Introduction to Business Economics

2. ECONOMICS
It is defined “as a social science which covers the
actions of individuals and groups of individuals in
the process of producing, exchanging and
consuming of goods and services to achieve
optimization of resource use”
1. Production Decisions
2. Exchange Decisions
3. Consumption Decisions
According to Lord Robins, ”Economics is the science
which studies human behavior as a relationship
between ends and scarce means which have alternative
uses”.

3. BUSINESS ECONOMICS
It deals with the decision making and forward planning in
uncertainty and integrates economic theory with business practice
for the purpose of facilitating decision-making and forward
planning by management. It is a science that deals with the
application of various economic theories, principles, concepts and
techniques to business management in order to solve business and
management problems.
According to SPENCER AND SIEGELMAN “Business Economics is
the integration of economic theory with business practice for the
purpose of facilitating decision making and forward planning by
management”.

4. APPLICATION
 Use of optimum techniques to improve
organizational decisions
 Understanding individual and market demand
decisions to forecast demand
 Analyze cost and supply structure to understand
supply decisions
 Understanding markets
 Understanding external factors like
unemployment, inflation

5.  Micro Economic Nature: Business Economics is micro
economic in its nature because it deals with matters of a
particular business firm only.
 Use of Economic Theories: Business Economics uses all
economic theories relating to the profits, distribution of
income etc.
 Normative Science: Business Economics is a normative
science. It studies the matters concerning the aims and
objectives of a business firm. It determines the methods to
be adopted for achieving such objectives. It also makes
enquiry into the good and bad in decision making. Hence it
is a normative science.
CHARACTERISTICS

6.  Macro-Economic Uses: Even though Business Economics
has the nature of Micro-Economics, it also uses Macro-
Economic approaches frequently. Certain matters in
Macro-Economics like Business Cycles, National Income,
Public Finance, Foreign trade etc. are essential for Business
Economics. So, Business Economics uses the macro-
economic phenomenon for taking business decisions.
 Economics is a science or an art. It is considered as
science if it is a systemized body of knowledge which
studies the relationship between cause and effect.
 Art is nothing but practice of knowledge.
 Where as science teaches us to know and art teaches us
to do.
It is science in which methodology and art in its
application.

7. 1. Demand Forecasting: Every business firm initiates and
continues its production process on the basis of the
anticipation of more demand for its goods in the future. It
makes research and conducts market survey with a view to
know the tastes and fashions of the consumers. It pools up the
resources and starts production for meeting the future
demand. Business Economics analyses the demand behavior
and forecasts the quantity demanded by the consumers.
SCOPE

8. 2. Cost Analysis: Business Economics deals with the analysis of
different costs incurred by the business firms. Every firm
desires to minimize its costs and increase its output by
securing several economies of scale. Business Economics deals
with the cost estimates and acquaints the entrepreneurs with
the cost analysis of their firm.
3. Profit Analysis: Every business firm aims to secure
maximum profits. But at the same time it faces uncertainty
and risk in getting profits. Business Economics deals with the
matters relating to profit analysis like profit techniques,
policies and break-even analysis.
4. Capital Management : Capital management is another
topic dealt in Business Economics. It studies matters like cost
of capital, rate of return, selection of best project etc.

9. Business Economics is a useful subject. In fact it is the most
significant of all social sciences, Its study is highly useful for
analysing and understanding the various economic problems.
Its study brings utility to all sections of the people. Business
Economics became the intellectual religion of the day.
Business Economics is described as both light giving and fruit
bearing science. It enriches our knowledge (light) and brings
results (fruits).
IMPORTANCE OF BUSINESS
ECONOMICS

10. 1. Useful to the Finance Minister : The study of Business
Economics is highly useful to the Finance Minister and the
personnel working in the finance department. It provides a
good knowledge about public revenue, public debt and public
expenditure. It helps them in forming a sound financial
policy and result oriented budget.
2. Useful to the Minister for Planning : The study of
Business Economics is also useful to the Minister for planning
and his personnel. It furnishes a good knowledge about the
various types of plans, mobilisation, plan implementation,
capital output ratio, investment strategy etc.
SIGNIFICANCE

11. 3. Useful to the Banker : Business Economics is also
useful to the bankers. It enables them to understand
the nature, purpose and implications of different
economic policies implemented by the business firms.
4. Trade Union Leaders : Knowledge of Business
Economics is also significant for the trade union
leaders. The study of Business Economics helps the
trade union leaders to understand the nature and
causes of industrial disputes, wage problem etc.

12. 5. Businessmen : Business Economics is also useful to the
businessmen. Businessmen, with the help of Business
Economics, can study the fluctuations in business, prices,
production and employment. They can adopt a proper strategy
for producing goods and services according to the changes in
demand.
6. Statesmen : Statesmen will also get benefit by studying
Business Economics. It enables them to understand the nature
and causes of economic problems. It helps them to solve the
economic problems like unemployment, inflation, scarcity of
goods etc.

13. 7. International Economic Problems
: International Economics is an important branch
of Economics. It deals with matters like terms of
trade, balance of payments, export and import
regulations etc. Its knowledge enables the
international agencies to determine the foreign
exchange value of various national currencies. Its
study is useful to all sections of the people.

14. DEMAND

15. DEMAND
 The demand for a commodity refers to the amount of
it which will be bought per unit of time at a particular
price.
 Demand in economics means effective demand for a
commodity. that is, one should have
i. Desire for a commodity or service
ii. Willingness to pay its price
iii. Ability to pay its price

16. DIRECT DEMAND AND DERIVED
DEMAND
 Direct Demand-for consumption goods
Goods and services that satisfy consumer desires.
 Derived Demand-These are sometimes called
intermediate goods.
For example, demand for steel (an intermediate good)
is derived from the demand for final goods (e.g.,
automobiles).

17. INDIVIDUAL DEMAND
Individual demand refers to the demand for a commodity from
the individual point of view. That quantity of a good a consumer
would buy at a given price during a given period of time is his
individual demand for that particular good.
MARKET DEMAND
Market demand refers to a total demand of all the buyers
taken together.

18. The general tendency of consumer’s behavior in
demanding a commodity in relation to the changes
in its price is described by the law of demand.
It states that the consumer demands more of the
good at a lower price and vice versa, other things
being constant. The quantity of a good demanded
is negatively related to price of the good.

20. The law of demand can be illustrated with the help of a
demand schedule i.e., as the price of a commodity
decreased the corresponding quantity demanded for that
commodity increases and vice versa. A demand schedule
for wheat.
Price of wheat per kg.
(in Rs)
Quantity demanded
(kgs per week)
5
4
3
2
1
10
20
30
40
50

21. D
Price(perunit)
0
Quantity demanded (per unit of time)
PA
QA
A
DEMAND CURVE

22. DETERMINANTS OF DEMAND
Own Price
Income of the
consumer
Price of other goods:
Complementary
Substitutes
Tastes and
preferences
Expectations of
future prices

23. CHANGE IN QUANTITY DEMANDED
D1
Change in quantity demanded
(a movement along the curve)
B
0
Price(perunit)
Quantity demanded (per unit of time)
100
$2
$1
200
A

24. D0
D1
SHIFT IN DEMANDPrice(perunit)
Quantity demanded (per unit of time)
100
$2
$1
200
B A
Change in demand
(a shift of the curve)
250

25. ASSUMPTIONS OF THE LAW
 No change in consumer’s income : throughout the
operation of the law, the consumer’s income should
remain the same. If the level of a buyer’s income
changes , he may buy more even at a higher price ,
invalidating the law of demand
 No change in consumer’s preferences : the consumer’s
tastes , habits and preferences should remain constant
 No change in fashion : if the commodity concerned
goes out of fashion, a buyer may not buy more of it
even at a substantial price reduction

26.  No change in weather conditions : it is assumed that
climatic and weather conditions are unchanged in
affecting the demand for certain goods.
 No change in government policy : The level of taxation
and fiscal policy of the government remain the same
throughout the operation of the law. Otherwise, the
changes in income tax, for instance may cause changes
in consumers income or commodity taxes may lead to
distortions in consumers preferences.

27. REASONS FOR DOWNWARD
SLOPING DEMAND CURVE
I. Income Effect : When price of a commodity falls, consumer's real
income rises that is he can now purchase more of the commodity with
the same income.
II. Substitution Effect : When price of a commodity falls, it become
cheaper than its substitute good so the users of substitute good would
shift their consumption to the given good and therefore the quantity
demanded of the commodity will rise.
III. Law of Diminishing Marginal Utility : It states that the satisfaction
derived from a commodity will diminish from every successive unit. So
the consumer would be willing to pay less and less for each successive
unit.

28. EXCEPTIONS
1. Giffen Goods : In case of certain inferior goods
called Giffen goods, when the price falls, quite
often less quantity will be purchased than before
because of the negative income effect and
people’s increasing preference for a superior
commodity with the rise in their real income.
Few appropriate examples may be listed, such as
cheap potatoes, cheap bread, vegetable ghee,
etc., as against superior commodities like good
potatoes, cake, and pure ghee.

29. 2. Commodities which are used as status
symbols: Some expensive commodities like
diamonds, expensive cars, etc., are used as status
symbols to display one’s wealth.
 The more expensive these commodities become, the
higher their value as a status symbol and hence, the
greater the demand for them.
 The amount demanded of these commodities increase
with an increase in their price and decrease with a
decrease in their price.
 Also known as a Veblen good

30. 3. Expectation of change in the price of commodity : If a
household expects the price of a commodity to increase, it
may start purchasing a greater amount of the commodity
even at the presently increased price.
 Similarly, if the household expects the price of the commodity to
decrease, it may postpone its purchases.
 Thus, some argue that law of demand is violated in such cases. In this
case, the demand curve does not slope down from left to right;
instead it presents a backward slope from the top right to down left.
 This curve is known as an exceptional demand curve.

31. SUPPLY

32. SUPPLY
 Supply of a commodity means quantity of a
commodity which is actually offered for sale at a
given price during the particular period of time.
 It is always referred to in relation to price and time.

33. S
A
Quantity supplied (per unit of time)
0
Price(perunit)
PA
QA
SUPPLY CURVE

34. THE LAW OF SUPPLY
Supply states that all other factors remaining unchanged
the supply of a good increases as its price increases.
This can be shown by a supply schedule, a supply curve
or a supply function.
The law of supply states that there is a direct relationship
between price and quantity supplied of a commodity,
other things remaining constant.

35. The supply is upward sloping because of:
i. the law of diminishing marginal productivity
ii. Goal of profit maximization
UPWARD SLOPING SUPPLY CURVE

36. SUPPLY FUNCTION
In a supply function, the determinants of supply can be
summarized as under :
Sx=f{Px,Pf,Py,……..,Pz,O,T,t,s}
Where, Sx=the supply of commodity X
Px=the price of X
Pf=the set prices of the factor
Py,….Pz=the prices of the goods
O=factors outside the economic sphere
T=technology used
t=commodity taxation
s=subsidy

37. DETERMINANTS OF SUPPLY
Price
Cost of
Production
Technological
Progress
Prices of
Related
Goods
Government
Policy

38. PRICE OF THE COMMODITY
At a higher price producer offers more quantity
at a lower price producer offers less quantity
P(x) S(x)
P(x) S(x)

39. Price of the related good(z)
When price of related good(z) increase and the price of
the commodity remain constant the supply of the
commodity(x) decreases and vice versa..
P(z) P(x)=constant S(x)
P(z) P(x) =constant S(x)

40. State of technology
Upgradation in the technology leads to reduction in cost
of production thus supply increases and vice versa
Upgradation in technology S(x)

41. GOVERNMENT POLICY
If the government policy is favorable the supply is more
and if the government policy is unfavorable the supply is
less
favourable government policy S(x)
unfavourable government policy S(x)

42. The supply schedule refers to a table showing the
quantity of a commodity supplied at various prices
during a given period. There are two types of supply
schedules. They are :-
1) The individual seller`s supply schedule and
2) The market supply schedule.

43. THE INDIVIDUAL SUPPLY
An individual supply schedule refers to the table
representing the different quantities of a commodity
offered for supply by an individual seller at alternative
price.
Price of commodity X Quantity supplied of
commodity X
10 150
15 250
18 400
20 600
25 900

44. The price-quantity relationship of a commodity in the
market is expressed in terms of the market supply. A
market supply is the aggregate supply schedule of all
the sellers or producers in the market. It refers to the
total quantities of a given commodity which the sellers
in the market are willing to offer for sale at various
prices. Thus, the market supply schedule is derived as
the sum total of the individual supply schedules of
every seller in the market.
THE MARKET SUPPLY

45. CHANGES IN QUANTITY SUPPLY
It includes expansion and contraction of supply.
A movement along the supply curve is caused by
changes in the price of the goods, other things
remaining constant.

46. Change in quantity
supplied (a movement
along the curve)
CHANGE IN QUANTITY SUPPLIED
Price(perunit)
Quantity supplied (per unit of time)
S0
Rs. 15
A
1,250 1,500
B

47. It includes increase and decrease in supply.
A shift in supply curve is caused by changes in factors other
than the price of the good.
These factors are:
Price of other commodities
State of technology
Cost of Production
Government policies

48. Shift in Supply
Price(perunit)
Quantity supplied (per unit of time)
S0
Shift in Supply
(a shift of the curve)
S1
$15
A B
1,250 1,500

49. THANKS