Unit 1 – Introduction to Business Economics BBA I year

[Pages:38]Unit 1 ? Introduction to Business Economics BBA I year

SYLLABUS - BUSINESS ECONOMICS

Unit I: Introduction?Basic concepts, Economic rationale of optimization, Nature and scope of business economics, Macro and Micro economics, Basic problems of an economy, Marginalism, Equimarginalism, Opportunity cost principle, Discounting principle, Risk and uncertainty. Externality and trade-off, Constrained and unconstrained optimization, Economics of Information. Unit II: Theory of Utility - Theory of utility, cardinal and ordinal utility theory, law of diminishing marginal utility, law of Equimarginal utility, indifference curves, consumer equilibrium, consumer surplus. Unit III: Concept of Demand and Supply - Different concepts of demand, demand curve, Determinants of demand, Law of demand, Demand forecasting methods, Market equilibrium, Concepts of elasticity. Concept of supply, supply curve, Conditions of supply, Elasticity of supply, Economies of scale and scope. Unit IV: Production and Cost Analysis - The production function, Short-run and Long-run production function, law of diminishing returns and returns to scale. Fixed, variable and other cost concepts, least cost-input combination, Relationship between production and cost. Unit V: Pricing in different Market Structures - Market ? Types ? Structures ? Features - Price determination (long run and short run) in Perfect Competition, Monopoly, Monopolistic and Oligopoly markets, pricing strategies.

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Unit 1 ? Introduction to Business Economics BBA I year

S.no Contents

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Basic concepts

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Business Economics

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Features of Business Economics

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Objectives of Business Economics

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Scope of Business Economics

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Micro and Macro Economics

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Basic problems of an economy

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Basic / fundamental concepts of Business Economics

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Optimization

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Economics of information

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Macro economics and micro economics of information

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Role of Business Economist

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Responsibility of Business Economist

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Business economics and other disciplines

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Importance / significance of Business Economics

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Unit 1 ? Introduction to Business Economics BBA I year

BASIC CONCEPTS OF ECONOMICS

1. Wants: "Want" is defined as having a strong desire for something. The word "need" is defined as lack of the means of subsistence. In every arena of life, the two concepts are opposing elements. The basic needs of man include food, clothing and shelter. Human needs are many. They are both tangible and intangible. Tangibles include things that we can touch and fell like need for a vehicle or cell phone. Intangibles are only felt like satisfaction, happiness, jealousy etc. Wants are unlimited. As soon as one ant is satisfied another arises and this process goes on.

2. Scarcity: When we talk of scarcity within an economic context, it refers to limited resources. These resources are the inputs of production: land, labor and capital which are used for satisfying human wants. The basic economic problem that arises because of this limited resources is that people have unlimited wants but resources are limited. This creates scarcity. For example: A student wants to purchase a book worth Rs. 100, but he has got only Rs. 50. This creates scarcity of money. In the same way we face so many situations in which we have numerous wants but the resources are limited. Thus, we make our own preferences according to scarcity and sacrifice less pressing wants for those which are preferred. For instance you have two wants. One is to go for a movie and the other is to have food in restaurant. You have limited money. Here, you prefer the more

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Unit 1 ? Introduction to Business Economics BBA I year

important one to the les important one. So, movie may be preferred to restaurant. Here, the concept of choice comes into picture which finally leads to opportunity cost. 3. Scale of Preference: It is defined as a list of unsatisfied wants arranged in the order of their relative importance. In other words, it is the list showing the order in which we want to satisfy our wants according to priority. In scale of preference,themost important wants come first and the less important wants come next. Choice therefore arises because human wants are unlimited but the resources are limited and scarce.

4. Choice: It can be defined as a system of selecting or choosing one out of a number of alternatives. Choice arises as a result of scarcity of resources. Since it is extremely difficult to produce all that we need choice has to be made by accepting or taking up themost pressing wants for satisfaction based on the available resources.

5. Opportunity Cost: Every scarce goods or activity has an opportunity cost. Opportunity cost of anything is the cost of the next best alternative which is given up. It refers to the cost of foregoing or giving up an opportunity. It is the earnings that would be realized if the available resources were put to some other use. It implies the income or benefit foregone because a certain course of action has been taken. Thus opportunity costs are measured by the sacrifices made in

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Unit 1 ? Introduction to Business Economics BBA I year

the decision. If there is no sacrifice involved by a decision there will be no opportunity cost. It is also called alternative cost or transfer cost. The opportunity cost of using a machine to produce one product is the income forgone which would have been earned from the production of other products. If the machine has only one use, it has no opportunity cost. Similarly, the opportunity costs of funds invested in one's own business is the amount of interest earned if the amount had been used in other projects.

BUSINESS ECONOMICS Business Economics consists of that part of economic theory which helps the business manager to take rational decisions. Economic theories help to analyze the practical problems faced by a business firm. Business Economics integrates economic theory with business practice. It is a special branch of economics that bridges the gap between abstract theory and business practice. It deals with the use of economic concepts and principles for decision making in a business unit. It is also called Managerial Economics or Economics of the Firm. Managerial Economics is economics applied in business decision-making. Hence it is also called Applied Economics. DEFINITION OF BUSINESS ECONOMICS In simple words, business economics is the discipline which helps a business manager in decision making for achieving the desired results. In other words, it deals with the application of economic theory to business management.

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Unit 1 ? Introduction to Business Economics BBA I year

According to Spencer and Siegelman,Business economics is "the integration of economic theory with business practice for the purpose of facilitating decisionmaking and forward planning by management". According to Mc Nair and Meriam, "Business economics deals with the use of economic modes of thought to analyze business situation". From the above said definitions, we can say that business economics makes in depth study of the following:

i) Understanding the business in a better way ii) Identification of the business areas where economic analysis can be

applied iii) Planning for the future based on the past events iv) Decision making

FEATURES/CHARACTERISTICS OF BUSINESS ECONOMICS The following characteristics of business economics will indicate its nature: 1. Micro economics:

Business economics is micro economic in character. This is so because it studies the problems of an individual business unit. It does not study the problems of the entire economy.

2. Normative science: Business economics is a normative science. It is concerned with what management should do under particular circumstances. It determines the

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Unit 1 ? Introduction to Business Economics BBA I year

goals of the enterprise. Then it develops the ways to achieve these goals. It always tries to match the future with the present. 3. Pragmatic: Business economics is pragmatic (practical). It concentrates on making economic theory more application oriented. It tries to solve the managerial problems in their day-today functioning of the business by applying economic concepts and models.

4. Prescriptive:

Business economics is prescriptive rather than descriptive. It prescribes solutions to various business problems. Instead of focusing on what had happened, it focuses on what should happen in the future. This particular feature helps the business unit to rectify its own mistakes.

5. Usesmacroeconomics:

Business economics is also useful to business economics. Macro-Economics provides an intelligent understanding of the environment in which the business operates. Business economics takes the help of macro-economics to understand the external conditions such as business cycle, national income, and economic policies of Government etc. 6. Uses theory of firm: Theory of firm tries to solve business problems to maximize profits. Business economics largely uses the body of economic concepts and principles towards solving the business problems. Business economics is a special branch of economics to bridge the gap between economic theory and managerial practice. 7. Management oriented:

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Unit 1 ? Introduction to Business Economics BBA I year

The main aim of Business economics is to help the management in taking correct decisions and preparing plans and policies for future. Business economics analyses the problems and give solutions just as doctor tries to give relief to the patient. 8. Multi disciplinary: Business economics makes use of most modern tools of Mathematics, Statistics and Operations Research in planning, decision etc. 9. Art and science. Business economics is both a science and an art. As a science, it establishes relationship between cause and effect by collecting, classifying and analyzing the facts on the basis of certain principles. It points out to the objectives and also shows the way to attain the said objectives. On the other hand business economists attain perfection by continuously applying and learning the concepts of business economics. It mostly deals with experience.

OBJECTIVES OF BUSINESS ECONOMICS Business economics provides such tools necessary for business decisions. Business economics answers the five fundamental problems of decision making. These problems are: (a) What should be the product mix? (b) Which is the least cost production technique and input mix? (c) What should be the level of output and price of the product?

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