Business Economics and Financial Analysis

Introduction to Managerial Economics

Presenter’s Name – Mr. L Sainath Yadav
Presenter’s ID – IARE11063
Department Name – Master of Business Administration
Lecture Number - 11
Presentation Date – 19.02.2025

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 Course Objectives
I The concepts of business economics and demand analysis helps in
optimal decision making in business environment.
II The functional relationship between Production and factors of
production and able to compute breakeven point to illustrate the
various uses of breakeven analysis.
III The features, merits and demerits of different forms of business
organizations existing in the modern business environment and market
structures.
IV The concept of capital budgeting and allocations of the resources
through capital budgeting methods and compute simple problems for
project management.
V Various accounting concepts and different types of financial ratios for
knowing financial positions of business concern.
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 Course Outcomes
COURSE OUTCOMES: After successful completion of the course,
students should be able to:
CO 1 List the basic concepts of managerial economics and analysis,
measurement of demand and its forecasting to know the current
status of goods and services.
CO 2 Examine to know the current status of goods and services. To
know the economies and diseconomies of scale in manufacturing
sector.
CO 3 Summarize the four basic market models like perfect
competition, monopoly, monopolistic competition, and oligopoly to
know the price and quantity are determined in each model.
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 Course Outcomes
COURSE OUTCOMES: After successful completion of the course,
students should be able to:
CO 4 Compare various types of business organizations and discuss
their implications for resource allocation to strengthen the
market environment.
CO 5 Analyze different project proposals by applying capital budgeting
techniques to interpret the solutions for real time problems in
various business projects.
CO 6 Develop the ability to use a basic accounting system along with
the application of ratios to create (record, classify, and
summarize) the data needed to know the financial position of
the organization.
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 Course Outcomes
At the end of the course, students should be able to
CO Course Outcomes Blooms
Taxonomy
CO 2 Examine to know the current status of goods Remember
and services. To know the economies and
diseconomies of scale in manufacturing
sector.

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 Production – Concept meaning
Production is a process of converting an input into a more valuable
output.
The analysis of demand is mainly used for planning production
processes and determining the level of production.
For equilibrium , supply should be equal to demand. Production is
an aspect of the supply side of the market.
In other words , production implies the creation of utilities – from
utility ,place utility , time utility and service utility.

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 Definition

 Production is the transformation or conversion of resources into

commodities over time. Economists view production as an activity
through which utility is created or enhanced for a product. A firm is a
business unit which undertakes the activity of transforming inputs
into output of goods and services.

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Production – Concept meaning

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 Definition

Prof J R Hicks defines production as “any activity whether physical or

mental which is directed to the satisfaction of other people’s wants
through exchange”.
This definition brings out the following features of production
(1) Both physical and mental activity is production;
(2)It must satisfy other people’s wants. For example, if
a farmer produces for his consumption, it is not productive
activity;
(3)There must be exchange. For example, if a
teacher teaches without receiving salary, it is not regarded as
production.

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 FACTORS OF PRODUCTION
 Factors of production is an economic term that describes the
inputs that are used in the production of goods or services in
order to make an economic profit. .
 These production factors are also known as management,
machines, materials and labor, and knowledge has recently
been talked about as a potential new factor of production.


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 Factors of Production
Production of wealth is done by factors of production. These factors of production have been divided
into four: Land, Labour, Capital and Organization.
• Land represents free gifts of nature. It includes agricultural land, building sites, mines, fisheries,
forests, etc. Only those free gifts which are subject to human ownership and control are included
under ‘land’.

• Labor represents human element in production. It includes physical and mental effort. All efforts
undertaken to earn income are called labor. Labor includes all workers from street sweepers to
professors and engineers.

• Capital represents man made instruments of production – machines,plants, tools, factory

buildings, etc. All wealth which is used to produce wealth is called capital.
• Organization consists of combining factors and undertaking uncertainties of modern production.
The organizer starts production units. He controls production. He decides what to produce and how
much to produce. He bears risks and uncertainties of production.
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 LAND
 Land is short for all the natural resources available to create
supply. It includes raw land and anything that comes from the
land. It can be a non-renewable resource. That includes
commodities such as oil and gold.
 It can also be a renewable resource, such as timber. Once man
changes it from its original condition, it becomes a capital good.
 For example, oil is a natural resource, but gasoline is a capital
good. Farmland is a natural resource, but a shopping center is a
capital good.
 The income earned by owners of land and other resources is called
rent.

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 LABOUR
 Labor is the work done by people.
 The value of labor depends on workers' education, skills, and
motivation.
 It also depends on productivity.
 That measures how much each hour of worker time produces in
output.
 The reward or income for labor is wages.

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 CAPITAL
 Capital is short for capital goods. These are man-made objects like
machinery, equipment, and chemicals, that are used in
production. That's what differentiates them from consumer goods.
 For example, capital goods include industrial and commercial
buildings, but not private housing. A commercial aircraft is a
capital good but a private jet is not.
 The income earned by owners of capital goods is called interest.

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 CAPITAL
 Capital is short for capital goods. These are man-made objects like
machinery, equipment, and chemicals, that are used in
production. That's what differentiates them from consumer goods.
 For example, capital goods include industrial and commercial
buildings, but not private housing. A commercial aircraft is a
capital good but a private jet is not.
 The income earned by owners of capital goods is called interest.

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 ORGANIZATION
 Organization consists of combining factors and
undertaking uncertainties of modern production. The
organizer starts production units. He controls
production. He decides what to produce and how much
to produce. He bears risks and uncertainties of
production

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 Production and cost analysis
In economics, a production function gives the technological relation
between quantities of physical inputs and quantities of output of
goods.
Prof J R Hicks defines production as “any activity whether
physical or mental which is directed to the satisfaction of other
people’s wants through exchange”.
This definition brings out the following features of production
(1)Both physical and mental activity is production;
(2)It must satisfy other people’s wants. For example, if a
farmer produces for his consumption, it is not productive
activity;
(3)There must be exchange. For example, if a teacher teaches
without receiving salary, it is not regarded as production. 17
Production and cost analysis

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Production Function
As Stigler defines “the production function is the name
given to the relationship between the rates of productive
services and the rates of output of the production”
Algebraically the production function can be written as:
O = f(N, L, K, T)

• Here, ‘O’ stands for output and N, L, K, T stand for natural

resources, labor, stock of capital and state of technology. It shows
that the rate of output P is function (f) of inputs N, L, K, T.

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 Types of Production Function
Short-Run Production Function: In the short run, at least one factor of
production is fixed. The output can only be increased by varying the
variable inputs, such as labor.
Long-Run Production Function: In the long run, all factors of
production are variable. This allows firms to adjust all inputs to achieve
the desired level of output.
Consider a garment company that uses cloth, sewing machines, and
tailors to produce garments. If the company has 100 meters of cloth, one
sewing machine, and one tailor, the production function can be
represented as: Q = min(40 meters, 20 pieces, 20 pieces)
This means the maximum output is determined by the limiting factor,
which in this case is the sewing machine and tailor, both capable of
producing 20 pieces
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 Types of Production Function
Short-Run Production Function: In the short run, at least one factor of
production is fixed. The output can only be increased by varying the
variable inputs, such as labor.

In the short run, at least one input (usually capital) is fixed.

Example: A bakery hiring more workers (variable input) to increase bread
production while keeping the number of ovens (fixed input) constant.

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 Types of Production Function
Long-Run Production Function: In the long run, all factors of
production are variable. This allows firms to adjust all inputs to achieve
the desired level of output.

In the long run, all inputs are variable.

Example: A car company expanding its factory size and hiring
more workers to increase production.

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Types of Production function
.

Type
s

Short –Run
Long – Run
(Inputs kept constant
(Varying all inputs)
One input (Labour)
is varied)
Law of variable Law of returns to
proportion scale
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USES OF PRODUCTION FUNCTION
• To obtain Maximum output

• Helps the producers to determine whether employing

variable inputs /costs are profitable

• Highly useful in long run decisions

• Least cost combination of inputs and to produce an output

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Production function- components
• The law of variable proportions is as follows: “If a producer
increases the units of a one variable factor while keeping
other factors fixed, then initially the total product increases at
an increasing rate, then it increases at a diminishing rate, and
finally starts declining.”
• The law of returns to scale explains the proportional change
in output with respect to proportional change in inputs.
In other words, the law of returns to scale states when there
are a proportionate change in the amounts of inputs, the
behavior of output also changes.

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In Law of Variable proportions
ASSUMPTIONS : Constant state of Technology: It is assumed that the
state of technology will be constant and with improvements in the
technology, the production will improve.
1. Variable Factor Proportions: This assumes that factors of production
are variable. The law is not valid, if factors of production are fixed.
2. Homogeneous factor units: This assumes that all the units produced
are identical in quality, quantity and price. In other words, the units are
homogeneous in nature.
3. Short Run: This assumes that this law is applicable for those systems
that are operating for a short term, where it is not possible to alter all
factor inputs.

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Production function Table
For Example:-To get a clear picture of the stages of variable proportion, we take the
example of agriculture. Let us assume that keeping land as a fixed factor, the
production of variable factor i.e., labour can be shown with the help of the following
table:

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Stages

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Graphical Representation of Three Stages of Law of Variable
Proportions
 Law of Variable proportions
Stage of production Stage -1 Stage-2 Satge-3

Total product Initially increases an Increases at a Decreases

increasing rate and decreasing rate and
later increases at a becomes maximum
decreasing rate

Average product Increases and reaches Decreases Continues to decrease

maximum

Marginal product Increases and reaches Continues to fall and Becomes negative
a maximum and starts becomes zero
falling
Production in the long-run-Law of returns to scale
In the long run the fixed inputs like machinery, building and other
factors will change along with the variable factors like labour, raw
material etc.
With the equal percentage of increase in input factors various
combinations of returns occur in an organization.
Returns to scale: the change in percentage output resulting from
a percentage change in all the factors of production. They are
increasing, constant and diminishing returns to scale.

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RETURNS TO SCALE TABLE
RETURNS TO SCALE
 STAGES OF RETURNS TO SCALE
Stage I: The total production increased at an increasing rate.
We refer to this as increasing stage
where the total product, marginal product and average
production are increasing.
Stage II: The total production continues to increase but at a
diminishing rate until it reaches the next stage. Marginal
product, average product are declining but are positive. The
total production is at the maximum level at the end of the
second stage with a zero marginal product.
Stage III: In this third stage total production declines and
marginal product becomes negative. And the average
STAGE-1
INCREASING RETURNS TO SCALE
STAGE-2-CONSTANT RETURNS TO SCALE
CONSTANT RETURNS TO SCALE
STAGE-3-DIMINISHING RETURNS TO SCALE
DIMINISHING RETURNS TO SCALE
ISO QUANTS-Production function with two variable inputs

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Assumptions of Isoquants
• There are only two factors of production.
• The two factors can substitute each other up
to certain limit.

• The shape of the isoquants depends upon

the extent of substitutability of the two inputs.
• The technology is given over a period

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ISOQUANT SCHEDULE
Isoquant curve
PRODUCTION FUNCTION

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Thank You

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