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1 Introduction to business economics.pdf
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- 2. Introduction • Business economicsis a field in applied economics which uses economic theory and quantitative methods to analyse business enterprises and the factors contributing to the diversity of organizational structures and the relationships of firms with labour, capital and product markets. • Study economics for • Understand various economic concepts • Apply in decision making process • Economics is the study of how societies use scarce resources to produce valuable goods and services and distribute them among different individuals. • Trade-off between Scarcity and efficiency
- 3. Microeconomics and Macroeconomics Sr. No. MicroeconomicsMacroeconomics 1. Microeconomics deals with the individual units of an economy. Macroeconomics deals with the aggregate ofindividual units or the whole economy. 2. It includes individual price, individual demand, individual income, etc. It includes general prices, aggregate demand,National income, etc. 3. Price determination and allocation of resources are the major problem studied under microeconomics. Determination of income and unemployment are the major problem studied under macroeconomics. 4. Two major tools i.e. demand and supply of a particular commodity is used in microeconomics. Two major tools i.e. aggregate demand (AD) and aggregate supply (AS) of a particular commodity is used in macroeconomics. 5. Microeconomics solves the central problem of what to produce, how to produce and for whom to produce. Macroeconomics solves the central problem of full employment of resources in the economy.
- 4. Microeconomics and Macroeconomics Sr. No. MicroeconomicsMacroeconomics 6. It is concerned with the equilibrium of a consumer, a producer and an industry. It is concerned with the equilibrium of level ofincome and employment in an economy. 7. Microeconomics uses bottom- topapproach for analyzing the economy. Macroeconomics uses top-bottom approach foranalyzing the economy. 8. It assumes that all macroeconomic variables like aggregate demand, national income and price are constant. It assumes that all microeconomic variables like individual demand, individual income, etc. are constant. 9. It is also known as price theory. It is also known as incometheory or employment theory. 10. It believes in Laissez-faire economy. It believes in command economy. 11. It is simple to study microeconomics. It is complex process to understand macroeconomic due to inclusion of large numbers.
- 5. Market • Place wheredecisions regarding consumption and production taken by the households and enterprises • Strong role in laissez-fair economy and no role in command economy.
- 6. Economic Environment • Theeconomic environment consists of external factors in a business market and the broader economy that can influence a business • Microeconomic environment – affects business decision making • Macroeconomic environment – affects entire economy • Many economic factors act as external constraints on the business – have little control over them • Examples of Macroeconomic factors • Interest rates; Taxes; Inflation; Currency; exchange rates; Consumer discretionary income, Savings rates, Consumer confidence; Unemployment rate; Recession; Depression
- 7. Economic Environment • Examplesof Microeconomic factors • Market size; Demand; Supply; Competitors; Suppliers; Distribution chain, such as retail stores • It is important because • Determines failure/ success of the business
- 8. Economic Model • Modelis a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them • Methodological use includes investigation, theorizing, and fitting theories to the world. • Subjective in design • Theoretical and empirical models • Model generally consists of set of mathematical equations • Simplified description of reality – by assumptions • Economic models also classified in terms of regularities
- 9. Economic Model • Cobb–Douglasmodel of production • Solow–Swan model of economic growth • Lucas islands model of money supply • Heckscher–Ohlin model of international trade • Black–Scholes model of option pricing • AD–AS model a macroeconomic model • IS–LM model the relationship between interest rates and assets markets • Ramsey–Cass–Koopmans model of economic growth.
- 10. Economic Model • Buildingempirical models • Dependent variables; independent variables • Endogenous variables and exogenous variables • Coefficients • Diverse opinion how the empirical model can be derived • Assume maximising behaviour • Nuanced approach – prediction
- 11. Economic Model • Whatmakes a good economic model • Precise and verifiable implications • Assess the ability to establish stylised facts • Why models fail • Prediction depends on randomness of data and validity of theory • Example – fail of models to predict the reasons of financial crisis • No economic model can be perfect to reality • A process and debate for the stand
- 12. Rational Decision Making •A decision-making process that results in the optimal level of benefit, or the maximum amount of utility • Economic actors are assumed to be self-interested and “rational,” meaning that people generally make logical decisions that produce the best outcomes for themselves. • Behavioural economics – Rational choice theory • Psychological insights while explaining economic behaviour • Rational person has self-control and is unmoved by emotional factors
- 13. Rational Decision Making •Challenges to Rational Behavior • Individuals have limited capacity to accurately calculate the costs and benefits of a decision. • individuals may choose a decision that is not optimal due to social norms. • Individuals do not always act in their own pure self-interest. • Individuals tend to satisfice rather than maximize decision outcomes. • Individuals tend to have a strong bias towards maintaining the status quo.
- 14. Rational Decision Making •Bounded rationality – individuals cannot exhibit fully rational behaviour due to a number of real-world limitations – they only satisfy • Individuals do not exhibit fully rational behaviour when making decisions, rather, they satisfice
- 15. Fundamental Economic Problems •What commodities to produce at what quantity • How are goods produced • For whom goods are produced
- 16. Production Possibility Frontier •Each economy has a stock of limited resources; in deciding what and how things should be produced, the economy is in reality deciding how to allocate its resources among the thousands of different possible commodities and services. • Inputs – factors of production and outputs • Limited resources and tradeoff between use of resources • Production possibilities • The production-possibility frontier (or PPF) shows the maximum quantity of goods that can be efficiently produced by an economy, given its technological knowledge and the quantity of available inputs.
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- 18. Production Possibility Frontier •Impact of economic growth
- 19. Production Possibility Frontier •Choice between public goods and private goods
- 20. Production Possibility Frontier •Choice between Present needs and future consequences
- 21. Free Market • Priceof goods and services determined by demand and supply • No government intervention no regulated market mechanism • Coordinated market in fields of study such as political economy, new institutional economics, economic sociology and political science • Economic system – Capitalism • Private ownership of means of production and operation • laissez-faire or free-market capitalism, state capitalism and welfare capitalism • Different degrees of government intervention
- 22. Free Market • Economicsystem – Georgism • Market free from all forms of economic privilege, monopolies and artificial scarcities • Returns to natural resources and land can’t be reduced due to perfect inelastic supply • Economic system – Laissez faire • Absence of non-market pressures on prices and wages such as those from discriminatory government taxes, subsidies, tariffs, regulations, or government-granted monopolies
- 23. Free Market • Economicsystem – Socialism • Various forms of worker cooperatives operating in a free-market economy such as the mutualist system to state-owned enterprises operating in unregulated and open markets • Free markets are not possible under conditions of private ownership of productive property • Class differences and inequalities in income and power • Workers in a socialist economy based on cooperative and self-managed enterprises have stronger incentives to maximize
- 24. Free Market • Characteristics •Economic equilibrium – market efficiency – Pareto optimum • Low barriers to entry • Perfect competition and market failure • Spontaneous order – better allocation of societal resources • Supply and demand
- 25. Planned Economy • Governmentor ruler makes most or all of the important decisions about the production and distribution of goods and services • “A planned economy is a type of economic system where the distribution of goods and services or the investment, production and the allocation of capital goods takes place according to economic plans that are either economy-wide or limited to a category of goods and services.” • It may use centralized, decentralized, participatory or Soviet-type forms of economic planning
- 26. Mixed Economy • Itis defined as an economic system blending elements of a market economy with elements of a planned economy, markets with state interventionism, or private enterprise with public enterprise. • Combination of free market principles and socialist principles • This can extend to a Soviet-type planned economy that has been reformed to incorporate a greater role for markets in the allocation of factors of production. • Combines elements of market economies and planned economies • Advocated by J M Keynes • Countries like USA, UK, India, Iceland, Sweden etc.
- 27. Mixed Economy • Typology •Mix of free markets and state intervention • Mix of private and public enterprise • Mix of markets and economic planning • Characteristics • Coexistence of private and public sector • Economic welfare • Economic planning • Free and controlled economic development
- 28. Mixed Economy • Merits •Adequate freedom • Maximum welfare • Modern technology • Best allocation of resources • Demerits • Low inflow of foreign capital • Inefficiency of public sector • Fear of nationalization • Problem of concentration of economic power • Presence of imbalance in the economy
- 29. India as aMixed Economy • Inability of the private sector or government sector to shoulder the burden of economic development alone is the reason • Coexistence of public and private sector due to adoption of Industrial Policies 1948 and 1956 • New policies to enhance economic growth thereby groundwork for scientific, industrial and technological development • Characteristics • Controlled yet free economy activities • Promoting citizen welfare • Economic welfare • Price regulation • Coexistence of public and private sectors