Module 1(One)
Business Economies
Business economics is a field of applied economics that studies
the financial, organizational, market-related, and environmental issues
faced by corporations. Business economics assesses certain factors
impacting corporations—business organization, management, expansion,
and strategy—using economic theory and quantitative methods. Research
topics in the field of business economics might include how and why
corporations expand, the impact of entrepreneurs, interactions
among corporations, and the role of governments in regulation.
• Business economics is a field of applied economics that studies
the financial, organizational, market-related, and
environmental issues faced by corporations.
• Business economics encompasses subjects such as the concept of
scarcity, product factors, distribution, and consumption.
Understanding Business Economics
In the broadest sense, economics refers to the study of the components and
functions of a particular marketplace or economy—such as supply and
demand—and the impact of the concept of scarcity. Within economics,
production factors, distribution methods, and consumption are important
subjects of study. Business economics focuses on the elements and factors
within business operations and how they relate to the economy as a whole.
The field of business economics addresses economic
principles, strategies, standard business practices, the acquisition of
necessary capital, profit generation, the efficiency of production, and overall
management strategy. Business economics also includes the study of
external economic factors and their influence on business decisions such as
a change in industry regulation or a sudden price shift in raw materials.
Concept of Economic: -
Economic is a social science. Its basic function is to study how people,
individual, household, firm and nation maximize their gain from limited
resources and opportunities
Maximizing behaviour/ optimizing behaviour is selecting the best out of
available option with the objectives of maximising gains from gives
resources.
1. Households; -
How household allocates their income (limited resources) between
various goods and services they consume so that they are able to
maximize their total satisfaction.
, 2. Producers: -
Firms decides on the commodity to produce, the productive
technology, location of the firm, price of the product etc.
3. Nation; - How nation allocate their resources and materials between
competing needs of the society so that economic welfare of the
society can be maximized.
Economic is thus, a social science which studies human behaviour in
relation to optimizing allocation of available resources to achieve given
ends.
Economic is a study of the choice making behaviour of people
1. Economic world is very complex
2. Economic decision has to be taken under the condition of
a) Imperfect knowledge
b) Risk and uncertainty.
Micro and Macro Economies
Another useful distinction is that economic theories make is between Micro
economies and Macro- Economics. Micro- economies deal with the theory of
the firm, and the behaviour and problems of individuals and of Micro-
organization. Macroeconomics is concerned with the behaviour of the
economic as a whole, and the theories about its operation. Thus, the study
of the level and determination of national income, employment and prices
and the analysis of aggregates consumption and balance of payment
belongs to Macro- economics.
It should be obvious that the roots of managerial economics springs from
micro economic theory. Price theory, demand concept and theories of
market structure, to take a few examples, are element of micro- economic
which managerial economic draw upon. The dependence of the latter of
micro economic theory is very much like the dependence of medicine on
biological sciences and of engineering or technology on physic. It is
important to note that managerial economics has and applied bias and an
interest in applying economic theory in order to solve real life problems of
enterprise. Mere teaching of micro-economic theory will not therefore, be a
substitute for the teaching of managerial economic. However, an elementary
course in micro-economic theory is useful pre- requisite for all student on
managerial economics.
, Aggregative or macro-economic theory on the other hand, has relevance
for managerial economics. But one part of this subject to which managerial
economics could contribute is national income forecasting. The latter is an
important aid to business condition analysis which in turn could be a
valuable input for forecasting the demand for specific product groups.
Assumptions and estimates of demand are essential data for most of the
allocation decisions managerial economics is concerned with.
Fundamental Concepts that aid Decision Making.
1.Incremental Principle: -
The incremental concept is probably the most important concept in
economics and is certainly the most frequently used in Managerial
Economics. Incremental concept is closely related to the marginal cost and
marginal revenues of economic theory.
The two major concepts in this analysis are incremental cost and
incremental revenue. Incremental cost denotes change in total cost,
whereas incremental revenue means change in total revenue resulting from
a decision of the firm.
The incremental principle may be stated as follows:
A decision is clearly a profitable one if
(i) It increases revenue more than costs.
(ii) It decreases some cost to a greater extent than it increases others.
(iii) It increases some revenues more than it decreases others.
(iv) It reduces costs more than revenues.
, 2. The Opportunity Cost Concept:
_____________________________________________
Both micro and macroeconomics make abundant use of the fundamental
concept of opportunity cost. In Managerial Economics, the opportunity cost
concept is useful in decision involving a choice between different alternative
courses of action.
The concept of opportunity cost implies three things:
1. The calculation of opportunity cost involves the measurement of
sacrifices.
2. Sacrifices may be monetary or real.
3. The opportunity cost is termed as the cost of sacrificed alternatives.
Opportunity cost refers to expected income foregoes from the second-best
use of the resources involved in the present decision.
Suppose a firm has Rs. 100 million at disposal and there are only three
alternatives uses
1. Expand the size of the firm
2. Set up a new production unit in another locality
3. To buy shares from another firm
The expected annual income return (income) from an alternative are as
follows:
1. Rs. 20 million
2. Rs. 18 million
3. Rs. 16 million
Rational Decision-making would suggest invest the money in alternative 1.
this implies that the manager would have to sacrifices the Annual Return of
Rs. 18 million expected from alternative 2.
The difference between actual earning and opportunity cost is called
Economic gain or Economic profit.
The concept of opportunity cost assumes a great significance where
Economic gain is neither insignificant nor very large.
3.Discounting Principle; -
This concept is an extension of the concept of time perspective. Since future
is unknown and incalculable, there is lot of risk and uncertainty in future.
Business Economies
Business economics is a field of applied economics that studies
the financial, organizational, market-related, and environmental issues
faced by corporations. Business economics assesses certain factors
impacting corporations—business organization, management, expansion,
and strategy—using economic theory and quantitative methods. Research
topics in the field of business economics might include how and why
corporations expand, the impact of entrepreneurs, interactions
among corporations, and the role of governments in regulation.
• Business economics is a field of applied economics that studies
the financial, organizational, market-related, and
environmental issues faced by corporations.
• Business economics encompasses subjects such as the concept of
scarcity, product factors, distribution, and consumption.
Understanding Business Economics
In the broadest sense, economics refers to the study of the components and
functions of a particular marketplace or economy—such as supply and
demand—and the impact of the concept of scarcity. Within economics,
production factors, distribution methods, and consumption are important
subjects of study. Business economics focuses on the elements and factors
within business operations and how they relate to the economy as a whole.
The field of business economics addresses economic
principles, strategies, standard business practices, the acquisition of
necessary capital, profit generation, the efficiency of production, and overall
management strategy. Business economics also includes the study of
external economic factors and their influence on business decisions such as
a change in industry regulation or a sudden price shift in raw materials.
Concept of Economic: -
Economic is a social science. Its basic function is to study how people,
individual, household, firm and nation maximize their gain from limited
resources and opportunities
Maximizing behaviour/ optimizing behaviour is selecting the best out of
available option with the objectives of maximising gains from gives
resources.
1. Households; -
How household allocates their income (limited resources) between
various goods and services they consume so that they are able to
maximize their total satisfaction.
, 2. Producers: -
Firms decides on the commodity to produce, the productive
technology, location of the firm, price of the product etc.
3. Nation; - How nation allocate their resources and materials between
competing needs of the society so that economic welfare of the
society can be maximized.
Economic is thus, a social science which studies human behaviour in
relation to optimizing allocation of available resources to achieve given
ends.
Economic is a study of the choice making behaviour of people
1. Economic world is very complex
2. Economic decision has to be taken under the condition of
a) Imperfect knowledge
b) Risk and uncertainty.
Micro and Macro Economies
Another useful distinction is that economic theories make is between Micro
economies and Macro- Economics. Micro- economies deal with the theory of
the firm, and the behaviour and problems of individuals and of Micro-
organization. Macroeconomics is concerned with the behaviour of the
economic as a whole, and the theories about its operation. Thus, the study
of the level and determination of national income, employment and prices
and the analysis of aggregates consumption and balance of payment
belongs to Macro- economics.
It should be obvious that the roots of managerial economics springs from
micro economic theory. Price theory, demand concept and theories of
market structure, to take a few examples, are element of micro- economic
which managerial economic draw upon. The dependence of the latter of
micro economic theory is very much like the dependence of medicine on
biological sciences and of engineering or technology on physic. It is
important to note that managerial economics has and applied bias and an
interest in applying economic theory in order to solve real life problems of
enterprise. Mere teaching of micro-economic theory will not therefore, be a
substitute for the teaching of managerial economic. However, an elementary
course in micro-economic theory is useful pre- requisite for all student on
managerial economics.
, Aggregative or macro-economic theory on the other hand, has relevance
for managerial economics. But one part of this subject to which managerial
economics could contribute is national income forecasting. The latter is an
important aid to business condition analysis which in turn could be a
valuable input for forecasting the demand for specific product groups.
Assumptions and estimates of demand are essential data for most of the
allocation decisions managerial economics is concerned with.
Fundamental Concepts that aid Decision Making.
1.Incremental Principle: -
The incremental concept is probably the most important concept in
economics and is certainly the most frequently used in Managerial
Economics. Incremental concept is closely related to the marginal cost and
marginal revenues of economic theory.
The two major concepts in this analysis are incremental cost and
incremental revenue. Incremental cost denotes change in total cost,
whereas incremental revenue means change in total revenue resulting from
a decision of the firm.
The incremental principle may be stated as follows:
A decision is clearly a profitable one if
(i) It increases revenue more than costs.
(ii) It decreases some cost to a greater extent than it increases others.
(iii) It increases some revenues more than it decreases others.
(iv) It reduces costs more than revenues.
, 2. The Opportunity Cost Concept:
_____________________________________________
Both micro and macroeconomics make abundant use of the fundamental
concept of opportunity cost. In Managerial Economics, the opportunity cost
concept is useful in decision involving a choice between different alternative
courses of action.
The concept of opportunity cost implies three things:
1. The calculation of opportunity cost involves the measurement of
sacrifices.
2. Sacrifices may be monetary or real.
3. The opportunity cost is termed as the cost of sacrificed alternatives.
Opportunity cost refers to expected income foregoes from the second-best
use of the resources involved in the present decision.
Suppose a firm has Rs. 100 million at disposal and there are only three
alternatives uses
1. Expand the size of the firm
2. Set up a new production unit in another locality
3. To buy shares from another firm
The expected annual income return (income) from an alternative are as
follows:
1. Rs. 20 million
2. Rs. 18 million
3. Rs. 16 million
Rational Decision-making would suggest invest the money in alternative 1.
this implies that the manager would have to sacrifices the Annual Return of
Rs. 18 million expected from alternative 2.
The difference between actual earning and opportunity cost is called
Economic gain or Economic profit.
The concept of opportunity cost assumes a great significance where
Economic gain is neither insignificant nor very large.
3.Discounting Principle; -
This concept is an extension of the concept of time perspective. Since future
is unknown and incalculable, there is lot of risk and uncertainty in future.
