.
▣ The marginal concept measures the change in the dependent
variable with respect to unit change in the independent variable.
▣ However, when the independent variable is subject to chunk
changes, then the concept of marginalism has to be replaced by
incrementalism.
▣ Incremental concept involves the estimation of impact of a decision
▣ All the marginal concepts are incremental concepts but vice-versa is
not true.
 DIFFERENCE BETWEEN MARGINAL
CONCEPT AND INCREMENTAL
CONCEPT
Marginal concept Incremental concept
It is expressed in terms of unit It is expressed in terms of bulk
change change
Here, reference is to one Here, more than one independent
independent variable, ie, single variable is considered, ie,
variable function multi-variable function
It is more specific It is more general
All marginal concepts are All incremental concepts need not
incremental concepts be marginal concepts
3. TIME PERSPECTIVE PRINCIPLE:

▣ The time perspective principle explains that the decision-maker

must give due consideration to time element in his
decision-making exercise.

▣ Therefore, the manager must consider the short and long-run

consequences of his decision.
▣ The principle of time preference states "A decision should take
into account both the short-run and long-run effects on revenue
and cost and maintain a right balance between the long run and
short-run perspectives."
4. DISCOUNTING PRINCIPLE:

▣ Discounting principle implies that if a decision affects costs and

revenues at future dates, it is necessary to discount those costs and
revenues to present values before a valid comparison of alternatives
is possible.

▣ The time value of money (TVM) is the idea that money available at
the present time is worth more than the same amount in the future
due to its potential earning capacity.
▣ This core principle of finance holds that, provided money can earn
interest, any amount of money is worth more the sooner it is
received.
5. STOCK AND FLOW:

▣ An economic variable is a magnitude whose value may

change.
▣ Some of these variables are stock and some are flows.
▣ A stock is a quantity measurable at a particular point of time.
▣ A flow is a quantity that can be measured over a specific
period of time.
6. INDUCTION AND DEDUCTION:

▣ There are two methods of investigation available to the economists,

namely:
(i) Deductive Method

(ii) Inductive Method

▣ In the words of Prof. Miller, "Deduction is the method of using a
general principle to reach a specific conclusion."
▣ According to Miller, "Induction is the process of reaching a general
conclusion from particular instance."
7. EQUI-MARGINAL PRINCIPLE:

▣ It states that a rational decision maker would allocate or hire his

resources in such a way that the ratio of marginal returns and
marginal costs of various uses of a given resource or of various
resources in a given use is the same.
▣ A consumer seeking maximum utility (satisfaction) from his
consumption basket will allocate his consumption budget on goods
and services such that

▣ where, MU₁ = Marginal utility from good one, MC₁ = Marginal cost
of good 1 and so on.
 RISK, RETURN AND PROFIT
▣ Risk is the deviation between expected and actual return.
▣ Risk is generally taken as dispersion or spread or standard
deviation between the actual and expected outcome.
▣ The firms that take risk get reward in the form of profits, which
are the net earnings of the business.
▣ The higher the risk, higher will be the profit.
▣ Return on investment is the percentage of the total investment. It
is the percentage ratio of the investment. Investment decisions are
taken on the basis of rate of interest.