Business Economics Unit 1 PDF

Business Economics UNIT 1 Muhammed Nahar IITTM, Bhubaneswar Course Outline Concepts of economics – Nature; scope; Characteristics and application of managerial economics Economics - wealth oriented view; welfare oriented view; scarcity view; development v...

Business Economics UNIT 1 Muhammed Nahar IITTM, Bhubaneswar Course Outline Concepts of economics – Nature; scope; Characteristics and application of managerial economics Economics - wealth oriented view; welfare oriented view; scarcity view; development view.  What is the fundamental ‘economic problem’?? NEEDS: are the basic necessities that a person must have in order to survive e.g. food, water, warmth, shelter and clothing Material needs, Physiological, needs, Emotional needs, etc. WANTS: desire for consumption of goods and services) are unlimited e.g. Bigger home, Car, etc. Economics deal with allocation of resources, the choices that are made by economic agents The Economic Problem Unlimited Wants Scarce Resources – Land, Labour, Capital Resource Use Choices SCARCITY The excess of wants resulting from having limited resources (land, labor, capital and entrepreneurs) in satisfying the endless wants of people It is a universal problem for societies – it is not limited to poor countries To the economist, all goods and services that have a price are relatively scarce. This means that they are scarce relative to people’s demand for them. The Economic Problem – Critical questions? ØWhat goods and services should an economy produce? § should the emphasis be on agriculture, manufacturing or services, should it be on sport and leisure or housing? TECHNOLOGY Ø How should goods and services be produced? – § labour intensive, land intensive, capital intensive? Efficiency? TECHNOLOGY Ø Who should get the goods and services produced? § Consumer? even distribution? TECHNOLOGY How Economic problems are addressed? Economic Products - Goods and services that are useful, scarce, and transferable Command a price because they are scarce GOODS SERVICES Consumer goods- Goods with final use by Work performed by someone individuals Ex: Home repair, concerts, haircuts Capital goods- Goods that are used to produce other goods How Economic problems are addressed? Economic activities – Production, Consumption and Exchange of Goods & Services Economy – system which attempts to solve economic problem Types of Economies – Household economy, Local Economy, National Economy, International Economy Key Economic Activities - Production Factors of Production Land natural resources available for production renewable resources: those that replenish non-renewable resources: cannot be replaced Labor physical and mental effort of people used in production Capital all non-natural (manufactured) resources that are used in the creation and production of other products Enterprise (Entrepreneurship) refers to the management, organization and planning of the other three factors of production  Factors of Production Land Labor Capital Enterprise Rent Wages Interest Profit Payments to factors of Production INCOME  What is Economics? q Economics comes from the Greek word Oikonomia q Oikos means ‘a household’ + Nomos means management Definition Aristotle described ‘economics as a household management that means the problems of food, shelter, clothing, education, treatment etc. for family members and the process of solving these problems by earning money’. Economics is the study of scarcity and how it affects the use of resources, the production of goods and services, the growth of production and well-being over time, and many other important and complicated issues that affect society. Economics is a social science concerned with the production, distribution, and consumption of goods and services Economics as Science Ø Science of Wealth Ø Science of Material Well Being (Welfare) Ø Science of Choice Making (Scarcity) Ø Science of Growth & Development Wealth oriented view of Economics "An inquiry into the nature and causes of the wealth of Nations". - Adam Smith (1723 -1790), the founder of economics. Wealth oriented view of Economics  Study of Wealth:  Economics deals with the study of wealth only  Therefore, it is concerned with the activities of man related to production, consumption, exchange and distribution of wealth  This definition conveys the feeling that Economics constitutes only material commodities while it ignores non-material goods as air, water and sunshine. Wealth oriented view of Economics  Stress on Wealth: Since the main aim of the political economy is to increase the riches of the economy, it gives more stress on wealth, not anything else.  Causes of Wealth: Economics is considered as study of causes of wealth accumulation which brings economic development. In order to increase wealth, production of material goods will have to be increased.  Economic Man: This definition is basically based on the man who is always aware of his ‘self-interest’ that leads him to material gains.  Welfare oriented view of Economics Science of Material Well Being “Economics is a study of man’s action in the ordinary course of life. It enquires how he gets his income and how he spends it.” -Alfred Marshall Features i. It is the study of mankind and the ordinary business life. ii. Economics is the study of wealth but more important is the study of man. iii. It emphasis on material requisites of well being (like food, cloth, shelter, etc.) iv. It emphasis on social welfare in terms of money. Scarcity oriented view of Economics Science of Choice Making “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” - Lionel Robbins Features- 1. Economics is the science 2. Unlimited wants ends 3. Limited means 4. Alternative uses of resources Scarcity oriented view of Economics Criticism Ø It does not emphasis either on welfare or on material well being. Ø This approach is more scientific Ø It emphasis on positive aspects of science Ø This definition reduces the subject matter by reducing it to theory of resource allocation Ø Robbin does not take into account the possibility of increase in resources overtime  Development oriented view of Economics Science of Dynamic Growth & Development: “Economics is a study of how men and society choose, with or without use of money, to employ source productive resources which could have alternative uses, to produce various commodities over time and distribute them for consumption now and in the future amongst various people and group of society. -Paul A. Samuelson Features 1. Emphasis is on the problem of choice making 2. It is proved that the problem of scarcity of resources is not merely confined to present but also to the future. 3. It is the study of dynamic approach by taking economic growth. 4. It is very comprehensive (have both aspects of welfare and choice making). 5. It has broaden the subject matter of economics. It includes consumption, production, exchange, distribution and public finance. Branches of Economics MICRO ECONOMICS: It is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Eg. Demand of product, supply, price, etc MACRO ECONOMICS: It is a branch of economics concerned with large-scale or general economic factors, such as interest rates and national productivity, etc Types of Economic Systems - MICRO & MACRO MACRO ECONOMICS MICRO ECONOMICS Whole Economy Individual Markets Inflation (General Price level) Individual Labour Market Employment / Unemployment Individual Consumer behaviour Aggregate Demand Effect on price of a good / service Productive Capacity of Economy Supply of good Subject matter of Micro Economics Theory of Demand Theory of Production Theory of Cost Theory of Product Pricing Theory of distribution Subject matter of Macro Economics Theory of National Income Theory of Output and Employment Theory of General Price Level Theory of Economic Growth Theory of International Trade Theory of Money Managerial Economics Managerial Economics is economics applied in decision- making Link between abstract theory and managerial practice. It is the application of economic concepts, theories, tools and methodologies to solve problems in business. It enables decision making. Analysis for identifying problems, organizing information and evaluating alternatives. Definition: Managerial economics is a study of application of managerial skills in economics. It helps in anticipating, determining and resolving potential problems. These problems may pertain to costs, prices or forecasting future market. Managerial Economics & Business Decision-making Decision Problem Tools & Traditional Managerial Economics Techniques Economics of Analysis Optimal Solution to Business Problems 25  Nature of Managerial Economics “Managerial Economics.. “is the integration of economic theory and business practice for the purpose of facilitating decision-making and forward planning by management.” ~ Spencer and Siegelman Managerial economics bridges the gap between 'theories' and 'practice'. Nature of Managerial Economics Chief Characteristics of Managerial Economics Managerial economics is micro-economic in character as it concentrates only on the study of the firm and not on the working of the economy. Managerial economics takes the help of macro-economics to understand and adjust to the environment in which the firm operates. Managerial economics is normative rather than positive in character. It is both conceptual (theory) and metrical (quantitative techniques). The contents of managerial economics are based mainly on the “theory-of firm’. Knowledge of managerial economics helps in making wise choices. Scope of Managerial Economics Objectives of a Firm Demand Analysis and Forecasting Production and Cost Analysis Pricing decisions Competition Profit management Capital management Market Structure Inflation and Economic conditions Product Policy, Sales decisions and Market strategy Significance of Managerial Economics In order to enable the manager to become more competent, managerial economics provides a number of tools and techniques. Managerial economics provides most of the concepts that are needed for the analysis of business problems. Managerial economics is helpful in making decisions. Evaluating choice of alternatives. Why Managers Need To Know Economics?? Managers are responsible for achieving the objective of the firm to the maximum possible extent with the limited resources placed at their disposal. Resources like capital, workforce and material are limited and scarce. There are legal constraints facing managers. Choice of business and the nature of products, Choice of size of the firm, Choice of technology, Choice of price, How to promote sales, How to face competition, How to decide on new investments, How to manage profit and capital, End of UNIT 1