Basic business economics
- 1. INTRODUCTION TO BUSINESS ECONOMICS Made with efforts of:- AARUSHI POKHRIYAL, RIDHIMA LAMBA, TISHA MAKHIJA
- 2. WHAT IS ECONOMICS ABOUT? Presentation title 2 Economics is the study of the processes by which the relatively scarce resources are allocated to satisfy the competing unlimited wants of human beings in a society. Economics concerns itself not just with the crucial concern of how a nation allocates its scarce productive resources to various uses.
- 3. Presentation title 3 It also deals with the processes by which the productive capacity of these resources is increased and with the factors which, in the past, have led to sharp fluctuations in the rate of utilisation of these resources. In the day-to-day events, we come across several economic issues such as changes in the price of individual commodities as well as in the general price level, economic prosperity and higher standards of living of some countries despite general poverty and poor standards of living in others. The tools of Economics chooses the best among the different alternative courses of action available to the decision maker.
- 4. Meaning of business economics Decision making refers to the process of selecting an appropriate alternative that will provide the most efficient means of attaining a desired end, from two or more alternative courses of action. It involves evaluation of feasible alternatives, rational judgment on the basis of information and choice of a particular alternative which the decision maker finds as the most suitable. Presentation title 4 The question of choice arises because our Productive resources such as land, labour, capital, and management are limited and can be employed in alternative uses.
- 5. The more efficient alternatives must be chosen and less efficient alternatives must be rejected. The management of a business unit generally needs to make strategic, tactical and operational decisions . Decisions making is not simple and straightforward as the economic environment in which the firm functions is highly complex and dynamic. The problem occurs because , most of the time, decisions are to be taken under conditions of imperfect knowledge and uncertainty. The theories of Economics provide the tools which explain various concepts such as demand, supply, costs, price, competition etc., Business Economics applies these tools in the process of business decision making. Business Economics has close connection with Economic theory (micro as well as macro economics) operations Research, Statistics, Mathematics and the Theory of Decision-Making. Business Economics is also useful for managers of ‘not-for-profit’ organizations such as NGO, and voluntary organisations . Presentation title 5
- 6. Definitions of business economics Presentation title 6 Joel Dean defined Business Economics in terms of the use of economic analysis in the formulation of business policies. Business Economics is essentially a component of Applied Economics as it includes application of lected quantitative techniques such as : • linear programming • regression analysis • capital budgeting • break even analysis • cost analysis This text is to focus on the heart of Business Economics i.e. the Micro Economic Theory of the behaviour of consumers and firms in competitive and not-competitive markets. It provides with a basic framework for making key business decisions about the allotion of scarce resources.
- 7. Nature of Business Economics
- 8. Presentation title 8 1. Business economics is a science- Science as a systematic body of knowledge and it is based on methodological observations. Similarly, Managerial Economics is also a science of making decisions and finding alternatives, keeping the scarce of resources in mind. 2. 2. Based on micro economics- In managerial economics, problems of a particular organization are looked upon rather than focusing on the whole economy. Therefore it is termed as a part of microeconomics. 3. 3. Incorporates elements of macro economics- Managerial Economics uses the concepts of macroeconomics to solve problems. Managers analyze the macroeconomic factors like market conditions, economic reforms, government policies to understand their impact on the organization.
- 9. • Business economics is also an art- Managerial Economics requires a lot of creativity and logical thinking to come up with a solution. A managerial economist should possess the art of utilizing his capabilities, knowledge, and skills to achieve the organizational objective. • Uses theory of markets and private enterprises- It uses the theory of the firm and resource in the backdrop of private enterprise economy. • Pragmatic in approach- Managerial economics is a tool in the hands of managers that aids them in finding appropriate solutions to business-related problems and uncertainties. As mentioned above, managerial economics also helps in goal establishment, policy formation, and effective decision making. It is a practical approach to find solutions. • Interdisciplinary in nature- Business Economics incorporates tools from many other disciplines like mathematics, statistics, accounting, marketing, etc. Therefore, it is interdisciplinary in nature. • Normative in nature- Economic theory has developed along two lines – positive and normative. A positive or pure science analyses cause and effect relationship between variables in an objective and scientific manner, but it does not involve any value judgement. Business Economics is generally normative or prescriptive in nature. It suggests the application of economic principles with regard to policy formulation, decision-making and future planning. Presentation title 9
- 10. SCOPE OF BUSINESS ECONOMICS Presentation title 10 The scope of Business Economics is quite wide. It covers most of the practical problems a manager or a firm faces. There are two categories of business issues to which economic theories can be directly applied, namely: 1. Internal issues or operational issues (this can be solved using Micro Economics) 2. External issues or environmental issues (this can be solved using Macro Economics)
- 11. Presentation title 11 1. Microeconomics applied to Internal or Operational Issue Operational issues include all those issues that arise within organization and fall within the purview and control of the management. Demand Analysis and Forecasting: Demand analysis pertains to the behaviour of consumers in the market. It studies the nature of consumer preferences and the effect of changes in the determinants of demand such as, price of the commodity, consumers’ income, prices of related commodities, consumer tastes and preferences etc. Production and Cost Analysis: Production theory explains the relationship between inputs and output. A business economist has to decide on the optimum size of output, given the objectives of the firm. He has also to ensure that the firm is not incurring undue costs. Inventory Management: Inventory management theories pertain to rules that firms can use to minimise the costs associated with maintaining inventory in the form of ‘work-in-process,’ ‘raw materials’, and ‘finished goods’. Inventory policies
- 12. Market Structure and Pricing Policies: Analysis of the structure of the market provides information about the nature and extent of competition which the firms have to face.This helps in determining the degree of market power (ability to determine prices)which the firm commands and the strategies to be followed in market management under the given competitive conditions such as, product design and marketing. Presentation title 12 Resource Allocation: Business Economics, with the help of advanced tools such as linear programming, enables the firm to arrive at the best course of action for optimum utilisation of available resources. Theory of Capital and Investment Decisions: For maximizing its profits, the firm has to carefully evaluate its investment decisions and carry out a sensible policy of capital allocation. Profit Analysis: Profits are, most often, uncertain due to changing prices and market conditions. Profit theory guides the firm in the measurement and management of profits under conditions of uncertainty. Profit analysis is also immensely useful in future profit planning. Risk and Uncertainty Analysis: Business firms generally operate under conditions of risk and uncertainty. Analysis of risks and uncertainties helps the business firm in arriving at efficient decisions and in formulating plans on the basis of past data, current information and future prediction.
- 13. 2. Macroeconomics applied to External or Environmental Issues Environmental factors have significant influence upon the functioning and performance of business. The major macro-economic factors relate to: ♦ The type of economic system ♦ Stage of business cycle ♦ The general trends in national income, employment, prices, saving and investment. ♦ Government’s economic policies like industrial policy, competition policy, and fiscal policy, foreign trade policy and globalization policies. ♦ Working of central banks and financial sector and capital market and their regulation. ♦ Socio-economic organisations like trade unions, producer and consumer unions and cooperatives. ♦ Social and political environment. Presentation title 13
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