Anna University- BA5101 Economic Analysis for Business-Unit 1

1. BA5101 - ECONOMIC ANALYSIS
FOR BUSINESS
Prepared By
Dr.M.Sankar, MBA.,M.Phil.,M.Sc(Psy).,Ph.D.
Associate Professor / Management Studies

2. The Central Concepts of Economics
 Learning Objectives
This chapter provides an introduction for economics and its
concepts, through the following points:
(A) Why study economics?(what is economics?, what is the
economic problem?, and the common fallacies in economic logic)
(B) The problems of economic organization
(C) Societies’ technological possibilities(PPF and its
applications)

3. Why Study Economics?
In all your life, you will run up against the truths of
economics in decisions, like:
How to choose your occupation?
How to buy a home?
How to pay for your children’s education?
How to vote in elections But,
the question is what does economics mean.

4. What is Economics?
Economics includes many topics like:
The behavior of the financial markets,
The reasons why some people or countries have high
incomes while others are poor, international trade and
globalization, and the government policies used to achieve
economic goals.
However, economics can be defined as “the study of how
societies use scarce resources to produce valuable goods and
services and distribute them among different individuals”.

5. Theme of Economics
Scarcity and Efficiency
If all goods and services could be produced in infinite quantities, all
goods would be free (like sand and seawater) and all prices would be
zero. But, as a result of scarcity, most goods are economic. The
economic problem results from the scarcity of the resources available
for any society relative to its unlimited needs and wants. That is why
the Society must use its resources efficiently. So, the two twin
themes of economics are scarcity
and efficiency.

6. Count….
 Scarcity “refers to a situation in which goods are limited
relative to desires”. Given unlimited wants, it is important for
an economy to make the best use of its limited resources. This
brings the notion of efficiency. Efficiency “means the most
effective use of a society’s resources in satisfying people’ s
wants and needs”. This means that the economy is producing
the highest combination of quantity and quality of goods and
services given its technology and scarce resources.

7. Count….
Economic efficiency
Economic efficiency is the measure of output obtained
with a given set of inputs, i.e. least amount of wastage.
Technological ability usually decides the upper limit for the
maximum efficiency which can be achieved.

8. The main economics problem
 What to Produce (in which quantities?)
 How to Produce?
 For whom to Produce?

9. THE PRODUCTION-POSSIBILITY FRONTIER
The production-possibility frontier (PPF) is a bridge
which ties the three concepts. If we assume that the
economy produces just a couple of goods (guns and butter
are the default choices for economists, scary lot!), then the
economy can produce a greater quantity of guns only if it
reduces the quantity of butter produced. Each point on the
PPF curve shows the maximum possible output of an
economy (i.e. the potential that the economy holds).

10. PRODUCTIVE EFFICIENCY
This is defined as producing goods and services
for the lowest cost. Productive efficiency is said to
occur on the production possibility frontier. On the
PPF curve, it is impossible to produce more of one
good without producing less of another.

12. Productive efficiency also involves producing at the lowest
point of the short run average cost curve (where MC cuts the
bottom of the SRAC curve.)

13. What Is Economic Efficiency
Economic efficiency is when all goods and
factors of production in an economy are
distributed or allocated to their most valuable
uses and waste is eliminated or minimized.

14. Economic Efficiency and Scarcity
The principles of economic efficiency are based
on the concept that resources are scarce. Therefore,
there are not sufficient resources to ensure that all
aspects of an economy function at their highest
capacity at all times. Instead, scarce resources must be
distributed to meet the needs of the economy in an
ideal way while also limiting the amount of waste
produced.

15. Efficiency in Production, Allocation, and Distribution
Productive firms seek to maximize their profits by
bringing in the most revenue while minimizing costs. To
do this, they choose the combination of inputs that
minimize their costs while producing as much output as
possible. By doing so, they operate efficiently; when all
firms in the economy do so, it is known as productive
efficiency.

16. What Is Economic Growth
Economic growth is an increase in the production
of economic goods and services, compared from one
period of time to another. It can be measured in
nominal or real (adjusted for inflation) terms.
Traditionally, aggregate economic growth is measured
in terms of gross national product (GNP) or gross
domestic product (GDP), although alternative metrics
are sometimes used.

17. Understanding Economic Growth
In simplest terms, economic growth refers to an
increase in aggregate production in an economy. Often,
but not necessarily, aggregate gains in production correlate
with increased average marginal productivity. That leads
to an increase in incomes, inspiring consumers to open up
their wallets and buy more, which means a higher
material quality of life or standard of living.

18. Macro Economics
macroeconomics, which is concerned with
how the overall economy works. It studies such
things as employment, gross domestic product,
and inflation—the stuff of news stories and
government policy debates. It Involves,
 Reasons for inflation and unemployment.
 Economic growth
 International trade and globalisation
 Reasons for differences in living standards and
economic growth between countries.
 Government borrowing

19. Micro Economics
Microeconomics is the study of particular
markets, and segments of the economy. It looks
at issues such as consumer behaviour,
individual labour markets, and the theory of
firms.
Micro economics involves
 Supply and demand in individual markets.
 Individual consumer behaviour. e.g. Consumer
choice theory
 Individual labour markets – e.g. demand for
labour, wage determination.
 Externalities arising from production and
consumption. e.g. Externalities

20. Difference between Micro and Macro Economics

21. Role of Government in Market Economy
 Monetary Policy - Monetary policy refers to the actions
undertaken by a nation's central bank to control money
supply and achieve sustainable economic growth.
 Fiscal Policy- Fiscal policy is the means by which a
government adjusts its spending levels and tax rates to
monitor and influence a nation's economy. It is the sister
strategy to monetary policy through which a central bank
influences a nation's money supply.