Business Economics Unit-1 PDF

Unit-1 Business Economics Scope of Business Economics Micro-Economics Applied to Operational Issues To resolve the organization's internal issues arising in business operations, the various theories or principles of microeconomics applied are as follows: Theory of Demand: The demand th...

Unit-1 Business Economics Scope of Business Economics Micro-Economics Applied to Operational Issues To resolve the organization's internal issues arising in business operations, the various theories or principles of microeconomics applied are as follows: Theory of Demand: The demand theory emphasizes on the consumer’s behavior towards a product or service. It takes into consideration the needs, wants, preferences and requirement of the consumers to enhance the production process. Theory of Production and Production Decisions: This theory is majorly concerned with the volume of production, process, capital and labour required, cost involved, etc. It aims at maximizing the output to meet the customer’s demand.  Pricing Theory and Analysis of Market Structure: It focuses on the price determination of a product keeping in mind the competitors, market conditions, cost of production, maximizing sales volume, etc. Profit Analysis and Management: The organizations work for a profit. Therefore they always aim at profit maximization. It depends upon the market demand, cost of input, competition level, etc. Theory of Capital and Investment Decisions: Capital is the most critical factor of business. This theory prevails the proper allocation of the organization's capital and making investments in profitable projects or venture to improve organizational efficiency. Macro-Economics Applied to Business Environment Any organization is much affected by the environment it operates in. The business environment can be classified as follows: Economic Environment: The economic conditions of a country, GDP, economic policies, etc. indirectly impacts the business and its operations. Social Environment: The society in which the organization functions also affects it like employment conditions, trade unions, consumer cooperatives, etc. Political Environment: The political structure of a country, whether authoritarian or democratic; political stability; and attitude towards the private sector, influence organizational growth and development. Managerial economics provides an essential tool for determining the business goals and targets, the actual position of the organization, and what the management should do fill the gap between the two.  BASIC PROBLEM OF AN ECONOMY All countries face the problem of scarcity as their resources are limited and resources have alternative uses. Every economy be it capitalist, socialist or mixed has to deal with this central problem of scarcity of resources relative to the wants for them. This is generally called ‘The Central Economic Problem’. The Central Economic problem is further divided into four basic economic problems. These are : What to produce? How to produce? For whom to produce? What provisions (if any) are to be made for economic growth? 1. WHAT TO PRODUCE ? Society has to decide whether to produce guns or butter, machines (capital goods) or cell phone (consumer goods). It also has to decide in what quantity each of the good would be produced. In nutshell, society must decide how much wheat, how many schools, how many meters of cloths etc. have to be produced. 2. HOW TO PRODUCE ? Society has to decide whether the goods and services are to be produced using labor intensive techniques or capital intensive techniques. This choice would depend on the availability of different factors of production (i.e. labor and capital) and their relative prices.  For e.g. Cotton can be produced using handloom, power looms or automatic looms. Production with handlooms involves use of labor and production with automatic loom involves use of more machines and capital. It is in the society’s interest to use those techniques of production that make the best use of available resources. 3. FOR WHOM TO PRODUCE ? A society cannot satisfy wants of all and thus it has to take an important decision ‘for whom’ it should produce. It has to decide on who should get how much of the total output of goods and services i.e. How to distribute goods and services among members of society. 4. WHAT PROVISION SHOULD BE MADE FOR ECONOMIC GROWTH ? A society has to decide how much saving and investment has to be made for future progress. A society would not like to use all its scarce resources for current consumption only, as if it uses all resources for current consumption and no provision is made for future production, the society’s production capacity would not increase.