F.Y.B.Com.

: Semester – 1
Discipline Related Elective (DRE) Courses

Business Economics – 1
Question Paper Pattern

Maximum Marks: 100 Duration: 3 Hrs,

Questions to be Set: 06
All Questions are Compulsory Carrying 15 Marks each.

Q.No. Particulars Marks

Q.1 Objective Questions* 20
(A) Sub questions to be asked 12 and to be answered any 10
(B) Sub questions to be asked 12 and to be answered any 10
(* Multiple Choice / True or False / Match the Columns / Fill
in the Blanks)
Q.2 Full Length Question 15
OR
Q.2 Full Length Question 15
Q.3 Full Length Question 15
OR
Q.3 Full Length Question 15
Q.4 Full Length Question 15
OR
Q.4 Full Length Question 15
Q.5 Full Length Question 15
OR
Q.5 Full Length Question 15
Q.6 (A) Theory Questions 10
(B) Theory Questions 10
OR
Q.6 Short Notes 20
To be asked 06, to be answered 04 Marks

Note: Full length question of 15 marks may be divided into two sub questions of 7/8 and 10/5
marks.
 Contents

MODULE -I: INTRODUCTION

1. Introduction to Business Economics
2. Market Demand and Supply

MODULE 2: DEMAND ANALYSIS

3. Demand Function
4. Elasticity of Demand
5. Demand Estimation and Forecasting

MODULE 3: SUPPLY AND PRODUCTION DECISIONS

6. Theory of Production
7. Short-Run and Long-Run Analysis of Production
8. Economies and Diseconomies of Scale

MODULE 4: COST OF PRODUCTION

9. Cost Concepts
10. Cost - Output Relationship
11. Break Even Analysis
University Paper Solutions (UPS)
November – 2017
November - 2018
 1. INTRODUCTION TO BUSINESS ECONOMICS
1.1 Introduction
1.2 Business Economics
1.3 Basic Concepts for Business Economic Analysis
 Opportunity Cost
 Incremental and Marginal Concepts
 Marginal Analysis
1.4 Functional Relations and Tool for Economic Analysis
 Variables
 Functions
 Equations
 Economic Data and Tools
 Graphs
 Curves
 Slopes

1.1 INTRODUCTION
Economics studies how societies use their scarce resources to produce and distribute
commodities to satisfy unlimited wants of its people. Goods and services are produced because
they have uses, 'utility' or the capacity to satisfy human wants. Production requires resources.
Resources are broadly classified into land, labour, capital and enterprise. Since resources are
scarce and have alternative uses, they have to be used optimally, that is, with minimum
wastage. Use of scare resources involves rational choices. Economics is the science of
choices. Thus the problems of scarcity and choices become the basis of economic analysis.

British economist, Lionel Robbins (1898-1984) stated, economic problem is concerned with
scare resource which have alternative uses for satisfying human wants, which are unlimited.
It is a problem of choice, a choice between ends and also a choice of using scarce resources
between alternative uses with the objective of maximizing satisfaction.

The subject matter of modern economics is generally divided into two parts: Microeconomics
and Macroeconomics. The terms micro and macro are derived from Greek words 'mikros' and
'makros' meaning 'small' and 'large', respectively.

Microeconomics studies the economic behaviour of individual decision making units such as
consumers, resource owners, business firms and of small groups of individual units like
industries and markets. In this connection, microeconomics examines the behaviour of the
industry with regard to determination of its product price, output and employment. It examines
how prices of products and factors are determined and how resources are allocated among
various uses. Microeconomics tends to offer a detailed treatment of one aspect of economic
behaviour but ignores interactions with the rest of the economy, in order to preserve the
simplicity of the analysis. Microeconomics has both theoretical and practical significance. Its
principles and concepts are used by firms to make decision regarding pricing, marketing,
resources utilisation and profit analysis.

Macroeconomics studies the functioning of an economy as a whole. It studies aggregate or

collective behaviour of a society in connection with economic choices. The main areas of study
include national income, aggregate demand and supply, employment level, inflation, recession,
international trade. Macroeconomic analysis is extremely useful in formulation of economic
policies by the government and monetary authorities. Business firms use macroeconomic data
and analyses to formulate present and future business policies. Forecasting of future trends is an
important part of applied macroeconomics.

1.2 BUSINESS ECONOMICS

Business economics is a field in economics that deals with issues such as business
organization, management, expansion and strategy. The primary focus of business economics is
a business enterprise or the firm. Business enterprises are units of production of goods and
services whose primary objective is to produce for the market in order to earn profit. Though
there are several not-for-profit business organizations, traditional microeconomic study focuses
on profit making enterprises.

Business Economics uses economic theory and quantitative methods to analyse the
functioning of business enterprises. It focuses on the application of fundamental economic
theories and laws in the decision making process of business enterprises.

The scope of business economics can be explained as follows:

1. Market Demand and Supply: One of the most important areas of study in business
economics is the market. Producers produce for the market where the interaction between the
demand and supply determines the price. The price of a product and its sales determine the total
revenue, from which total cost is deducted to arrive at a firm's profit or loss. A business
enterprise's survival, success and failure depend upon what price the market determines for its
product.

2. Production Analysis: Business economics analyses the process of production. A firm tries to
make optimum use of the resources available to it in order to maximize production and
minimize cost. Laws of Variable Proportions and Laws of Returns to Scale are used to
understand production in the short run and the long run, respectively.
3. Cost and Profit Analysis: In order to analyse costs, cost functions are used to make decision
regarding optimum utilization of resources. Business economics uses concepts of opportunity
cost and implicit cost to determine economic profit and differentiate it from accounting profit.
This is done to determine the actual resource utilization in businesses.

4. Market Structures: The study of market structures is a very important part of business
economics. Understanding competition makes firms take better decisions about their pricing,
marketing and production strategies. The study of market structures like perfect competition,
monopoly, monopolistic competition and oligopoly form an important part of business
economics.

5. Pricing: Pricing is one of the most important business decisions that determines a firm's
revenue and profit. Business economics deals with the analysis of different pricing practises and
studies their applications in different types of firms. For example, which pricing practice is
appropriate for a multi-product firm or a public sector enterprise?

6. Objectives of the Firm: Profit is the primary objective of business firms. Business
economics studies break-even analysis and profit maximising equilibrium of a firm. Besides,
other objectives of the firm like, sales maximisation, growth maximisation and satificing
behaviour are also studied in business economics.

7. Forecasts and Business Policy: A firm's decisions are influenced by the larger economic,
political and social environment in which it operates. Government policies, national income
changes, population changes, business cycles, all affect a firm's decisions. While studying the
impact of the external economic factors that affects a firm's decision making, business
economics uses macroeconomic principles. Business economics uses quantitative techniques
(mathematics and statistical techniques) to study how business enterprises forecast future trends
in demand, costs, revenue and profit. Forecasting future trends is extremely important for a firm
as the success of its plans depends on how well it can forecast the future. Demand forecasting is
an applied component of business economics.

8. Project Planning: Project planning or capital budgeting is done by any investor to determine
the criteria on which to make investment decisions. The study of different methods of project
planning is one of the most important components of business economics. Methods like pay-
back period, net present value and internal rate of return are studied under business economics.

RELATIONSHIP BETWEEN ECONOMIC CONCEPTS AND BUSINESS DECISIONS

Business economics may be considered as economics applied to problem solving at the level of
the firm. A business firm which is a decision making unit is confronted with the problem of
scarcity of resources. It has to deal with the problem of scarcity of resources which have
alternative uses to produce a commodity from among many. There is, therefore, a similarity
between an economic and a business problem. Both deal with scarcity and alternative uses of
scarce resources to produce goods and services on the basis of priority to maximise
satisfaction (profit). Thus economics as well as business economics involve tackling the
problem of choice and valuation.

We have discussed the nature and scope of business economics. From among the numerous
economic concepts and theories, some are more relevant and have a direct bearing on business
decisions as explained in the table 1.1.

Table 1.1
Economic Concept/Theory
1. Demand Analysis
2. Production and Cost Analysis
3. Market Structure Analysis
4. Project Appraisals
5. Firm's Behaviour Analysis
6. Risk and Uncertainty Analysis
Business Economics/Decisions
1. Product, pricing, innovation, marketing
2. Input-Output analysis, use of technology,
productivity improvement, recycling wastes,
environmental compliance
3. Price-output decisions, marketing,
diversification, market expansion, mergers,
take-overs
4. Investment decisions
5. Profit determination, sales and market
share targets, stakeholders' interest
6. Economic forecasting and planning

1.3 BASIC CONCEPTS FOR BUSINESS ECONOMIC ANALYSIS

Business economic analyses are made with the help of some fundamental concepts and
techniques. These are used to understand the functioning of a firm and help them in their
decision making process. Some of these are discussed here.
(A) OPPORTUNITY COST
As economics deals with the problem of scarcity of resources, the concept of opportunity cost
becomes the basis for economic analysis.
What is opportunity cost?
Think about the different options you face in life, like what career to choose, how to spend a
certain time of the day, what mode of transport to use, which mobile phone to purchase and
many more. On a daily basis we make choices that deal with the use of our time and other
resources. We tend to use the resources for what we believe to be the best alternative at that
point of time. Suppose, you have a couple of hours at your disposal; you might want to use that
time to watch TV, read a book, go out for a walk, chat with friends or go out and help a social
service organisation. Let us assume you feel that helping out at the social service organisation
would be the best way to spend your time, then the opportunity cost would be the next best
alternative that you have sacrificed, let's say chatting with friends. So, in order to use your
time resource for one activity, you have to forego another activity. This forgoing is
opportunity cost of doing the activity you chose. The choice and sacrifice needs to be made
because;
(a) resources are scarce; and
(b) resources have alternative uses.
This concept of opportunity cost is very important in economic analysis to understand how
choices are made by households, firms and governments. The opportunity cost of a chosen
activity or commodity is the value of the next best alternative that is foregone. It can be
understood as an opportunity lost.
The concept is very significant for business economic analysis of choices because resources
have more than one use. Sometimes opportunity cost can be measured in terms of money but
sometimes it cannot be. When it is difficult to measure opportunity cost in terms of money, it
has to be imputed, that is, it has to be given a representative value. For example, an
entrepreneur who has never worked outside her business may not be able to compute the
opportunity cost of working in her own business. In that case, she will have to estimate it by
taking a representative income earned by someone who has similar skills and qualifications as
her.
Business economists include all costs, whether they reflect monetary transactions or not; while
accountants generally exclude nonmonetary transactions. Opportunity cost of using factors that
belong to the entrepreneur herself, like capital from personal savings, own premises, or her
own skills, need to be added to explicit or transaction costs in order to arrive at economic cost.
The difference between revenue and economic cost determines economic profit. The concept of
opportunity cost is used to determine factor incomes like rent, interest and wages. Thus to an
economist, opportunity costs are as important as explicit monetary costs.
(B) MARGINALISM AND INCREMENTALISM
Marginalism is at the base of economic decision making. Economic choice usually involves
some adjustment or change from the existing situation. Therefore, decisions regarding use of
resources have to be made 'at the margin'. This is referred to as marginalism. Since resources
are scarce, each and every additional unit of resources need to be utilized by the economic unit
in an optimal manner, that is, with minimum or zero wastage.
Marginal means additional or extra. Economic analysis is marginal analysis as there is
always the need to make decision regarding some change. Mathematically, marginal is denoted
by a small unit change and is expressed by the symbol A. Typically, the change under
consideration is small, but a marginal choice can involve a major economic adjustmet.
Business economic analyses are based on marginalism. Business units are constantly taking
decisions at the margin. For example, whether to increase or decrease production output and
capacity, whether or not to change the R&D and marketing budgets, whether to diversify,
expand market, internationalise business, change workforce strength and many more.
Any change in the existing situation will bring about a change in some parameters and
measurements. To study the effect of such changes, we need to understand that some variables
are independent, for example, output level. Some variables are dependant, for example, total
cost. As output level increases, so will total cost. This change in total cost is measured by
marginal cost.
Let us take the measurements of cost and revenue. A decision to produce more output (Q) will
result in a rise in total cost (TC), as well as total revenue (TR). Thus, change in TC ( TC)
depends on change in output level ( Q) and change in TR ( TR) depends on change in output
level ( Q). The ratios of the change in the dependant variable (in this case, TC and TR) to the
change in the independent variable (in this case, Q) measure marginal cost (MC) and marginal
revenue (MR).
Thus,
MC = TC/ Q
MR = TR/ Q
Other marginal concepts used in business economic analyses are: marginal product, marginal
utility, marginal propensity to consume and save.
INCREMENTALISM
Though the term marginal denotes a small unit change, many a times changes take place in
'chunks' or 'batches', for example, firms don't generally increase production by one more unit,
but by a batch of additional units. In such situations the concept used is incrementalism.
Incremental concepts involve the estimation of the impact of a decision. For example, a firm
may decide to open a branch in another city. This is an incremental decision. The decision will
be based on the comparison between incremental cost and incremental revenue.
Relationship Between Total, Average and Marginal
(i) Total and marginal : Marginal measures any change in the total values. When a total
value changes it is reflected in the marginal measurement. For example, changes in total utility
are measured by marginal utility. The relationship between total values and marginal values can
be explained as follows:
Change in Total Marginal
Total values are increasing Marginal values will be positive
Total values are declining Marginal values will be negative
Total values rise at an increasing rate Marginal values will rise
Total values rise at an diminishing rate Marginal values will fall
(ii) Marginal and average: Average measures the arithmetic mean. In economics average is
calculated by dividing a dependant total value by a relevant independent value. For example,
average product is measured as total product/units of labour used.
Average values change when additions are at the margin For example, if an additional unit of
output is produced, then both total and average cost will change.
The relationship between average values and marginal values can be explained as follows:
(a) When marginal is greater than average, average will rise.
(b) When marginal is equal to average, average will remain constant.
(c) When marginal is less than average, average will fall.
These relations have important bearing on business decision making.
The general relationship between any average and marginal values can be explained by the
following diagram:

Relationship Between TR, AR and MR in Perfect and Imperfect Competition

One can understand the relationship between total, average and marginal values through the
example of revenue measurements.
Perfect Competition:
In perfect competition there are large number of buyers and sellers, the product sold by sellers
are homogenous, there is free entry and exit of firms, there is perfect mobility of factors, perfect
market knowledge and no government intervention. The price of the product is determined by
market demand and supply and each seller is a price taker. Under these conditions, the price per
unit charged by every seller will be the same. The following table shows the relationship
between TR, AR and MR in a perfectly competitive market.
Unit of Output Price Per Unit TR=P x Q (R)
Sold(Q) (p) AR=TR/Q (R) MR=TRn-TRn-1
1 10 10 10 -
2 10 20 10 10
3 10 30 10 10
4 10 40 10 10
5 10 50 10 10
6 10 60 10 10
7 10 70 10 10
8 10 80 10 10
9 10 90 10 10
10 10 100 10 10
It can be observed that price is constant at all levels of output sold. Since price is constant, TR
increases at a constant rate. AR = price. MR measures the change in TR and MR = AR (or
price). The AR = MR curve is a horizontal straight line parallel to the X-axis. The TR curve is
an upward rising straight line curve. The slope of TR ATR/AQ which is equal to MR.
Imperfect Competition :
In market structures like monopoly and monopolistic competition a seller can sell more by
lowering the price. Due to the existence o remote substitutes (in case of monopoly) and close
substitutes (i case of monopolistic competition), the demand curve of individua sellers is
downwards sloping. In case of monopoly, the deman curve is relatively inelastic due the
absence of close substitutes. I case of monopolistic competition, the demand curve is relatively
elastic as there are many close substitutes available in the market.
The following table shows the relationship between TR, AR and MR in imperfect competition.
Unit of Output Sold (Q) Price Per Unit (P) TR=P x Q (R) AR=TR/Q (R) MR=TRn-TRn-1
1 10 10 10 -
2 9 18 9 8
3 8 24 8 6
4 7 28 7 4
5 6 30 6 2
6 5 30 5 0
7 4 28 4 -2
8 3 24 3 -4

(a) With decline in price, output sold increases.

(b) TR initially rises and then declines.
(c) Changes in MR reflects the changes in TR. When TR rises at diminishing rate, MR declines
but is positive. When TR i maximum and constant, MR is zero. When TR declines, MR i
becomes negative.
(d) AR is not equal to MR.
(C) MARGINAL ANALYSIS
Marginal decisions are taken not only by individuals, households and firms but also by
governments. Governments may want to increase the existing tax rates or increase public
expenditure on education. All these decisions involve analysis of marginal cost and marginal
benefits. Any economic choice is based on the expected marginal or incremental benefit and the
expected marginal cost of the action under consideration. If a firm decides to increase output
level, it will then have to work out the marginal cost of producing the additional units of output
and compare this cost with the marginal revenue it will earn by selling the additional output. A
rational firm will produce the additional output only if the marginal revenue exceeds marginal
cost.

1.4 FUNCTIONAL RELATIONS AND TOOLS FOR ECONOMIC

ANALYSIS
Economic analyses are based on looking for relevant cause-effect relations between different
variables and then taking decisions or the basis of the analyses. Some of the important concepts
and tools of economic analysis are discussed here.

1. VARIABLES
Economic theories and models are constructed to explain economic activities. An economic
model is a simplified representation of real world phenomena. For example, the Law of
Demand is used to understand the relationship between price and quantity demanded.
Since the real world is extremely complex and ever changing, it i necessary to build a model
with some restrictions or assumptions to understand the relationships between different
variables tha matter. A variable is a magnitude of interest that can be definer and measured. In
other words a variable is something whose magnitude can change or can take on different
values. Variable frequently used in business economics are price, profit, revenue cost,
investment. Since each variable can have different values, it i represented by a symbol. For
instance price may be represented by P, cost by C, and so on.
Variables can be endogenous and exogenous. An endogenous variable is a variable that is
explained within a theory. An exogenous variable influences endogenous variables but the
exogenous variable is itself is determined by factors outside the theory. For example the theory
of value helps to determine the equilibrium price with the help of demand and supply curves. In
this model, price and quantity demanded and supplied are endogenous variables as they are
within the model or they are controllable variables in the model. When price changes, the
respective quantities also change in response. But there are other factors that determine demand
and supply. Some of these are consumer preferences, prices of related commodities, input costs,
advertisement, government policies and so on. These are exogenous variables as they are
outside the model but they also have an influence on price, demand and supply.
2. FUNCTIONS
A function shows the relationship between two or more variables. Dr It indicates how the value
of one variable (i.e. dependent variable) - depends on the value of one or more other (i.e.
independent) variables. It also shows how the value of one variable can be found by specifying
the value of other variable.
For instance, economists generally link the volume of consumption by the households to the
receipts of disposable income (income left al after deduction of taxes and addition of transfer
incomes like pension, subsidies). Such behaviour is specified by saying that d consumption is a
function of disposable income. This functional relationship between consumption and
disposable income can be expressed as
C = f(Y)
where C is aggregate consumption, Y is disposable income and f stands for the functional
relation. This functional expression means that aggregate consumption depends upon the
disposable income. Similarly, in business economics, functional relations between price of a
commodity (P) and quantity demanded (Q) can be expressed as Q = f (P).
3. EQUATIONS
The expression Q = f (P) states that Q is related to P. It says nothing about the form that this
relation takes.
An equation specifies the relationship between the dependent and independent variables.
For instance, the functional relationship between price and quantity demanded can take different
forms. The specific relationship between two or more variables is specified in the form of an
equation.
For instance the function Q = f (P) can be expressed in a simple equation as
Q=-bP ……..(1)
Where, b is a constant and it has a value greater than zero but less than one. Thus the equation
(1) shows that Q is a constant proportion of price. For example if b is 0.5 then the quantity
demanded would fall by 0.5 for every unit rise in price. The negative sign indicates the inverse
relationship between price and quantity demanded. The equation (1) also shows that if price is
zero, quantity demanded will also be zero.
The function Q = f (P) can also be expressed in the form of an alternative equation as
Q = a – bP ………(2)

Where a and b are parameters and have values greater than zero The equation (2) also shows
that quantity demanded is an inverse linear function of price. The coefficient a denotes quantity
demanded at zero price. The parameter a has a positive value and is independent of price. When
price is zero, bP will be zero, but quantity demander will not be zero but will be equal to a. In
the above equation, b measures the slope of the demand curve. It is measured as Q/ P The
demand curve has a negative slope, hence the negative sign.

Therefore, equations specify the functional relationship between dependent and independent
variables. Each equation is a concise statement of a particular relation.

4. ECONOMIC DATA AND TOOLS

Economists make use of evidence to test the relevance of a specific prediction of theories and
models. They also try to explain, analyse and predict observed real world economic behaviour
of people. To analyse economic issues and the relationship between variables economists use
data. Relevant, quantifiable data is absolutely essential for making business decisions.
Tools for Economic Analysis
The relationship between variables can be expressed either in words, in numerical schedules or
tables, in mathematical equations, or in graphs. For example, the relationship between the
quantity supplied of a commodity and its price can be expressed in the following ways:
(i) A sentence explaining the direct relationship
(ii) A supply equation QSX = -c + dPx
(iii) A table giving different levels of supply at different prices
(iv) An upward rising curve with price on the Y-axis and supply on the X-axis.

5. GRAPHS

Graphs are geometrical tools used to express the relationship between variables. Graphs are
essential in economics because they allow us to analyse economic concepts and examine
historical data. Business economics makes extensive use of graphs to analyse economic
relations.

A graph is a diagram showing how two or more sets of data or variables are related to one
another.
The important points to understand about a graph are :
(i) The horizontal line on a graph is referred to as the horizontal axis, or sometimes the x axis.
The vertical line is known as vertical axis or y axis.
(ii) The lower left hand corner where the two axes meet is called the origin. It signifies 0.
(iii) The variables are represented on the two axes.
(iv) The kind of relationship between the variables on the axis is depicted in the curve or curves
shown in the graph. For example, if the relationship between the variables is inverse, then the
curve will be downward sloping or will have a negative slope.
6. CURVES
The functional relationship between the variables specified in the form of equations can be
shown by drawing lines in the graph. The line depicts the relationship between the variables.
For instance, the onship between consumption and income shown in equation (2) is expressed
by drawing a line as in Fig. 1.3.

The line CC, is a straight line and has a positive slope. It shows that aggregate consumption is
positively related to aggregate disposable income. It shows that an increase in disposable
income will lead to an increase in consumption. In this case the relationship between the
variables is direct. Direct relationships occur when variables move in the same direction, that is,
they increase or decrease together. On the other hand, inverse relationships occur when the
variables move in the opposite direction.
Thus, a line depicts the underlying relationship between two variables. Depending upon the
relationship between the variables the line can have a positive or negative slope. The line only
suggests but does not prove the underlying relationship between the variables. The line is called
a curve in economics. A curve can be linear (straight line) or non-linear depending on the data
used.
7. SLOPES
One important way to describe the relationship between two variables is by the slope of a line.
Slopes show us how fast or, at what rate, the dependant variable is changing in response to
a change in the independent variable. By looking at the slope of the line we can quantify the
average relation between the variables. The slope is defined as the amount of change in the
dependant variable measured (usually on the vertical or Y-axis) per unit change in the
independent variable measured (usually on the horizontal or X-axis). Therefore, the slope is
equal to Y/ X, where Y is the dependant variable; X is the independent variable and delta ( )
stands for a change.
In other words, the slope is an exact numerical measure of the relationship between the change
in Y and the change in X. For instance the slope of a demand curve is measured as
 Q/ P. (Though in most cases, the dependant variable is represented on the vertical axis and
the independent variable is represented on the horizontal axis, the notable exceptions to this
convention are the demand and supply curves, in whose case it is the reverse)
(a) Slope of a Straight Line: The measurement of slope of the straight (Linear) line is shown in
Figs. 1.4 (a) and 1.4 (b).

The movement of A to B on the lines DD₁ and SS₁ in Fig. 1.4 (a) and 1.4 (b) may occur in two
stages. First there is a horizontal movement from A to C, indicating one unit increase in X.
Second, there is corresponding vertical movement up or down from C to B. The length of CB
indicates the change in Y per unit change in X. Thus, the slope measures the change in Y per
unit change in X. Since in Fig. 1.4 (a) and 1.4 (b) BC corresponds to change in Y ( Y) and AC
corresponds to change in X ( X) the slope of the line AB is Y/ X.
In Fig. 1.4 (a) the two variables change in opposite directions, that is, when one variable
increases the other decreases. So the two s will always be of opposite sign. Therefore, their
ratio, which is the slope of the line DD₁, is always negative.
In Fig. 1.4 (b) the two variables change in the same direction so both changes will always be
either positive or negative Therefore, their ratio, which is the slope of this line SS₁, is always
positive.
If the line is straight its slope is constant everywhere. The slope of the line indicates whether
the relationship between the two variables is direct or inverse. The relationship is direct when
the variables move in the same direction, that is, they increase or decrease together. Thus a
positive slope indicates a direct relationship as in Fig. 1.4 (b). On the other hand, the
relationship is inverse when the variables move in opposite directions, that is, one increases as
the other decreases. A negative slope indicates the inverse relationship as in Fig. 1.4 (a).
(b) Slope of a Curved Line: A curved or a non-linear line has different measurements of slope
at different point.
Measurement of slope of a curved line is shown by drawing a dome shape curve as in Fig. 1.5.
The curve ABCDE in Fig. 1.5 increases initially, reaches a maximum point at C and then
declines. The slope of the curved line at a point is given by the slope of the straight line, that is
tangent drawn to the curve at the given point. For instance, it we want to find out the slope of
the curve at point B we have to draw a straight line tot as a tangent to the curve at point B. By
calculating the slope of the straight line t₁t₂ we can find out the slope of the curved line at point
B. We can see from Fig. 1.5 that it has a positive slope. Similarly, we can find out the slopes at
different points by drawing tangents to respective points.
For instance, we can find out the slopes at the C and D by drawing tangents t 3t4 and t5t6,
respectively. It can be seen from the Fig. 1.5 that the slope of the curve is positive in the rising
region from A to C and negative in the falling region C to E. At the maximum point of the
curve, that is, at point C, the slope is zero. A zero slope indicates that a small change in the
variable X around the maximum point of the curve has no effect on the value of the variable Y.
Similarly, we can also find out the slopes of a "U" shaped curve. A "U" shaped curve first falls,
reaches a minimum point and then rises. It's slopes can be found out by the same technique as
shown in Fig. 1.5, that is, by the slopes of the tangents drawn to the curve. In the falling region
the slope of the curve is negative and in the rising region the slope is positive. At the minimum
point of the "U" shaped curve the slope is zero.
(c) Intercepts: The intercept is the point at which the line or the curve crosses the vertical axis.
point C the line CC₁ crosses the vertical axis. In other words OC is the height of the vertical axis
where the line CC₁ crossed the vertical axis. Therefore, OC is the intercept. It shows the value
of consumption when income is zero.
In the equation, C = a₁ + a₂Y
a1 is the intercept i.e. the value of C when Y is zero. There can be vertical and horizontal
intercepts. The vertical intercepts shows the value of Y variable when X variables is zero. On
the other hand, the horizontal intercept shows the value of X variable when Y variable is zero.

REVIEW QUESTIONS

1. Define economics and bring out the differences between microeconomics and
macroeconomics.
2. Define business economics? Discuss its scope.
3. Bring out the relationship between economic concepts and business economic decisions.
4. Explain the concept of opportunity cost and bring out its significance in business economics.
5. "Marginalism is at the base of economic decision making." Explain.
6. What is the difference between marginalism and incrementalism? Explain the relationship
between total, average and marginal values.
7. Explain the significance of the following in economic analysis:
(a) Variables
(b) Functions
(c) Equations
(d) Data
(e) Graphs
(f) Curves
(g) Slopes
9. Explain how slopes of linear and non-linear curves are measured.
10. What are intercepts?
11. Explain the following diagram :
MC
AC MC
MC
12. Write explanatory notes on :
(a) Opportunity cost
(b) Marginalism
(c) Business economics and decision making
(d) Relationship between total, average and marginal values
(e) Functions and variables
(f) Slopes
(g) Equations and graphs
(h) Incrementalism

OBJECTIVE QUESTIONS

A. Choose the correct answer and rewrite the statements :

1. Resources need to be used optimally because
(a)they are freely available (b) they are scarce
(c) their supply is unlimited (d) they can be used only for one purpose
2. Which of the following statements describes microeconomics?
(a) Variables are generally aggregates
(b) Helps to understand the larger environment in which a business operates
(c) It usually ignores interrelationship between individual aggregate economic variables
(d) It's subject matter is collective human behavior
3. The primary focus of business economics is
(a) economic welfare (b) economic growth
(c) the firm (d) the global economy
4. Opportunity cost is defined as
(a) sacrifice of the next best alternative use of a factor
(b) cost of production
(c) selling cost
(d) overhead cost
5. When total values are increasing,
(a) marginal values will be negative (b) marginal values will be zero
(c) marginal values will be 1 (d) marginal values will be positive
6. Rising marginal values indicate,
(a) total values rising a diminishing rate (b) total values rising an increasing rate
(c) total values rising a constant rate (d) total values falling
7. When total values rise at a diminishing rate, it means
(a) marginal values are falling (b) marginal values are rising
(c) marginal values are constant (d) marginal values are negative
8. When marginal values are less than average values,
(a) average will rise (b) average will remain constant
(c) average will fall (d) average will be
9. Which of the following is true of the relationship between TR,AR and MR in perfect
competition?
(a) TR=AR = MR
(b) TR rises at a diminishing rate and AR is greater than MR
(c) TR rises at a constant and AR is less than MR
(d) TR rises at a constant rate and AR is equal to MR
10. In the equation, Dx = a - bP, b denotes
(a) X-intercept (b) slope of the demand curve
(c) Y- intercept (d) demand for x
11. In case of a non-linear curve
(a) The slope will be the same at different points
(b) The slope will be zero
(c) The slope will be one
(d) The slope will be different at different points
12. Slope measures
(a) the rate at which a dependent variable changes due to a u change in an independent variable
(b) the rate at which an independent variable changes due to a u change in a dependent variable
(c) elasticity
(d) total variables
Ans. (1) - (b), (2) - (c), (3) - (c), (4) - (a), (5) - (d), (6) - (b), (7) - (a) (9) - (d), (10) - (b), (11) -
(d), (12) - (a)

B. State whether the following statements are true or reasons for your answers :

1. Economics is the science of choices.

2. Microeconomics deals with the analysis of national income.
3. The primary focus of business economics is economic welfare.
4. Business forecasts are extremely important aspect of economics.
5. Opportunity costs can always be measured in terms of money.
6. Opportunity costs arise because resources are unlimited.
7. Incrementalism and marginalism are one and the same.
8. Business decision making involves comparison between costs and marginal benefits.
9. When total values are rising, marginal values will be negative.
10. If a firms average cost in 300 and the cost of producing an additional unit is 400 and price
unit is 375, then the firm should not produce the additional unit, assuming there is no change in
the price of the product.
11. An exogenous variable is within an economic model.
12. Functions express relationship between two or more variables.
13. In the equation C=a+bY, a denotes the slope of the consumption curve.
14. In case of a non-linear curve, the slope will be different at different points.
Ans.
1. True; For Reasons: Refer Section 1.1.
2. False; For Reasons: Refer Section 1.1.
3. False; For Reasons: Refer Section 1.2.
4. True; For Reasons: Refer Section 1.2.
5. False; For Reasons: Refer Section 1.3.
6. False; For Reasons: Refer Section 1.3.
7. False; For Reasons: Refer Section 1.3.
8. True; For Reasons: Refer Section 1.3.
9. False; For Reasons: Refer Section 1.3.
10.True; For Reasons: Refer Section 1.3.
11.False; For Reasons: Refer Section 1.4.
12.True; For Reasons: Refer Section 1.4.
13.False; For Reasons: Refer Section 1.4.
14.True; For Reasons: Refer Section 1.4.
C. Match the columns:
Group A
1. Graphs
2. Equations
3. Business Economics
4. Endogenous variables
5. Incrementalism
6. Slope of a straight line
7. Opportunity cost
Ans. (1) - (e), (2) - (g), (3) - (h), (4) - (i), (5) - (k), (6) - (a), (
Group B
(a) will be same at all points
(b) may not always be quantified
(c) small unit change
(d) will differ from point to point
(e) are geometrical tool to study functions
(f) are transactional costs
(g) mathematically expressed functions
(h) uses economic theory and quantitative techniques
(i) are within an economic model
(j) are outside an economic model
(k) Measures larger change