Business

Economics OT E S . I N
U N
Module 1
K T

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 Economics
• Economics originated from the Greek
word ‘IOKONOMIA’ which means
Household Management
• Adam Smith ( Father E S
of . I N
Economics) >
U N O T
KT of Nations’
1776 > ‘Wealth
• Economics studies how the society
and individuals use the limited
resources to satisfy the unlimited
wants.
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 Business Economics
Definition
• BE is the branch of analysis which
employs the application of economic
concepts, methods E
andS . I N
theories to
U N OT
K T
solve the practical problems faced by
a business firm and to formulate
rational business decision.

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 Role / Significance / Scope /
Relevance of Business Economics
• Estimation of Product Demand
• Forecasting Future Demand
• Deciding the Input combinations
• E S . I N
Estimation of Cost
N OT
of the product
• K TU
Determination of Price of product
• Analyze Market structures
• Profit Estimation and Planning
• Expenditure estimation
• Output estimation and Cost reduction
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Basic Economic Problems /
Central Problems in an Economy
• Basic concern : Scarcity of Resources
( Limited Resources and Unlimited Wants)
• Basic Economic Problems or Central
Problems in an EconomySas
E . I N
follows :
1. The Problem ofU N O T
Allocation of Resources.
K T
2. The Problem of Fuller Utilization of
Resources.
3. The Problem of Growth of Resources.
4. The Problem of Efficiency.

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 The Problem of Allocation of
Resources
• The major concern pertains to
• 1. What to Produce ? ( Produce
according to the current needs of an
economy) E S . I N
U N OT
• 2. How to K T
Produce ? ( L or K, Depends
on Price and Availability)
• 3. For whom to Produce ? ( For
society and household)

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 The Problem of Fuller
Utilization of Resources
• Optimum usage of limited resources

• No wastage
S . I N
T U N OTE
K
• Best efficient usage of scarce
resources to tap maximum
productive capacity

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The Growth of Resources
• To improve the standard of living
• To achieve economic growth of an economy
• It is through Technological Advancement
where an economy increase the recourse
limit . I N
OT E S
K T U N
• Technology Advancement > More Growth
for an economy
The Problem of Efficiency
• Efficient usage of resources of manner

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 Scarcity v/s Choice
• Scarcity means that resources are not
available in the required quantity to satisfy
all the wants and needs.
• Since we face Scarcity, people I N have to
T E S .
make choice between
T U N O goods and services.
K
• In 1932, Lionnel Robinson ( ‘Nature and
significance of Economics’) defined
economics as a “science which studies the
human behaviour in relationship with given
ends and scarce means”

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Economic Resources OR
Factors of Production
• In Economics , resources are
classified into 4
1. Land (La) > Surface soil + Natural
resources E S . I N
U N O T
T
2. Labour (L)K> Mentally and Physically
fit for work
3. Capital (K) > All Man made aids to
production
4. Organization / Enteurperneurship >
Combines all factors
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Production Possibility Curve (PPC) or
Production Possibility Frontier (PPF)

• PPC or PPF shows the various

combinations of two commodities
that can be produced with latest
technology available E and
S . I Nwithin
U N O T
given resources
KT utilised fully and
efficiently.
Assumptions
 Only 2 commodities
 Latest technology
 Fuller utilisation
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Production Possibilities Good X Good Y

A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0

S . I N
T U N OTE
K

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Explanation
• Any point on PPC shows fuller utilisation of
resources
• Any point above or beyond PPC > point
cannot be attained, beyond the scope
• Any point below the PPC shows the under
utilisation of resources
E S . I N
• PPC is downward U N O T
slopping curve and
K T
concave in shape shows resources are
transferred from one use to other use, that’s
why it is known as transformation curve.
• It is also known as production boundary or
production frontier

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 Shift in PPC
Shift in PPC shows technological
growth in the economy

S . I N
T U N OTE
K

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 Opportunity Cost
• It is defined as the cost for next best
alternative forgone.
Marginal Opportunity Cost
Marginal opportunity cost is defined
as the additional unitsSof. I a good
N
OT E
sacrificed K UN
toTproduce an additional
Production Good X Good Y Marginal
unit of the other good
possibilities Opp.cost
A 0 15 -
B 1 14 1
C 2 12 2
D 3 9 3
E 4 5 4
F 5 0 5
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• To produce an additional unit of X
, more units of Y is being
sacrificed . It means marginal
opp.cost is increasing
• It gives concave shape to PPC
E S . I N
• If marginal opp.cost
N OT is
K TU
decreasing, PPC takes convex
shape
• If marginal opp.cost is constant ,
PPC would be a straight line
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 Marginal Analysis
• Marginal means ‘Additional’

• Marginal analysis is concerned with

finding out the N
changeS . I N
E in the total
U OT
K T
arising because of one additional
unit.

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 Marginal Utility Theory
Basic Concepts
Utility
The want satisfying capacity of a commodity is known as
utility. It is expressed in Utils. It is put forward by
Bernoualli.
Total Utility ( TU)
S . I N
T U OTE
TU refers to the total satisfaction derived by the consumer
N
from the consumption of a given quantity of a commodity
K
Marginal Utility (MU)
MU refers to the additional utility derived by the consumer
from the consumption of an additional unit of a
commodity
MU = TU n – TU n-1
MU = d(TU)
d(Q)
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 Marginal Utility Theory
• Assumption > Rationality ( max
utility within limited income)
Theory
The consumerN will E S . I
maximize
N total
U O T
K T
utility when he allocates his income
among various commodities in such
a way that the marginal utility of the
last rupee spent on each
commodities are equal.
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Law of Diminishing Marginal Utility Theory
(DMU) / Theory of Consumer Behaviour

• Theory has been developed by Prof.Alfred

Marshall
Assumptions of the Theory
 Rationality N
T E S . I
 Commodities should
T U N Obe homogenous and
normal K
 No time gap between the consumption of
goods
 No change in taste and preferences
 No change in price of the commodity

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 Statement of Theory
• As the consumer consumes more and
more units of a same good, the
additional utility (MU) from each
additional units goes on
S . I N
decreasing.
U N O TE
KT

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Units TU MU
Cons
umed

0 0 0

1 10 10

2 18 8
S . I N
3 24 6 T U N OTE
K
4 27 3

5 29 2

6 29 0

7 27 -2
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STAGE 1 > Increasing Returns
• TU , MU increases at an increasing rate
Stage 2 > Diminishing Returns
• MU starts falling
• TU increases at a diminishing rate
• At the end of second stageIN , MU reaches
zero and TU reaches T E
at S .
its maximum
T U N O
(Point M ) K
Stage 3 > Negative Returns
• After point M, MU becomes negative
• TU starts falling
NOTE : TU moves according to MU
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 Consumer Equilibrium
• According to DMU ,the consumer
reaches equilibrium when MU of last
unit is equal to price of the
commodity E S . I N
U N O T
K T
 When he consumes only one
commodity
MU = PRICE
 When he consumes more than one
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