BUSINESS ECONOMICS
Lecture 1
(Introduction)
Teacher:
ISMATULLAH BUTT
Business Economics-
2
Introduction
Lecture Contents:
What is economics?
Types of economics
Economics and Business Economics
Characteristics of Business Economics
Application of Economics in Business Management
Scope of Business/Managerial Economics
Managerial Economics Vs Economics
Responsibilities of Business Economist
Relationship of Managerial Economics with other Subjects
Economics
3
In economics, those activities of mankind are studied
which are concerned with earnings and spending of
money.
For the successful handling of these activities certain
laws and rules are formulated which are known as
various theories of economics.
Use of these rules & tools provided for analyzing
business conditions and applying them for arriving at
various economic decision is known as managerial or
Business economics.
What Business Economics does?
4
Business economic meets these needs of the business firm:
Economic Theory Decision Problems
and in Business
Methodology
Business Economics Application of
Economic Theory and Methodology
To solving Business problems
Optimal Solution to
Business Problems
Economics and Business Economics
5
ECONOMICS:
Economics is a social science . Its basic function is to study
how people – individual house holds, firms and nations
maximizing their gains from their limited resources and
opportunities.
In economic terminology it is called as “maximizing
behaviour” or more approximately “optimizing behaviour”.
Optimization means selecting best out of available resources
with the objective of maximizing gains from given resources.
Micro Economics & Macro
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Economics
Micro Economics
Derived from the Greek word mikros meaning “Small”.
Microeconomics studies economic relationship or economic
problems at the level of an individual- an individual firm, an
individual household or an individual consumer.
E.g. Study of Tetra Pak
It is basically concerned with determination of output and
price for an individual firm or industry.
Scope of Microeconomics
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Studies individuals/firms
Helps firms to allocate/use scarce resources
Decides price based on demand and supply
Formulates policies and plans for firm’s
economic development
Helps government fix tax for buyers and sellers
Studies different conditions of markets eg.
Monopoly, oligopoly
Micro Economics & Macro
8
Economics
Macro Economics
Derived from the Greek word makros meaning “Large”
Macroeconomics studies economic relationships or economic
problems at the level of the economy as a whole.
E.g. Study of Unemployment, inflation, Per capita income.
It is basically concerned with determination of aggregate
output and general price level in the economy as a whole.
Positive and Normative Economics
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Positive Economics:
When we are studying a problem and its related issues which
are subject to verification, like the extent of poverty and
unemployment we are referring to positive economics.
The positive statements describe what was, what is and what
would be under the given set of circumstances.
All these statements are capable of empirical verification on
the basis of which degree of truth can be found.
Positive and Normative Economics
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Normative Economics:
When we are offering suggestions to solve the problem
(which are not subject to verification, e.g. the suggestion of
reservation in jobs to solve the problem of poverty) we are
referring to normative economics.
Normative statements describe what ought to be. Its objective
is to determine norms or aims.
These are opinions relating to right or wrong of a particular
policy matter, and are always a matter of debate.
Economics and Business Economics
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According to Spencer and Siegelman, “ Managerial Economics
may be defined as the integration of economic theory with
business practice for the purpose of facilitating decision
making and forward planning by management.”
Decision Making: Means selecting one out of a set of two or
more alternatives or in other words, making a choice.
Planning: Means planning for the business activities to be
undertaken for future.
The problem of selection arises because the supply of factors of production
(land, labor, capital and enterprise is scarce or limited.
Managerial Economics helps management in making right
decisions and planning for the future under the condition of
uncertainty.
Business Economics-Other
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Definitions
According to McNair and Meriam, “ Business Economics
consists of the use of economic modes of thought to analyze
business situation.”
According to Joel Dean, “The purpose of managerial economics is to show
how economic analysis can be used in formulating business policies.”
In the words of Joseph L. Messy, “ Business Economics is the
use of economic theories by the management in making
business decisions.
Managerial Economics is that branch of knowledge in which theories of
economic analysis are used for solving business management problems and
determination of business policies.
Managerial Economics serves as a bridge between Economics
and Business Management.
Business Economics -
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Characteristics
1) Micro- economic in Nature: The problem of a particular firm
is studied in it and not the whole economy.
2) Theory of Firm or Economics of Firm: All the economic theories,
concepts and economic models known as “Theory of Firm” or “Economics
of Firm” are studied in Managerial economics.
3) Importance of Macro Economics too : Macro economics helps to
understand the overall environment in which a firm operates its activities.
The knowledge of Macro economics enables the managers to co-ordinate and
adjust their business in the best possible way with environmental forces on
which they have no control. E.g. Fiscal policy, industrial policy,exim policy.
4) Applied Approach: Managerial economist analyses good or
bad effects of various decisions on the firm. So BE is not a
theoretical subject but a subject of practical utility.
Business Economics -
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Characteristics
5) Perspective nature: It indicates what should be done and what not.
6) Decision making at Managerial level: ME is a practical subject
and its main object and function is to help the management in formulating
suitable business policies.
7) Coordinating Nature: Managerial economics provides the business
managers practical and theoretical solutions of their business problems.
8) Both Science and Art: Managerial economics is used as a systematic
knowledge, therefore, it is a science. It provides methods to reach the most
beneficial decision to the business requiring various skills hence it is an art
too.
9) As a complementary subject: In managerial economics, helps are
sought from various disciplines like statistics, mathematics, operation
research in order to understand the business situation and arrive at their
solution by using tools provided by these discipline.
Application of Economics in Business
Management
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1) Helpful in Organizing: Business managers can learn through
the study of Business Economics what to produce, how to
produce, for whom to produce and when to produce. This
helps them to organize well.
2) Helpful in Planning: Managers with the use of business
economics can plan to mobilize and use resources effectively.
3) Helpful in Decision making: Business managers can decide on the
basis of their knowledge of Business Economics number of relevant things
such as what kind of production should be undertaken, what should be the
technique etc. so as to get the maximum profit.
4) Helpful in co ordination: Business economics helps to
establish co ordination between traditional theoretical
concepts of economics and actual business practices.
Application of Economics in Business
Management
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5) Helpful in Formulating Business Policies: Business Economics
helps in deciding its policies for the real objectives and certain
business situation of the firm.
6) Helpful in Cost Control
7) Helpful in Demand Forecasting: Business economics provides
the use of economic concepts for estimating economic
relations among various variables for managerial decisions.
8) Minimizing Uncertainties:
9) Helpful in Understanding External Environment: Business
Economics helps the business managers in understanding the
external environment in which the firm has to function and
shows him the way to co-ordinate his business with it.
Scope of Managerial Economics
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1) Demand Analysis and Forecasting: Demand analysis and forecasting of
demand facilitates the decision making and forward planning. If demand
forecasting of a firm is correct, the firm earns more profit and if they
are wrong it suffers losses.
2) Production Planning and Management: Every firm is engaged in certain
production, hence it has to plan and manage the production. Firm has
to make profitable decisions keeping its factors of production and the product
in view.
3) Cost Analysis: One of the important responsibilities of business managers is
to analyze and control costs in order to maximize the profit. It can be
done only by the proper investigation and research about the respective
costs.
4) Pricing Policies and Practices: Deciding the price is one of the important
subject of business economics. The success of a firm depends upon
decisions regarding prices.
Scope of Managerial Economics
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5) Profit Management: Managerial economics helps in
analysis of profit measurement and control.
6) Capital Management: Capital management in business
economics includes cost of capital, profitability of the
capital and the selection of suitable project or projects out
of various projects.
7) Decision Theory under Uncertainty: Uncertainties are many
fold such as uncertainty of demand, uncertainty of cost,
uncertainty of capital etc. Many statistical methods are
developed for taking decision under condition of such
uncertainties.
Managerial Economics Vs
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Economics
Business Economics:
It deals with the application of economic principles and
theories to the problems of business firms.
Nature of managerial economics is Micro economics.
Managerial economics is micro in character but it deals with
the problems of business firms only and it does not study
problems of individuals.
The main focus of study in managerial economics is profit
theory.
Managerial Economics Vs
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Economics
It adopts, modifies or reformulates existing economic
models to suit the specific conditions and to serve specific
problems of a business firm.
Managerial economics is applied in nature.
Concepts and models developed in business economics
have their practical utility in solving problems of the
business firm.
Managerial economics is new subject which came in existence
only after second world war.
Managerial Economics Vs
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Economics
Economics deals with the body of principles and theories itself.
Nature of economics is both Micro economics and Macro
economics.
Economics has a wider scope.
Under economics all the distribution theories like rent, wages and
interest are studied along with the theory of profit.
Economic theory makes assumption and hypotheses,
economic relationships and generates economic models.
Economic theory avoid complexities and makes simplified
assumptions to solve complicated theoretical issues.
Managerial Economics Vs
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Economics
Theories and principles of economics are away from
practical realities and are based on a number of
unrealistic assumption.
Economics is much older subject.
Role of Business Economist
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Studies at macro level and links it to the firm
Transforms it to profitable business
Assists in business planning
Carries out cost benefit analysis
Decision making related to – price ,investments, goods
Conducts research on industrial market
Conducts statistical analysis
Must be vigilant and able to handle pressures
Relationship of Managerial Economics
with other Subjects
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Managerial Economics and Statistics:
Managerial Economics employs statistical methods
for experimental testing of economic generalization.
The generalization can be accepted in practice
only when they are checked against the data from
the world of reality and found valid.
Importance of Statistic in
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Economics
a) Understanding of Economic Problems:
Helps to identify causes behind the economic problems
and formulate policies accordingly.
b) Working out Cause and Effect Relationship:
Helps to find cause and effect between different set of data.
Example: Helps to determine relationship between
consumption expenditure and average income.
c) Economic theories:
Helps to formulate economic theories.
Economist assume relationship between two variables & then
collect data to test it – Theory develops when assumption is
valid.
Importance of Statistic in
26
Economics
d) Economic Forecasting:
Helps to predict future trends and change in one variable
due to change in another variable.
e) Forecasting of Policies:
Helps in policy formulation
Expected domestic production of wheat will help to
determine imports required for Wheat in 2018 based on
expected demand of wheat in the country in 2018.
d) Condensing Elaborate Data:
Per Capita Income(PCI) Vs remembering income of all
citizens of a country.
