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Business Economics (ECO 341)Fall Semester, 2012

Khurrum S. Mughal

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Required Texts & Readings: Economics, 19th Edition by Paul A. Samuelson &

William D. Nordhaus

Recommended Readings: Articles from Economics, 4th Edition by David H. Hyman Economist Weekly, Business Section.

Course Material

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Class Participation 5

Quizzes

10

Assignments 10

Presentation 10

Two Mid Term Examinations 25

Final Exam 40

100

Grading Criteria

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5

Economics

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Definition:How societies use scarce resources to produce

valuable goods and services and distribute them among different individuals.(Economics, 19th Edition by Paul A. Samuelson & William D. Nordhaus)

Economics

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ScarcityProduction is never high

enough to meet everyone’s demand

Wants are unlimited

EfficiencyAn economy is producing

efficiently unless no individual’s economic welfare can be improved unless someone else is made worse off

Economics

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Microeconomics Study of economics at smaller scale Adam Smith: Markets, Firms, & Households Wealth of Nations (1776): Determination of prices of land, labour, &

capital; and strength and weaknesses of market mechanism

Macroeconomics Study of overall performance of the economy General Theory of Employment, Interest & Money, John M Keynes

(1936) What causes business cycles, with alternating spells of high

unemployment and high inflation

Fallacies Encountered in Economic Reasoning: The post hoc fallacy - causality Failure to hold other things constant The fallacy of composition

Basics of Economics

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Positive EconomicsBased on facts of an economy

Normative EconomicsInvolves ethical precepts and norms of fairness

Basics of Economics

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Types of EconomiesMarket Economies: Individual and private

firms make the major decisions regarding production and consumption (laissez-faire economy)

Command Economies: Government makes all important decisions about production and distribution

Mixed Economies

Basics of Economics

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Limited Resources: Land Labour Energy Factories and tools Technical knowledge etc.

Allocation among innumerable possibilities Choice of input and output allocation

Factors of Production: land, labour and capital

Basics of Economics

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Basics of Economics

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Opportunity Cost: The cost of giving up any activity when one makes a choice to choose the best possible alternativeExample: Choosing between production of

computers and printers by a firm on PPF

Basics of Economics

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Marginal Analysis: How much you get from using one more unit Marginal Utility

Marginal Product

Marginal Revenue

Marginal Cost

Basics of Economics

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Time Dimension:Short Run

Operating period in which at least one factor of production is in fixed supply

Long Run Operating period in which all factors of production

are in variable supply

Short Run Profits Vs Long Run Success of Business

Basics of Economics

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Limited Resources: Land Labour Energy Factories and tools Technical knowledge etc.

Allocation among innumerable possibilities Choice of input and output allocation

Factors of Production: land, labour and capital

Basics of Economics

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Inputs and Outputs

The Production Possibility Frontier

Application of PPFs

Poor Vs High Income Nations

Choice among Public and Private Goods

Economic Growth

Current Vs Future Consumption

Unattainable Vs Inefficient Points on PPF

Society’s Technological Possibilities

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Application of theory and tools of analysis of decision science to examine how an organization can achieve its aims and objectives most efficiently

Business Economics

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Managerial Economics

Management Decision Problems

Economic Theory:Micro & Macroeconomics

Managerial Economics:Application of economic theory

and decision tools to solve managerial decision problems

Decision Science:Mathematical Economics and Econometrics

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Relationship to economic theory:Linked to individual firms investment decision,

production and preferences of consumers.Macroeconomic conditions in which a firm is

functioning.

Economic theories aim to predict economic behaviour

Theory of the firm is of utmost importance for Managerial Economics

Relationship to Economic Theory

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Mathematical Economics is used to formalize the economic models of economic theory in the form of an equation

Econometric tools are used to statistically analysis the models using real world data

The tools are used for forecasting as well.

For Example: Demand of Education

Relationship to Decision Sciences

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Integration of Economic Theory, Decision Science Tools, and Business Areas of Study

Managerial Decision Process:Establishing the objective of the firmProblems and Obstacles towards achieving the

objectiveIdentifying the range of possible solutionsSelecting the optimal solutionImplementation of the solution

Relationship with Business Administration

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Types of Business Decisions

Price and Output Decisions

Demand Estimation

Choice of technique of production

Advertising Decisions

Long-run Production Decisions

Investment Decisions

Relationship with Business Administration

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y=f(x) or y=g(x,z) or y=h(x1, x2,…..xn)

Total, Average and Marginal ProductsExample: Labor to be employed in

Construction

Economic Models: Experiments similar to Natural science experiments by holding everything else constant

Functional Relationships in Economics

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Example of Demand and SupplyDemand Function

Qd=a-bP where b<0Supply Function

Qs=c+dP where d>0

Equilibrium

Qd=Qs

Economic Models