Economics and BCK Notes

CHAPTER-1: NATURE AND SCOPE OF BUSINESS ECONOMICS


UNIT – 1: INTRODUCTION

What is Economics about?
 Greek word ‘Oikonomia’ which means Household
 19th century Economics was known as ‘Political Economy’.
 An inquiry into the ‘Nature and Causes of the wealth of Nations’ (1776), The
wealth of Nations by Adam Smith (first modern work of economics)
 Two fundamental facts
 Human being have unlimited wants and
 The means to satisfy these unlimited wants are relative scare

Meaning of business economics?
Decision Making refers to the process of selecting an appropriate alternative that
will provide the most efficient means of attaining a desired end, from two or
more alternative course of action.
Decision making is not simple and straightforward. It is highly complex and
dynamic.
Business economics integrates economics theory with business practice
Business economics also referred as managerial economics.

Definition of business economics?
 The use of economic analysis to make business decisions involving the best use of
an organization’s scare resources.
 Joel Dean defined business economics in terms of the use of economics analysis in
the formulation of business policies. Business economics is essentially a component
of applied economics.

Nature of Business Economics
Micro Economics
 Study of the behavior of different individuals (consumer and firms) and
organization within an economic system.
Macro Economics
 Study of the overall economic phenomena or the economy as a whole.

Describing the nature of business economics
 Economic world is complex and interdependence
 Economic theories are hypothetical and simplistic in nature
 Business economics is a science
 Based on macro economics
 Incorporates elements of Macro Analysis
 Business economics is also an Art
 Use of Theory of markets and private enterprises
 Pragmatic (practical way of dealings with problems) in approach

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 Interdisciplinary in Nature
 Normative in Nature (ought to be, descriptive in nature, involves value judgement)
& Positive in nature (what is, no value judgement, cause and effect relationship )

Scope of Business Economics
1. Microeconomics applied to Internal or Operational issues:- that arise within the
organization and fall within the purview and control of management.
 Demand analysis and Forecasting
 Production and cost analysis
 Inventory management
 Market structure and Pricing policies.
 Resource allocation
 Theory of capital and investment decisions
 Profit analysis
 Risk and uncertainty analysis
2. Macroeconomics applied to external or Environmental issues
 Economic system
 Business cycle
 National income, employment prices, saving and investment
 Fiscal policy, foreign trade policy, economic policies
 Central banks
 Unions and cooperatives
 Social and political environment.




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UNIT 2:- BASIC PROBLEM OF AN ECONOMY

Central problem of Economy



What to produce How to produce For whom to produce What provision
should be made
for economics
What goods to be Labour intensive Rich growth
produced
How much quantity Capital intensive Poor
to be produced


CAPITALIST ECONOMY (eg: United States and United Kingdom,Hong Kong, South
Korea)
Characteristics:
(i) Right to private property
(ii) Freedom of enterprise
(iii) Freedom of economic choice
(iv) Profit motive
(v) Consumer sovereignty
(vi) Competition
(vii) Absence of government interference
How do capitalist economies solve their central problems?
Deciding what to produce – capital goods
Deciding how to produce – capital intensive
Deciding for whom to produce – rich
Deciding about consumption, saving and investment – higher the level of income
and interest rates, higher will be the savings. Greater the profit expectation
greater will be investment.
Merits of Capitalist Economy
 Self regulating
 Profit motive
 Economic growth is faster
 Optimum allocation of resources
 Operating efficiency
 Cost of production is minimized

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 Incentive for efficient economic decisions and implementation
 Quality goods due to competition
 Incentive for innovation
 Fundamental right to property and right to freedom
 Democratic framework
Demerits of Capitalism
 Economic inequality and social injustice
 Property rights over human rights
 Economic inequalities
 Ignores human welfare
 Income inequality
 Exploitation of labour
 Consumer sovereignty is myth
 Misallocation of resources ( for luxury goods)
 Less of merit goods (education and health)
 Unplanned production
 Enormous waste of productive resources
 Formation of monopolies
 Excessive materialism as well as conspicuous and unethical consumption.

SOCIALIST ECONOMY (eg: China, North Korea)
The concept of socialist economy was propounded by Karl Marx and Frederic Engels in
their work ‘the Communist Manifesto’ published in 1848.Socialist economy is also
called as çommand economy or centrally planned economy.
Characteristics:
 Collective ownership
 Economic planning
 Absence of consumer choice
 Relatively equal income distribution
 Minimum role of price mechanism or market forces
 Absence of competition
Merits of Socialism
 Equitable distribution of wealth and income
 Rapid and balanced economic development
 Better utilization of resources
 Unemployment is minimised


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