Business Economics - Unit 1

Business Economics - Unit 1

• Business economics is the application of economic principles to decision-making in businesses.
• It bridges the gap between economic theory and practical business applications.
• Business economics assists in solving business problems effectively.
• The study emphasizes how firms utilize resources effectively with limited resources, legal frameworks, and varying product types.
• Key elements include demand analysis, forecasting, production analysis (costs), pricing, competition, and capital management.

Course Outline

• Concepts of economics, including nature and scope.
• Characteristics and application of managerial economics.
• Different views on economics:
  • Wealth-oriented view. Focuses only on increasing wealth.
  • Welfare-oriented view. Encompasses the study of human well-being in society.
  • Scarcity-oriented view. Examines decision-making when resources are limited.
  • Development-oriented view. Considers economic growth and dynamic changes over time.

Economic Problem

• The fundamental economic problem arises from unlimited wants and limited resources.
• Needs are basic necessities for survival.
• Wants are desires for goods and services that are not essential.
• Scarcity exists because resources are not enough to fulfill all desires.
• Choices must be made on what, how, and for whom to produce.

Scarcity

• Scarcity is a universal issue for societies, especially for countries with limited resources.
• Scarce resources include land, labor, and capital.
• To economists, goods and services with prices are considered relatively scarce, as their supply is less than the demand.

Economic Problem - Key Questions

• What goods and services should an economy produce? (Considering factors such as agriculture, manufacturing, services, etc)
• How should goods and services be produced? (Analyzing labor-intensive, land-intensive, capital-intensive methods, and efficiency)
• Who should get the goods and services produced? (Considering consumers and distribution methods)

Economic Activities

• Economic activities involve the production, consumption, and exchange of goods and services.
• Economics as a system attempts to resolve economic problems arising from these activities.

Factors of Production

• Land: Natural resources essential for production.
  • Renewable resources replenish, while non-renewable ones do not.
• Labor: Physical and mental efforts used in production.
• Capital: Non-natural (manufactured resources) utilized in production.
• Enterprise (Entrepreneurship): Organizes and plans the other three factors.
• Each factor of production earns a specific payment:
  • Rent (land).
  • Wages (labor).
  • Interest (capital).
  • Profit (enterprise).

What is Economics?

• Economics originates from the Greek word "oikonomia," combining "oikos" (household) and "nomos" (management).
• Economics studies the allocation of limited resources for producing and distributing goods and services to satisfy unlimited needs and wants.

Economics as a Science

• Economics is a social science dealing with the production, distribution, and consumption of goods and services, focusing on resource allocation to address societal well-being.
• It considers wealth, welfare, scarcity, and development.

Wealth-Oriented View of Economics

• Emphasizes the study of wealth accumulation.
• Adam Smith, the founder of economics, believed economics studies the nature and causes of the wealth of nations.
• Wealth-oriented economics primarily focuses on material goods and services, disregarding immaterial aspects like air and sunshine.

Wealth-Oriented View - Stress on Wealth

• The main aim of political economy is to increase national wealth.
• Factors like production of material goods must be increased to increase wealth.
• This wealth-oriented view focuses on economic growth and material gains.

Welfare-Oriented View of Economics

• Focuses on the well-being of people, encompassing issues like income, consumption, and how societies use resources.
• Alfred Marshall posited that economics is a study of human action in daily life, emphasizing how people earn and spend income.
• This approach considers human needs like food, clothing, and shelter.

Scarcity-Oriented View of Economics

• Emphasizes the science of making choices when resources have alternative uses.
• Lionel Robbins defined economics as the study of human behavior in allocating scarce resources with alternative uses.
• It explores how people make choices and allocate resources appropriately.

Scarcity-Oriented View - Criticism

• Fails to fully consider welfare and material well-being.
• Oversimplified and too focused on resource allocation.
• Doesn't account for the potential increase in resources over time.

Development-Oriented View of Economics

• Considers economic growth and change over time.
• Paul A. Samuelson viewed economics as the study of how individuals and societies make choices with limited resources, considering both present and future needs.
• This approach considers growth, consumption, production, exchange, distribution, and finance.

Branches of Economics

• Microeconomics: Studies individual markets, consumers, firms, and their resource allocation decisions.
• Macroeconomics: Examines large-scale economic issues (e.g., inflation, employment, national productivity), impacting the whole economy.

Subject Matter of Microeconomics

• Demand theory
• Production theory
• Cost theory
• Product pricing theory
• Distribution theory

Subject Matter of Macroeconomics

• National income theory
• Output and employment theory
• General price level theory
• Economic growth theory
• International trade theory
• Money theory

Managerial Economics

• Applies economic theory and tools to business decision-making.
• It bridges abstract theories with practical applications.
• Analyzes business problems to provide solutions for optimal outcomes.

Nature of Managerial Economics

• A pragmatic application of micro-economic principles within a business context.
• Utilizes economic theories, tools, and methods to analyze business situations.
• Incorporates insights from macroeconomics to understand the broader market environment.
• Normative (prescriptive for 'best' decisions) and not purely descriptive or positive.
• Employs both conceptual (theory) and metric (quantitative) techniques.
• Concentrates on the "theory of the firm."

Scope of Managerial Economics

• Objectives of the firm
• Demand analysis and forecasting
• Production and cost analysis
• Pricing decisions
• Competition
• Profit management
• Capital management
• Market structure
• Economic conditions
• Product policy, sales, and market strategy

Significance of Managerial Economics

• Enables managers to become more competent by providing tools and techniques.
• Provides essential concepts for analyzing business problems.
• Assists in decision-making and evaluating alternative courses of action.

Why Managers Need to Know Economics

• Managers must effectively manage limited resources to achieve firm objectives.
• Considerations must involve scarce resources, business choices, and market conditions.
• Understanding economical factors is crucial for determining business strategy.