BUSINESS ECONOMICS NOTES

BBA 1st Semester

RU BBA 101
FACULTY: Ms. RUBA NASIM
Unit- 1
Economics
Economics is a social science concerned with the production, distribution, and consumption
of goods and services. It studies how individuals, businesses, governments, and nations
make choices about how to allocate resources in an effective and efficient manner.
Economics is that subject which relates to wealth.
Business Economics
BE is a stream of management studies which emphasizes on solving business problems and
decision-making by applying the theories and principles of microeconomics and
macroeconomics. It is a specialized stream dealing with the organization’s internal and
external issues by using various economic theories.
Business Economics is a field of applied economics that studies the financial,
organizational, market-related, and environmental issues faced by different companies.

Differences between Goods and Services:

Basis of Goods Services
Comparison

Nature Tangible Intangible

Transfer of Possible Not Possible

Ownership

Separable Goods can be separated from the Services cannot be

seller separated from the service
provider

Storage Goods can be stored Services cannot be stored

Perishable Not all goods are perishable Services are perishable

[destroy]

Production and Goods have a significant time gap Services are produced and
Consumption between production and consumed together
consumption
Difference between Customer and Consumer:
A customer is an organization or individual who purchases a product or service with the
motivation to resell, gift, or use it. A customer always makes a payment. A consumer
is anyone that uses a product or service, but they don’t always pay for it.

Difference between Inflation and Deflation:

Inflation and deflation are opposite phenomena of price changes in an economy. Inflation
is an increase in the general prices of goods and services, indicated by a positive increase
in price rate. Deflation is a decrease in the general prices of goods and services, indicated
by a negative price rate. Both can have negative impact on economic growth when cause in
excess.

Division of Business Economics - Macroeconomics and Microeconomics

Business economics is the application of logical and analytical tools that attempts to solve
the different problems by the application of theories and practice. It is important to study
the concept of microeconomics and macroeconomics. Microeconomics is the study of
economics at an individual, group, or company level. Whereas, macroeconomics is the
study of a national economy as a whole.

Microeconomics [small]
Microeconomics is defined as the study of the decision-making process of small or
individual units with respect to the proper allocation of their limited resources. Focus is
directed to individual units or a small number of units instead of a combination of all the
units. It is also called as Internal Environment.
Macroeconomics [wide]
Macroeconomics is defined as the study of the economical behaviour on larger scale or the
total study of individuals like total production, consumption, overall output, etc. The study
of macroeconomics includes: General Price and rates of interest, National output, National
income, Rate of economic growth, Level of employment etc. It is also called as External
Environment.
Difference between Microeconomics and Macroeconomics

S.No Microeconomics Macroeconomics

Microeconomics studies individual Macroeconomics studies a nation’s

1.
economic units. economy, as well as its various totals.

Microeconomics primarily deals with Macroeconomics is the study of aggregates

2. individual income, output, price of [total] such as national output, income,
goods, etc. price levels etc.
 Microeconomics tells the demand and Macroeconomics tells the aggregate [total]
3.
supply of a particular product. demand and supply of a nation.

Macroeconomics tells how to increase the

Microeconomics studies how a
4. levels of employment and income of the
company can earn profits.
nation.

Internal and External Environment

The internal environment of an organization includes all factors within its boundaries, like
its resources, employees, and management that can be controlled. The external
environment includes factors outside the organization, like market trends, competition,
or legal regulations, which are beyond its direct control.

BASIS FOR
COMPARISON INTERNAL ENVIRONMENT EXTERNAL ENVIRONMENT

Meaning Internal Environment refers to External Environment is a set of all

all the factors and conditions the heavy forces that have the
present within the company, potential to affect the
which can affect the company's organization's performance,
working. profitability, and functionality.

Nature Controllable Uncontrollable

Includes Strengths and weaknesses Opportunities and threats

Company only All companies operating in the
industry

Focus on Business Strategy, functions Business survival, growth,

and decisions reputation, expansion, etc

External Environment includes PESTEL Analysis.

  Political.

The political impact on the company is greatly affected by the government laws and

policies. The company needs to satisfy its requirements of government otherwise it has to

pay fine.

 Economic.

It includes management of funds for overall development.

 Social.

The social environment continues changing with respect to time like the mindset of the

consumer as well as their lifestyles. Any service or product of any company can not achieve

success until it satisfies the customers.

 Technological.

In the development of business, use of new technologies are somewhat compulsory. It also

helps in research and development.

 Legal.
Legal aspects means all the rules and regulation made by government needs to be followed.

 Environmental.

Try to use maximum products which are environment friendly. As due to the production of

larger number of products there might be a hazard if the resources used are not recyclable.

Nature of Business Economics

1. Art and Science: Business economics requires a lot of logical thinking and creative skills
for decision making or problem-solving. It is also considered to be a stream of science by
some economist claiming that it involves the application of different economic principles,
techniques and methods, to solve business problems.

2. Micro Economics: In Business economics, managers generally deal with the problems
related to a particular organization instead of the whole economy. Therefore it is
considered to be a part of microeconomics.

3. Uses Macro Economics: A business functions in an external environment, i.e. it serves

the market, which is a part of the economy as a whole. It includes PESTEL.

Therefore, it is essential for managers to analyse the different factors of macroeconomics

such as market conditions, economic reforms, government policies, etc. and their impact on
the organization.

4. Multi-disciplinary: It uses many tools and principles belonging to various disciplines such
as accounting, finance, statistics, mathematics, production, operation research, human
resource, marketing, etc.

5. Prescriptive Discipline: It aims at goal achievement and deals with practical situations or
problems by implementing corrective measures.

6. Management Oriented: It acts as a tool in the hands of managers to deal with business-
related problems and uncertainties. It also provides for goal establishment, policy
formulation and effective decision making.

7. Pragmatic: It is a practical and logical approach towards the day to day business
problems.

Business Economics & Other Subjects--- SCOPE

1. Business Economics and Traditional Economics:
Business Economics has been described as economics applied to decision-making. It may be
viewed as a special branch of economics bridging the gulf between pure economic theory
and managerial practice. The relation between Business Economics and Economics is as
close as is Engineering to Physics and Medicines to Biology.

Traditional Economics has two main divisions: microeconomics and macroeconomics.

Microeconomics which is at nation level & Macroeconomics which is beyond national
boundaries.
2. Business Economics and Accounting:
Business economics and accounting are closely interrelated. Accounting can be defined as
the recording of financial operations of a business firm. A business manager needs a lot of
accounting information data for logical analysis in decision-making and policy formulation,
which is also required in economics.
3. Business Economics and Operational Research:
Operational Research is closely related to business economics. Operational research is the
application of mathematical techniques to solving business problems. It provides all the
data required for business decisions and forward planning.
4. Business Economics and Marketing:
Business Economics helps marketing in two ways. First, as a basic discipline, providing tools
and concepts of analysis and second, as an integrating area, providing its judgement on the
optimum sales volume under the given cost function of a firm, market structure, and the
objective function to be optimized.
5. Business Economics and Production Management:
Production is defined as the creation of utility by transforming input into output. It usually
refers to manufacturing activity and the term operations are used to denote a wider
meaning, encompassing all economic activity which creates economic utility.

6. Business Economics and Personnel / Employees Management:

A human resource manager has to concern himself with two types of problems: (i) an
effective utilization of human resources in terms of costs and productivity and (ii)
improvement in the terms and conditions of employment as an adjunct to employee
satisfaction.
Economic Tools:
1. OPPORTUNITY COST:
 Opportunity cost is a concept in Economics that is defined as those values or benefits
that are lost by a business, business owners or organisations when they choose one
option or an alternative option over another option, in the course of making business
decisions.
In simple words, it can be said as the value that is lost when a business is choosing
between two or more alternatives.
For example, if you have Rs 10,000 and you have two options, to buy a new phone or
to make a fixed deposit in a bank and if you choose to buy a phone then the benefit
you can get from FD will be an opportunity cost that is lost.

Opportunity costs can be calculated using the following formula

Opportunity Cost = Return on investment for an option not chosen – Return on investment
for a chosen option

2. INCREMENTAL CONCEPT

The main objective of incremental principle is maximization of profits or in other words to

raise the profits in the business

By increasing in the production, the total cost of the product reduces and simultaneously
profits rises.
Two components of incremental concept is, Incremental cost & Incremental revenue.

Incremental cost may be defined as the change in total cost resulting from a particular
decision. Incremental revenue is the change in total revenue resulting from a particular
decision.

3. Time Perspective Principle

According to this principle, a manger/decision maker should give due emphasis, both to
short-term and long-term impact of his decisions, before reaching any final conclusion.
The economic concepts of the long run and the short run have become part of everyday.
Economists are also concerned with the short-run and long-run effects of decisions on
revenues as well as on costs. The actual problem in decision-making is to maintain the right
balance between the long-run and short-run.
The time perspective concept states that the decision maker must give due consideration
both to the short run and long run effects of his decisions. He must give due emphasis to
the various time periods. It was Marshall who introduced time element in economic theory.

4. Discounting Principle
According to this principle, if a decision affects costs and revenues in long-run, all those
costs and revenues must be discounted to present values before valid comparisons. This is
essential because a rupee worth of money at a future date is not worth a rupee today.
Money actually has time value.
Discounting can be defined as a process used to transform future currency into an
equivalent number of present currency.

5. Equi-Marginal Concept:
The equimarginal principle is an important idea in the economics. It is otherwise
known as the “equal marginal principle” or the “principle of maximum satisfaction.”
The equimarginal principle states that consumers choose combinations of various
goods in order to achieve maximum total utility.

The Equation for the Equal Marginal Principle:

What is Utility?
Want satisfying power of a commodity is said as Utility.

Types of Utility:
Total utility: The Total Utility refers to the sum of utility that an individual derives from the
consumption of all the units of a given commodity at a point or over a period of time.

Marginal utility: MU is the difference in total utility due to the utilisation of one extra unit
of goods or commodities.

Types of MU:

1. Positive Marginal Utility

When buying extras of an item provides more satisfaction, this is considered to be a

situation of their providing positive marginal utility.

2. Negative Marginal Utility

When more of an item is not beneficial, but actively harmful or has negative effects, this is a
case of negative marginal utility.
3. Zero Marginal Utility

Zero marginal utility occurs when purchasing additional units of an item provides no more
utility.

HOW TO MEASURE UTILITY?

[i] When utility can be measure in form of numbers it is called Cardinal Utility.

[ii] When utility can not be measure in form of numbers it is called Ordinal Utility.

RELATIONSHIP BETWEEN TU AND MU:

The relationship between TU (total utility) and MU (marginal utility) can be discussed as
follows:

1. As long as MU (marginal utility) is positive, the TU (total utility) increases with an

increasing rate.
2. When TU is maximum, the MU reaches zero. TU stops growing in this phase, this
point is known as the point of satiety.
 3. When consumption increases beyond the point of satisfaction, then the MU becomes
negative and TU starts falling.

Role of Business Economics in Decision Making:

Business economics plays a key role in decision making and running an organization. The
contribution of business economics in decision making can be summarized in the following
functions:
 Minimizing risk and uncertainty
 Profit planning and control
 Demand and sales forecasting
 Measuring efficiency of a product
 Studying effects of government policies

Besides this, a Business economist has various functions in an organization, which are as
follows:
1. Forecasting sales of an organization.
2. Performing individual market research.
3. Performing economic analysis competitors.
4. Deciding the prices of Products and Services.
5. Performing investment analysis.
6. Helping the top management in making decisions related to trade and public
relations and foreign exchange.
7. Performing capital budgeting and production planning.
8. Measuring the earning capacity of an organization.
9. Keeping the top management informed regarding any changes in the business
environment.
So, a Business economist guides the management of an organization regarding the
environment of the economy and its impact on the activities of an organization. In India,
the importance of a Business economist is growing rapidly. Nowadays, all large
organizations and industrial houses are hiring Business economists so that they can take
efficient business decisions.