Business Economics

Unit-1Introduction to Microeconomics

Meaning of business economics• Managerial economics is a science that deals with the

application of various economic theories, principles, concepts and techniques to business management in order to solve business and management problems. It deals with the practical application of economic theory and methodology to decision making problems faced by private, public and nonprofit making organizations

• According to Lord Robins, ”Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”.

According to SPENCER AND SIEGELMAN “Business Economics is the integration of economic theory

with business practice for the purpose of facilitating decision making and forward planning by management”.

 

• Business economic meets these needs of the business firm. This is illustrated in the following presentation.

Economic Theory and

Methodology

Business Management

Decision Problems

Business EconomicsApplication of Economics

to solve business problems

Optimal solutions to business problems

CHARACTERISTICS OF BUSINESS ECONOMICS1. Micro Economic Nature: Business Economics is micro economic in its nature

because it deals with matters of a particular business firm only.2. Use of Economic Theories: Business Economics uses all economic theories

relating to the profits, distribution of income etc.3. Realistic One: Business Economics is a realistic science. It studies all matters

concerning business organization by considering the real conditions existing in the business field.

4. Normative Science: Business Economics is a normative science. It studies the matters concerning the aims and objectives of a business firm. It determines the methods to be adopted for achieving such objectives. It also makes enquiry into the good and bad in decision making. Hence it is a normative science.

5. Macro-Economic Uses: Even though Business Economics has the nature of Micro-Economics, it also uses Macro-Economic approaches frequently. Certain matters in Macro-Economics like Business Cycles, National Income, Public Finance, Foreign trade etc. are essential for Business Economics. So, Business Economics uses the macro-economic phenomenon for taking business decisions.

6. Economics is a science or an art. • It is considered as science if it is a systemized

body of knowledge which studies the relationship between cause and effect.

• Art is nothing but practice of knowledge. • Where as science teaches us to know and art

teaches us to do.• It is science in which methodology and art in

its application.6

NATURE AND SCOPE OF BUSINESS ECONOMICS The scope of Business Economics consists of the following:• 1. Demand Forecasting: Demand forecasting is an

important topic studied in Business Economics. Every business firm initiates and continues its production process on the basis of the anticipation of more demand for its goods in the future. It makes research and conducts market survey with a view to know the tastes and fashions of the consumers. It pools up the resources and starts production for meeting the future demand. Business Economics analyses the demand behavior and forecasts the quantity demanded by the consumers.

2. Cost Analysis: Business Economics deals with the analysis of different costs incurred by the business firms. Every firm desires to minimize its costs and increase its output by securing several economies of scale. But it does not know in advance about the exact costs involved in production process. Business Economics deals with the cost estimates and acquaints the entrepreneurs with the cost analysis of their firm.

3. Profit Analysis: Every business firm aims to secure maximum profits. But at the same time it faces uncertainty and risk in getting profits. It has to make innovations in production and marketing of its goods. Business Economics deals with the matters relating to profit analysis like profit techniques, policies and break-even analysis.

4. Capital Management : Capital management is another topic dealt in Business Economics. It denotes planning and control of capital expenditure in business organisation. It studies matters like cost of capital, rate of return, selection of best project etc.

IMPORTANCE OF BUSINESS ECONOMICS Business Economics is a useful subject. In fact it is the most significant of all social sciences, Its study is highly useful for analysing and understanding the various economic problems. Its study brings utility to all sections of the people. Business Economics became the intellectual religion of the day. Business Economics is described as both light giving and fruit bearing science. It enriches our knowledge (light) and brings results (fruits).

• The theoretical and practical utility or significance of Business Economics is explained from the following points:

THEORETICAL SIGNIFICANCE1. Understanding Economic Behavior The study of Business Economics helps us to understand the economic behavior

of human beings. 2. Working of the Economic System Business Economics explains the conditions which influence the progress of the

economy. It makes suggestions for overcoming the complicated problems faced by the people and the government in various economic systems. Hence it has great significance for understanding the working of the economic system.

•

3. Intellectual Value The study of Business Economics sharpens the intellectual calibers of individuals. It

imparts certain qualities like rational behavior, proper allocation of resources etc. 4. Economic Tools Mrs. Joan Robinson described Economics as a box of economic tools. It provides a good

knowledge regarding the nature, causes and effects of various economic phenomena. 5. Economic Growth Business Economics suggests various ways and means for maintaining the growth rates

in the developed economies. It also analyses the factors obstructing the economic growth of these countries.

6. Economic Development Developing countries aim at achieving economic development within a short span of

time. Business Economics enables us to understand the nature and conditions necessary for the successful organisation of business firm.

7. Performance of the Economy Business Economics helps us to assess the performance of the economy. We can judge

the position, progress and future of an economy through several theories and models of Business Economics.

8. Economic Planning Economic planning is an important branch of economics. Economics

provides a good knowledge and information regarding the techniques of Economic Planning. It sharpens our mental abilities by clearly explaining the types, aims and objective of economic plans.

9. Prediction Business Economics serves as the best means for predicting the

economic events. It helps us to predict the consequence of various economic phenomena.

10. Ethical Value Business Economics inculcate certain ethical norms like honesty,

responsibility and adjustability etc. It upholds the moral and cultural values of individuals. It makes them honest and dignified citizens.

PRACTICAL SIGNIFICANCE

1. Useful to the Finance MinisterThe study of Business Economics is highly useful to the Finance Minister and the personnel

working in the finance department. It provides a good knowledge about public revenue, public debt and public expenditure. It helps them in forming a sound financial policy and result oriented budget.

2. Useful to the Minister for Planning The study of Business Economics is also useful to the Minister for planning and his

personnel. It furnishes a good knowledge about the various types of plans, mobilisation, plan implementation, capital output ratio, investment strategy etc.

3. Useful to the Bankers Business Economics is also useful to the bankers. It enables them to understand the

nature, purpose and implications of different economic policies implemented by the business firms.

4. Trade Union Leaders Knowledge of Business Economics is also significant for the trade union leaders. The

study of Business Economics helps the trade union leaders to understand the nature and causes of industrial disputes, wage problem etc.

5. Businessmen Business Economics is also useful to the businessmen. Businessmen,

with the help of Business Economics, can study the fluctuations in business, prices, production and employment. They can adopt a proper strategy for producing goods and services according to the changes in demand.

6. Statesmen Statesmen will also get benefit by studying Business Economics. It

enables them to understand the nature and causes of economic problems. It helps them to solve the economic problems like unemployment, inflation, scarcity of goods etc.

7. International Economic Problems International Economics is an important branch of Economics. It deals

with matters like terms of trade, balance of payments, export and import regulations etc. Its knowledge enables the international agencies to determine the foreign exchange value of various national currencies. Thus, Business Economics has both theoretical and practical significance. Its study is useful to all sections of the people.

• Microeconomics:• Microeconomics is the study of the economic

system from the perspective of households and business firms, it focuses on the nature of individual consumption and production units within a particular market or economic system

• It is the study of decisions that people and organizations make with regard to the allocation of resources and prices of goods and services.

• Microeconomics also takes into account various policies like tax policies and government regulations at the individual level and the firm level. Thus it encompass demand and supply.

• Explanation of Microeconomics: • Microeconomics and allocation of resources. The microeconomic

theory takes the total quantity of resources as given. It seeks to explain how they are allocated to the production of goods. The allocation of resources to the production of goods depends upon the price of various goods and the prices of factors of production. Microeconomics analyses how the relative prices of goods and factors are determined. Thus the theory of product pricing and the theory of factor pricing (rent wages, interest and profit) fall within the domain of micro economics.

• Microeconomics and economic efficiency. The microeconomic theory seeks to explain whether the problems of scarcity and allocation of resources so determined are efficient. Economic efficiency involves (1) efficiency in consumption (2) efficiency in production and distribution and (3) over all economic efficiency. The price theory shows under that conditions these efficiencies are achieved.

Importance of Microeconomics: Before Keynesian revolution, the body of economics mainly consisted

of micro economics. The classical economics as well as the neo-classical economics belonged to the domain of micro economics. The importance and uses of micro economics in brief are as under.

Helpful in understanding the working of private enterprise economy. The micro economics helps us to understand the working of free market economy. It tells us as to how the prices of the products and the factors of production are determined.

Helps in knowing the conditions of efficiency. Micro economics help in explaining the conditions of efficiency in consumption, production and in distribution of the rewards of factors of production.

Working economy without central control. The micro economics reveals how a free enterprise economy functions without any central control.

Study of welfare economy. Micro economic involves the study of welfare economics.

Limitations of Microeconomics:Microeconomics despite its many advantages is not free from limitations. They in brief are,

Microeconomics deals with the individual perspective, not the aggregate economy. Therefore, what is applicable to an individual may not true for economy.

Microeconomics uses assumptions such as, Assumption of full employment in the economy which is unrealistic and that other things will remain unchanged when one particular variable is changed.

Assumption of liaises fair policy which is no longer in practice in any country of the world.

It does not analyze the economy as a whole. It deals with specific parts of the economy and tries to provide solution to specific problems.

Thank you