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BACHELOR OF COMMERCE DEGREE PROGRAMME

DEPARTMENT OF COMMERCE
FACULTY OF MANAGEMENT STUDIES AND COMMERCE
UNIVERSITY OF JAFFNA

Subject
ECONOMIC FOR ENTERPRISE
Status
CORE
Course Code
COM 11032
Year & Semester
FIRST YEAR/ SEMESTER I

ECONOMICS
Economics is a social science which deals with
human wants and their satisfaction.
Economics Defined - Economics is the study of the
ALLOCATION of SCARCE resources to meet
UNLIMITED human wants.
The study of how individuals and societies choose to
use the scare resources

Main Divisions of Economics


1. Production
2. Consumption
3. Exchange
4. Distribution

Consumption
Consumption deals with the satisfaction of human wants.
When a want is satisfied, the process is known as
consumption.

Production
Production refers to the creation of wealth.
it refers to the creation of utilities.
utility refers to the ability of a good to satisfy a want.

Exchange
In modern times, no one person or country can be selfsufficient. This gives rise to exchange.
Goods may be exchanged for goods or for money.
If goods are exchanged for goods, we call it barter.
As goods are exchanged for money, we study in economics
about the functions of money, the role of banks and we also
study how prices are determined.
We also discuss various aspects of international trade.

Distribution
Wealth is produced by the combination of land, labor,
capital and organization.
it is distributed in the form rent, wages, interest and profits.
In economics, we are not much interested in personal
distribution.

Microeconomics
Microeconomics - is concerned with decision-making by
individual economic agents such as firms and consumers.

Macroeconomics
Macroeconomics - is concerned with the aggregate
performance of the entire economic system.
That is, examines the economic behavior of aggregatesincome, employment, output, and so on on a national scale

Methods of Economics
1.Positive economics
2.Normative economics
3.Descriptive economics
4.Empirical economics

Positive Economics
Positive economics is the study of the causal relationships that exist
in the economy.
It just states what the relationship is. There are no value judgments
involved.
It just states what the situation is.
The statement if taxes on tobacco is doubled, there will be
substantial reduction in tobacco consumption is a positive economic
statement.

If government subsidy to basic education is reduced, there will be


higher drop-outs among children of poor families, is another positive
economic statement.

Positive economic theory would describe how money


supply growth impacts inflation,
but it does not provide any guidance on what policy should be
followed.
The unemployment rate in France is higher than that in the
United States is a positive economic statement.
It gives an overview of an economic situation without
providing any guidance for necessary actions to address the
issue.

Normative Economics
Normative economics is a branch of economics that
expresses value or normative judgments about economic
fairness.
It focuses on what the outcome of the economy or goals of
public policy should be.

Value judgments play an integral part in the ranking of


possible objectives and the choices to be made among them.
Taking the tobacco example, a normative statement would be
Taxes on tobacco should be raised by 100% to substantially
reduce tobacco consumption. Notice the term should in the
statement.
In the education example, a normative economic statement
would likely be, The government should continue to
subsidize basic education to minimize drop outs.

Descriptive Economics
Descriptive economics involves the collection of a
country's economic data and compilation by
economists.
The aim of the process is to try and identify
repetitive patterns in the economy and to try and
explain them.

Empirical Economics
An approach to economics that involves the observation and
measurement of behavior
Empirical evidence is a source of knowledge acquired by
means of observation or Experimentation
Whereas theoretical refers to abstract representations,
empirical is actual real world observations.

Field of Economics

Comparative Economic System


Urban and Regional Economics
Econometrics
Development Economic
Labor Economics
International Trade
International Monetary Economics
Public Economics
Economic History

Comparative Economic System


Comparative economic systems is the subfield of economics
dealing with the comparative study of different systems of
economic organization
such as capitalism, socialism, feudalism and the mixed
economy.
Examines the ways alternative economic systems function

Urban and Regional Economics


Urban economics is broadly the economic study of urban
areas;
it involves using the tools of economics to analyze urban
issues
such as crime, education, public transit, housing, and local
government finance.

Urban and Regional Economics


The economic study of regions based on the consideration of
space, transportation cost, and location in production and
consumption decisions.
Regional economics studies a wide variety of topics, including
the migration of labor, the macroeconomic activity in cities
and states, and the location choices of firms.

Econometrics
Econometrics is the application of mathematics, statistical
methods to economic data OR
The application of statistical and mathematical theories to
economics for the purpose of testing hypotheses and
forecasting future trends.

aim to give empirical content to economic relations.

Development Economic
Development economics is a branch of economics which
deals with economic aspects of the development process in
low-income countries.
Development economics involves the creation of theories and
methods that aid in the determination of policies and practices

Development Economic..
Its focus is not only on methods of promoting economic
development, economic growth and structural change but also
on improving the potential for the mass of the population

LABOUR ECONOMICS
Labour economics seeks to understand the functioning and
dynamics of the markets for wage labour.
Labour markets function through the interaction of workers
and employers.
attempts to understand the resulting pattern of wages,
employment, and income.
Deals with the factors that determine wage rates,
employment, and unemployment

International Trade
International trade is the exchange of capital, goods, and
services across international borders or territories.

International Monetary Economics


Same as international finance, but with more emphasis on the
role of money and less on other financial assets.
Study trade flows among countries and international financial
institutions

PUBLIC ECONOMICS
focused on studying the public sector and examining the ways
it interacts with the private sector.
A variety of topics are covered, including taxation, welfare,
and the impact of social policy on economic health

ECONOMIC HISTORY
Economic history is the study of economies or economic
phenomena in the past.

Analysis in economic history is undertaken using a


combination of historical methods, statistical methods,
and by applying economic theory to historical
situations and institutions.

TERMS
Economic Theory
A statement or set of related statements about causes
and effect, action and reaction, in economic life.

For example, an economic theory would be "if the price of


something goes up, people will buy less of it." We could test
that theory by observing whether or not cigarette sales
decline after a price increase.

MODEL
A model is a more formal statement of a theory.
It often takes the form of stating the presumed relationship between
two or more factors in a precise way.
The factors included in a model are called variables because they
are things that can change over time.

In our earlier example, the price of cigarettes is a variable, and the


quantity of cigarettes purchased is another variable. A theory links
these two variables together in such a way that explains the causal
relationship between them in a testable way
Usually a mathematical statement of a relationship between
two or more variables

VARIABLE
A measure that can change from time to time or from
observation to observation
A characteristic, number, or quantity that increases or
decreases over time, or takes different values in different
situations.
Two basic types are:
Independent variable: that can take different values and can
cause corresponding changes in other variables
(2) Dependent variable: that can take different values only in
response to an independent variable.

ECONOMETRIC MODEL
Econometric modelsarestatistical models
used ineconometrics.
An econometric model
statisticalrelationship

specifies

the

A simple example assumes that monthly


spending by consumers is linearly dependent
on consumers' income in the previous month.
Then the model will consist of the equation

Ct = a + bY[t-1]+ et
where Ct is consumer spending in month t, Yt-1
is income during the previous month, and et is
an error term measuring the extent to which
the model cannot fully explain consumption.
Then one objective of the econometrician is to
obtain estimates of the parameters a and b;
these estimated parameter values, enable
predictions for future values of consumption to
be made based on the prior month's income.

Ceteris paribus
Literally, all else equal. Used to analyze the relationship
between two variables while the values of other variables are
held unchanged

such as, "If we reduce our prices by X percent, ceteris


paribus, our sales revenue should go up by Y percent."
Latin for, all other things being equal.

STOCKS AND FLOWS


Stocks and flows are basic concepts in
economics
Stocks can be measured at a given point of time
A flow is a quantity that can be measured only
in terms of a specified period of time. In other
words, it has a time dimension
For example, wealth is a stock and income is a
flow.

Occams Razor
It's often important to dispense with less relevant aspects of an
issue so that we can focus on specific issues. We do this all the
time. For example, when trying to determine the cause of an upset
stomach, we focus on things like what we ate earlier, the presence
of a fever, and so on. We don't usually include factors such as the
strength of sunspots or the weather in Brazil. Similarly, when
economists try to explain social phenomena, they key in on the
factors that seem most relevant. This practice comes from the
principle known as Occam's razor, which instructs us to strip away
extraneous detail in order to expose the important aspects of a
question.

Economic resources
land
natural resources, the free gifts of
nature

labor
the contribution of human beings

capital
plant and equipment
this differs from financial capital

entrepreneurial ability

Resource payments
Economic Resource

Resource payment

land

rent

labor

wages

capital

interest

entrepreneurial ability

profit

OPPORTUNITY COST
The opportunity cost of any alternative is
defined as the cost
of not selecting the "next-best" alternative.

Marginal analysis
Marginal benefit = additional
benefit resulting from a one-unit
increase in the level of an activity
Marginal cost = additional cost
associated with one-unit increase
in the level of an activity

Net benefit
Individuals are not expected to
maximize benefit; nor are they
expected to minimize costs.
Individuals are assumed to attempt to
maximize the level of net benefit (total
benefit minus total cost) from any
activity in which they are engaged.

Marginal analysis
MB > MC expand the activity
MB < MC contract the activity
optimal level of activity: MB = MC
(Net benefit is maximized at this
point)

Marginal benefit
MB generally declines as the level of an
activity rises, ceteris paribus.
Consider the MB of time spent studying:

Marginal cost
For most activities, marginal cost
rises as the level of the activity
increases.

Optimal study time


The optimal amount of study time
occurs at the point at which MB = MC

Firms Objective: Profit Maximization


The standard assumption in microeconomic
theory of the firm
is that: The firms goal is to maximise its
economic profit
A firm has to decide:
What to produce
How to produce the output
How much to sell and at what price
How to promote the product.

ECONOMIC PROFIT
Economic Profit = Total Revenue - Total
Economic Cost
Total revenue is the sum of the payments the firm
receives
from the sale of its output.
Distinctions between the economists and the
accountants
concept of cost must be borne in mind when
calculating a
firms economic cost:

Economic costs are opportunity costs - i.e.


the value of inputs in their best alternative use.
Economic cost is generally not equal to
accounting cost
Economic cost may be greater or less than
accounting cost.
The economic cost includes the accounting
cost, or actual funds spent carrying out the
action, and the opportunity cost