Business Economics

Dr. Gaurav Gupta

 Definition
.Wealth Definition-Prof.Adam Smith
“Economics is a science that inquiry into the
nature and causes of wealth of a nations”.

.Welfare Definition-Prof. Marshall

“Economics is a study of man’s actions in
the ordinary business of life. It enquires
how man gets his income and how he
spends it.”
 Definition
.Scarcity Definition-Prof.Robbins
“Economics is the science which studies the
human behavior as a relationship between ends
and scarce means which have alternative uses.”
 Micro Economics

Microeconomics is the branch of economics that examines the

behavior of individual decision-making units—that is, business
firms and households.
 Macro Economics
Macroeconomics is the branch of economics that examines the
behavior of economic aggregates— income, output, employment,
and so on—on a national scale.
aggregates— income, output, employment, and so on—on a
national scale
 The Method of Economics

Positive economics studies economic

behavior without making judgments. It
describes what exists and how it works.
Normative economics, also called policy
economics, analyzes outcomes of
economic behavior, evaluates them as
good or bad, and may prescribe courses
of action.
Scarcity, Choice, and Opportunity Cost
Human wants are unlimited, but
resources are not.
Three basic questions must be answered
in order to understand an economic
system:
What gets produced?
How is it produced?
Who gets what is produced?
Every society has some system or
mechanism that transforms that society’s
scarce resources into useful goods and
services.
Capital refers to the things that are themselves
produced and then used to produce other
goods and services.
The basic resources that are available to a
society are factors of production:
Land
Labor
Capitl
 ………………………………..

Opportunity cost is that which we give

up or forgo, when we make a decision
or a choice.
 The Production Possibility Frontier
The production possibility frontier
(ppf) is a graph that shows all of the
combinations of goods and services
that can be produced if all of
society’s resources are used
efficiently
PPF
• The production
possibility frontier curve
has a negative slope,
which indicates a trade-
off between producing
one good or another.
PPF
• Points inside of the
curve are inefficient
• At point H, resources
are either unemployed,
or are used inefficiently
PPF
• Point C is one of the
possible combinations
of goods produced
when resources are
fully and efficiently
employed
The Basic Decision-Making Units
• A firm is an organization that transforms
resources (inputs) into products (outputs).
Firms are the primary producing units in a
market economy.
• An entrepreneur is a person who organizes,
manages, and assumes the risks of a firm,
taking a new idea or a new product and
turning it into a successful business.
• Households are the consuming units in an
economy.
The Circular Flow of Economic Activity

• The circular flow of

economic activity shows
the connections between
firms and households in
input and output markets.
 Input Markets and Output Markets
• Output, or product,
markets are the markets
in which goods and
services are exchanged.
• Input markets are the
markets in which
resources—labor, capital,
• Payments flow in the opposite
direction as the physical flow of and land—used to
resources, goods, and services produce products, are
(counterclockwise).
exchanged.
 Input Markets
Input markets include:
• The labor market, in which households supply
work for wages to firms that demand labor.
• The capital market, in which households supply
their savings, for interest or for claims to future
profits, to firms that demand funds to buy
capital goods.
• The land market, in which households supply
land or other real property in exchange for rent.
 Determinants of Household Demand
A household’s decision about the quantity of a particular output to demand
depends on:

• The price of the product in question.

• The income available to the household.
• The household’s amount of accumulated wealth.
• The prices of related products available to the
household.
• The household’s tastes and preferences.
• The household’s expectations about future income,
wealth, and prices.
 Quantity Demanded

• Quantity demanded is the amount

(number of units) of a product that
a household would buy in a given
time period if it could buy all it
wanted at the current market price.
 Demand in Output Markets
ANNA'S DEMAND • A demand schedule
SCHEDULE FOR is a table showing
TELEPHONE CALLS
QUANTITY
how much of a given
PRICE DEMANDED product a household
(PER (CALLS PER
CALL) MONTH) would be willing to
$ 0
0.50
30
25 buy at different
3.50
7.00
7
3
prices.
10.00
15.00
1
0
• Demand curves are
usually derived from
demand schedules.
The Demand Curve
ANNA'S DEMAND
SCHEDULE FOR
• The demand curve is
TELEPHONE CALLS a graph illustrating
PRICE
QUANTITY
DEMANDED how much of a given
(PER
CALL)
(CALLS PER
MONTH) product a household
$ 0
0.50
30
25 would be willing to
3.50
7.00
7
3 buy at different prices.
10.00 1
15.00 0
The Law of Demand
• The law of demand
states that there is a
negative, or inverse,
relationship between
price and the quantity of
a good demanded and
its price.
• This means that
demand curves slope
downward.
Other Properties of Demand Curves

• Demand curves intersect the

quantity (X)-axis, as a result of
time limitations and diminishing
marginal utility.
• Demand curves intersect the (Y)-
axis, as a result of limited
incomes and wealth.
 Income and Wealth

• Income is the sum of all households

wages, salaries, profits, interest
payments, rents, and other forms of
earnings in a given period of time. It is
a flow measure.
• Wealth, or net worth, is the total
value of what a household owns
minus what it owes. It is a stock
measure.
 Related Goods and Services

• Normal Goods are goods for which

demand goes up when income is
higher and for which demand goes
down when income is lower.
• Inferior Goods are goods for which
demand falls when income rises.
 Related Goods and Services

• Substitutes are goods that can serve as

replacements for one another; when the
price of one increases, demand for the
other goes up. Perfect substitutes are
identical products.
• Complements are goods that “go
together”; a decrease in the price of one
results in an increase in demand for the
other, and vice versa.
Shift of Demand Versus Movement Along a Demand
Curve

• A change in demand is not the

same as a change in quantity
demanded.

• In this example, a higher price

causes lower quantity demanded.

• Changes in determinants of
demand, other than price, cause a
change in demand, or a shift of the
entire demand curve, from DA to DB.
A Change in Demand Versus a Change in Quantity
Demanded

• When demand shifts to the right,

demand increases. This causes
quantity demanded to be greater
than it was prior to the shift, for
each and every price level.
 A Change in Demand Versus a Change in Quantity
Demanded
To summarize:

Change in price of a good or service

leads to

Change in quantity demanded

(Movement along the curve).

Change in income, preferences, or

prices of other goods or services
leads to

Change in demand
(Shift of curve).
The Impact of a Change in Income
• Higher income decreases the • Higher income increases the
demand for an inferior good demand for a normal good
 The Impact of a Change in the Price of
Related Goods
• Demand for complement good
(ketchup) shifts left

• Demand for substitute good (chicken)

shifts right

• Price of hamburger rises

• Quantity of hamburger
demanded falls
From Household to Market Demand

• Demand for a good or service can be defined

for an individual household, or for a group of
households that make up a market.
• Market demand is the sum of all the
quantities of a good or service demanded per
period by all the households buying in the
market for that good or service.
 From Household Demand to Market
Demand
• Assuming there are only two households in the
market, market demand is derived as follows:
Mobile phone (electronic product)
Demand curve of mobile phone(electronic
product)
 ELASTICITY OF DEMAND
It is three types
*price elasticity
*income elasticity
*cross elasticity
 Definition Of Price Elasticity Of Demand

• The change in the quantity demanded of a

product due to a change in its price is known
as Price elasticity of demand. Thus, the
sensitiveness or responsiveness of demand to
change in price is as called elasticity of
demand
Price elasticity curve
 Kinds Of Price Elasticity Of Demand
1) Perfectly elastic demand
2) Relatively elastic demand
3) Elasticity of demand equal to utility
4) Relatively inelastic demand
5) Perfectly inelastic demand
Let Us See Some Views On Them
 Perfectly elastic demand

y
When the
Perfectly elastic
P demand curve demand for a
R product changes
I
D
–increases or
C D
decreases even
E
when there is no
change in price,
it is known as
perfect elastic
0 x
demand.
 Relatively elastic demand
y
When the
P Relatively elastic proportionate
R demand curve
D
change in
I
demand is more
C
than the
E
proportionate
D
changes in price,
it is known as
0 x
relatively elastic
demand
demand.
Elasticity of demand equal to utility

When the
y
D
proportionate
P
change in
R
demand is equal
I Elasticity of
C
demand equal to proportionate
E
to utility curve changes in price,
D
it is known as
unitary elastic
0 demand
x demand
 Relatively inelastic demand
Y
D When the
Relatively inelastic
demand curve
proportionate
change in demand
P
is less than the
R proportionate
I changes in price, it
C is known as
E relatively inelastic
demand
D

O X
demand
Perfectly inelastic demand
Y
D
When a change in
price, howsover
Perfectly inelastic
P demand curve large, change no
R changes in quality
demand, it is known
I
as perfectly inelastic
C
demand
E

0 D X
demand
ALL KINDS OF DEMAND CAN BE SHOWN
IN ONE DIAGRAM AS FOLLOW
Y

WHERE
P D1) Perfectly elastic
R demand
D
I D1 D2)Relatively elastic

C demand
D2 D3)Elasticity of demand
E
D3
equal to utility
D4
D4)Relatively inelastic
0 D5 X demand
DEMAND D5)Perfectly inelastic
demand
Price elasticity survey on mobile phone 11
year
Practical Importance of the Concept of Price
Elasticity Of Demand
• The concept is helpful in taking Business
Decisions
• Importance of the concept in formatting Tax
Policy of the government
• For determining the rewards of the Factors of
Production
• To determine the Terms of Trades Between
the Two Countries
(2) Income Elasticity Of Demand
Types Of Income Elasticity Of Demand

• Positive Income elasticity of demand

• Negative Income elasticity of demand
• Zero Income elasticity of demand
 Positive Income elasticity of demand
Y
D

P
A

D
Income

B S
O Quantity Demanded X
Positive Income elasticity of demand

• Income Elasticity Equal to Unity or One

• Income Elasticity Greater Than Unity Or
One
• Income Elasticity Less Than Unity or One
Negative Income elasticity of demand
Price

Total Revenue

B S

Quantity Demanded (000s)

Zero Income elasticity of demand
Y
D
Income

O X
D

Quantity Demanded
Case study of income elasticity of demand of
electronic product(mobile phone)
 All Income Graphs Representation
Y
F
E
D
C
Income

B
A

O X
Quantity Demanded
 Measurement Of Income Elasticity Of
Demand

Proportionate change in Demand

Income Elasticity Of Demand =
Proportionate change in Income
i.e. ∆q ∆y
Income Elasticity Of Demand = +
Q Y
Measurement Of Income Elasticity Of
Demand
• Here , ∆q = Change in the quantity demanded.
Q = Original quantity demanded.
∆y = Change in income.
Y = Original income.
• For e.g. ,when Income of the consumer =
2,500/- , he purchases 20 units of X, when
income = 3,000/- he purchases 25 units of X
Measurement Of Income Elasticity Of
Demand
• Thus
Income Elasticity of Demand
∆q ∆y
= +
Q Y

= (5/20) + (500/2500)
= 1.5
therefore here the IED is 1.5 which is more
than one.
Factors Affecting Income Of Demand
• Income Itself Only.
• Price Of the Commodity
Types of Elasticity Of Substitution on
Graph
Change in QUANTITIY ratio of good x & y
Y
E4
E3

E5

E2

E1
X
O
Change in PRICE ratio of good x & y
Price elasticity of demand depends on:

• Proportion of income spent on particular

good say X.
• Income elasticity of demand.
• Elasticity of substitution.
• Proportion of income spent on product other
than X.
 Cross Elasticity of Demand

• Cross elasticity of demand express a

relationship between the change in the
demand for a given product in response to a
change in the price of some other product
• E.g. if the X tea demand reduces
tremendously than it effect could be seen in
demand of sugar and milk.
Cross elasticity of demand of mobile phone
survey in mobile industry
Types of Cross Elasticity of Demand of
electronic product
• Cross Elasticity of Demand Equal to Unity or
One
• Cross Elasticity of Demand Greater than Unity
or one
• Cross Elasticity of demand less than unity or
one
 Measurement Cross Elasticity of
Demand
Proportionate change in Demand
for product X
Cross Elasticity of Demand =
Proportionate change in Price of
i.e. product Y

Cross Elasticity of Demand = ∆qx +

∆p y
Qx Py
 Cross Elasticity of Demand For
Y Substitutes
D
Price of Y

O X
Demand for Y
 Cross Elasticity of Demand For
Y Complementary Products
D
Price of Y

D
O X
Demand for Y
 Cross Elasticity of Demand For Neutral
Y Products
D
Price of Y

O X
Demand for Y
 Importance of Cross Elasticity Of
Demand
• The concept is of very great importance in
changing the price of the products having
substitutes and complementary goods .
• In demand forecasting
• Helps in measuring interdependence of price
of commodity .
• Multiproduct firms use these concept to
measure the effect of change in price of one
product on the demand of their other product
 Advertising Elasticity of Demand

• Advertising elasticity of demand is the

measure of the rate of change in demand
due to change in advertising expenditure
• The amount of change in demand of goods
due to advertisement is known as
Advertisement Elasticity of Demand .
Advertising by HTML playback of mobile
phone
 Importance of the Advertising
Elasticity Of Demand in Business
Decisions
• It is useful in competitive industries.
• Though advertisement shifts the demand
curve to right path but it also increases the
fixed cost of the firm.
Other electronic product( laptops) elasticity
of demand
 Supply in Output Markets
• A supply schedule is a table showing how
CLARENCE BROWN'S
SUPPLY SCHEDULE much of a product firms will supply at
FOR SOYBEANS
different prices.
QUANTITY
SUPPLIED
PRICE (THOUSANDS
(PER OF BUSHELS • Quantity supplied represents the number of
BUSHEL) PER YEAR) units of a product that a firm would be willing
$ 2 0 and able to offer for sale at a particular price
1.75 10
during a given time period.
2.25 20
3.00 30
4.00 45
5.00 45
 The Supply Curve and
the Supply Schedule
• A supply curve is a graph illustrating how much
of a product a firm will supply at different prices.
CLARENCE BROWN'S 6

Price of soybeans per bushel ($)

SUPPLY SCHEDULE
FOR SOYBEANS 5
QUANTITY
SUPPLIED
4
PRICE (THOUSANDS
(PER OF BUSHELS
3
BUSHEL) PER YEAR) 2
$ 2 0
1.75 10 1
2.25 20
3.00 30 0
4.00 45
5.00 45 0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year
 The Law of Supply
6 • The law of supply
Price of soybeans per bushel ($)

5
states that there is a
4
3
positive relationship
2 between price and
1 quantity of a good
0 supplied.
0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year
• This means that
supply curves
typically have a
positive slope.
 Determinants of Supply
• The price of the good or service.
• The cost of producing the good, which in
turn depends on:
– The price of required inputs (labor, capital,
and land),
– The technologies that can be used to produce
the product,
• The prices of related products.
 A Change in Supply Versus
a Change in Quantity Supplied

• A change in supply is not the

same as a change in quantity
supplied.

• In this example, a higher price

causes higher quantity
supplied, and a move along
the demand curve.

• In this example, changes in determinants of supply, other than price, cause an

increase in supply, or a shift of the entire supply curve, from SA to SB.
 A Change in Supply Versus
a Change in Quantity Supplied

• When supply shifts to the

right, supply increases. This
causes quantity supplied to
be greater than it was prior to
the shift, for each and every
price level.
 A Change in Supply Versus
a Change in Quantity Supplied
To summarize:

Change in price of a good or service

leads to

Change in quantity supplied

(Movement along the curve).

Change in costs, input prices, technology, or prices of related goods and

services
leads to

Change in supply
(Shift of curve).
 From Individual Supply
to Market Supply
• The supply of a good or service can be
defined for an individual firm, or for a group
of firms that make up a market or an industry.
• Market supply is the sum of all the quantities
of a good or service supplied per period by all
the firms selling in the market for that good or
service.
 Market Supply
• As with market demand, market supply is the
horizontal summation of individual firms’
supply curves.
 Market Equilibrium
• The operation of the market
depends on the interaction
between buyers and sellers.
• An equilibrium is the condition
that exists when quantity supplied
and quantity demanded are equal.
• At equilibrium, there is no
tendency for the market price to
change.
Market Equilibrium
• Only in equilibrium
is quantity supplied
equal to quantity
demanded.
• At any price level
other than P0, the
wishes of buyers
and sellers do not
coincide.
Market Disequilibria
• Excess demand, or
shortage, is the condition
that exists when quantity
demanded exceeds quantity
supplied at the current
price.
• When quantity demanded exceeds
quantity supplied, price tends to
rise until equilibrium is restored.
Market Disequilibria
• Excess supply, or surplus, is
the condition that exists
when quantity supplied
exceeds quantity demanded
at the current price.

• When quantity supplied exceeds

quantity demanded, price tends to
fall until equilibrium is restored.
 Increases in Demand and Supply

• Higher demand leads to higher • Higher supply leads to lower

equilibrium price and higher equilibrium price and higher
equilibrium quantity. equilibrium quantity.
Decreases in Demand and Supply

• Lower demand leads to • Lower supply leads to

lower price and lower higher price and lower
quantity exchanged. quantity exchanged.
Relative Magnitudes of Change

• The relative magnitudes of change in supply and demand determine the

outcome of market equilibrium.
Relative Magnitudes of Change

• When supply and demand both increase, quantity will increase, but
price may go up or down.