ECO113

BUSINESS ECONOMICS

Dr. Md Abusaad
Assistant Professor
 Lecture Outcomes
After this lecture, you will be able to
✓understand the various forms of economic Analysis
✓discuss the various problems in economics
✓describe the basic economic problems
 Forms of Economic Analysis
Micro and Macro
Microeconomics (“micro” Macroeconomics (“macro”
meaning small): study of meaning large): study of

the behaviour of small aggregates.

economic units. – Focus on aggregate demand

and aggregate supply,
– An individual consumer
national income,
– a seller/ a producer/ a firm, or
employment, inflation, etc.
a product.
 Partial and General Equilibrium

Partial equilibrium analysis: General equilibrium analysis:

Related to micro analysis explains economic phenomena
in an economy as a whole
Example - single market
Example- product market,
factor market etc.
 Static and Dynamic Analysis

• Static economic analysis is • Dynamic state refers to a

also known as a timeless state where there is a change.
economy
• The economic variables like
• Stationary state is an consumption function,
economy in which the tastes, income and investment in a
resources and technology do dynamic state.
not change through time.
 Positive and Normative Economics

Positive economics: Normative economics:

“what is” in economic “what ought to be” in
matters economic matters.

• Analyzes problems on • Incorporates value

the basis of facts. judgments about what the
economy should be like.
 Short Run and Long Run

• Short run: Time period • Long run: Time period

not enough for consumers long enough for
and producers to adjust consumers and producers
completely to any new
to adjust to any new
situation.
situation.
• Some inputs are fixed and
• All inputs are variable
others are variable
• Normative approach in economics deals with:
a. What is
b. What ought to be
c. Normal goods
d. All of the above
Basic Economic Concepts

Scarcity Choice

Opportunity
Cost
• SCARCITY
– One of the important concepts in economics is scarcity.

– Scarcity is defined as excess of wants in relation to

resources to satisfy them.

– Scarcity is a universal problem faced by poor as well as

rich nations in order to fulfil their needs.
• It give rise to the problem of resource allocation.

• In technical terms, scarcity implies excess demand.

Whenever, demand for a commodity exceeds the supply of
the same commodity, then, there is a scarcity of that
particular commodity.

• Scarcity is the root of the problem which requires the

managerial attention.
• CHOICE

– When scarcity exists, choices are to be made.

• OPPORTUNITY COST

– Opportunity cost is defined as the next best alternative

that has to be forgone for another choice which gives
more satisfaction.
 Opportunity cost
• What a person sacrifices when he choose one option
over another.
• Whenever a manager takes or makes a decision, he
chooses one course of action, sacrificing the other
alternative courses.
• For every decision that a manager takes, he gives away
something. This is called a trade-off. When we assign a
value to this, it is known as opportunity cost.
• At times, the information about the quantities is
provided. So, in that case, the ratio of their respective
prices determines the opportunity cost.
Example of Opportunity Cost
______________ is the value of alternative foregone in order
to have something else

a. Opportunity curve

b. Production Possibility curve

c. Indifference curve

d. Opportunity cost
 Basic Economic Problems

1. WHAT TO PRODUCE?
❖ Refers to the type of goods and services to be produced

2. HOW TO PRODUCE?
❖ Refers to the cheapest method of production

3. FOR WHOM TO PRODUCE?

❖ Refers to the distribution of income
 Kinds of Economic Decisions
The fundamental problems faced by an economy are:
What to Produce?
• This relates to the type and range of goods to be produced
How to Produce?
• This relates to the means of production (Labour or capital)
For whom to Produce?
• This relates with the problem of distribution of the product among various
economic agents
Are Resources used Economically?
Are Resources Fully Employed?

Is the Economy Growing?

• The first four problems are related to microeconomics whereas 5th and 6th
problem is related with macroeconomics.
 Production Possibility Curve
• Used to explain the basic economic concepts: Scarcity,
Choices and Opportunity cost.

DEFINITION:

The PPC shows the various possible combinations of

goods and services produced within a specified time
period with all its resources fully and efficiently
employed.
 Assumptions
• The economy is operating in full employment and full
production capacity (full efficiency).
• The amount of resources available are fixed.
• The state of technology does not change throughout the
production.
Good X Good Y
0 15
1 14
2 12
3 9
4 5
5 0
 Shape of PPC
Good Y

16 PPC IS CONCAVE

14
Increasing Opportunity Cost
12

10

4
2

Good X
0 1 2 3 4 5
Good Y
If it allocates all its resources to Good Y, it will
16 produce at Point A.
A
If it allocates all its resources to Good X, it will
14 produce at Point F.
12 C
If the country is at Point C on
10 D the PPC, it can produce the
combination of 2 units of Good
8
X and 12 units of Good Y.
6 Point D shows the production of
4
3 units of Good X and 9 units of
Good Y.
2
F
0 1 2 3 4 5 Good X
Good Y

16 Z
A
B UNATTAINABLE Point outside the PPC
14
(Point Z) ➔ SCARCITY
C
12 Y
Any point along the PPC
10 ➔ CHOICES
D
8
ATTAINABLE
6 Point inside the PPC
(Point Y) ➔ Waste E
4 of resources and
inefficiency
2
F
0 1 2 3 4 5 Good X
 How do we measure slope of PPC
• The value of slope at any point on the Production
Possibilities Frontier (PPF) curve or Production
Possibilities Curve (PPC) indicates the opportunity cost.

• It is also called as marginal rate of transformation

(MRT). Slope of the PPC defines the rate of producing
two goods with available resources and technology.
 Shape of PPC

• Increasing Opportunity Cost - Concave PPC

• Decreasing Opportunity Cost - Convex PPC

• Constant Opportunity Cost - Linear PPC

 Increasing Opportunity Cost
Increasing opportunity cost is a
case when more of a special good
is made, the cost in terms of other
goods or services grows.
Constant Opportunity Cost Decreasing Opportunity Cost
Constant opportunity cost is a Decreasing opportunity cost is a
case of perfect substitution so case when less of a special
that the production possibility good is made, the cost in terms
curve is linear. of other goods or services
grows.
______________ is the locus of all such combination of
two commodities which can be produced in a country
with its given resources and technology?
a. Production Possibility Curve
b. Marginal Rate of Substitution
c. Indifference Curve
d. None of the above
 Factors that influence Shift in PPC

Good Y

16
When the country
14 enjoys economic
growth, the PPC
12 bounds outward.
Economic Growth
10

8
When the country
6 is struck by natural
disasters, economic
4 growth will decline
and the PPC will
2 shift to the left.
Good X
0 1 2 3 4 5
 Good Y Technology increases the
production of Good Y.

16
Technology increases the
production of Good X.
14

12

10
Technology
8

4
2

0 Good X
1 2 3 4 5
 Good Y

16

14
Increase in
population
12

Population 10

8
Decrease in
6
population
4
2

0 Good X
1 2 3 4 5