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BY,

PROF. JAYMIN ARVIND SHAH

ECONOMIC CONCEPTS RELEVANT


TO BUSINESS

Demand
Supply
Production
Distribution
Consumption
Consumption function
Cost

Price
Competition
Monopoly
Profit
Optimisation
Marginal-Average
Elasticity
Macro and Micro analysis

1. DEMAND
Most

widely used/ misused/ abused word of


economics
A person desperately needs blood/ lifesaving drug without which he is sure of
getting deleted from population list. Can we
take him as a person constituting demand
for blood or LSD?
Suppose there is one car agency. Can it
consider all/ most of rich persons in a given
locality who do not possess cars for
demand?

DEMAND

Three conditions must be there:


Need

of Commodity/ services
Willingness to buy
Ability to pay

Both of them must exist simultaneously


Potential

demand
Actual demand

LAW OF DEMAND

Market Demand curve

2. SUPPLY
Production

and supply
Supply refers to the amount of quantity of a
good/ service willing and able to offer for sale
by producers at a given price, during a given
time and at a given place.
Supply function relates quantity supplied with
own price, related goods prices, Technology,
input prices, weather/ Road conditions,
transportation, movement restrictions, so on)
Supply Curve shows a positive association
between Qs and P, ceteris paribus.

SHAPE OF SUPPLY CURVE


The

normal shape of supply curve is upward


slopping from left to right. It indicates, cost
of production remaining constant/
decreasing, higher the price, larger is the
profit. Hence, greater incentive to raise
supply.

Based

on the time period, namely Market


Period, short period, long period and secular
period, shape of supply curve may be vertical,8
steeper or flatter.

LAW OF SUPPLY

Market Supply curve

MARKET CLEARANCE
Both demand and supply interact to determine the
market equilibrium
Depending on which kind of market and time
period, each force has its role on market.
While demand and supply are influenced by a
number of factors
In very short run, supply is given, medium run
there is some scope for increase and in long run, it
is fully flexible.

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3. CONSUMPTION
An unavoidable human activity which satisfies
individuals by fulfilling wants-both economic and
non-economic
Goods and services possess utility or want
satisfying quality in them
Since goods and services cost us, we COMPARE the
benefit (utility) and costs (price).
An algebraic relationship between national income
and consumption spending that tells us what, for
each possible level of national income, the level of
consumption spending will be.
Laws of consumption

Diminishing

utility

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CONSUMPTION FUNCTION

An algebraic relationship between national income


and consumption spending that tells us what, for
each possible level of national income, the level of
consumption spending will be.

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4. PRODUCTION
Conversion of inputs into output (Ag/ Ind/ Mfg)
Creation of utility (services)
Controversy to exclude/include services in GDP
Traditional factors of production (L, L, C, M)
How can production be increased?

Increasing

one input keeping others same


Increasing all inputs

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PRODUCTION..CONTD
Applicability of these laws
Assumptions:

State

of technology remains constant


At least one factor must be kept constant
Contribution of fixed input does not get influenced by
varying factor

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5. DISTRIBUTION
Distribution refers to sharing of the national product
among the groups of individuals as factors of
production.
Factors of production/ factor payments
Land, labour, capital, organization (features)
Wages, rent, interest, and profit

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HOW PAYMENTS GET DETERMINED?


The criteria are ideal (based on marginal product) /
legal (wages determined as per laws in organized
sector) / demand-supply factors (higher demand for
labour provides it higher wage, vice versa)
Profits get determined only towards the end.

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6. COST

Cost in accounting sense is different from cost in


economic sense.
Money costs and real costs
Opportunity cost
Implicit cost & explicit cost
Short run versus long run
fixed Vs Variable Costs
Total/ Marginal/ Average cost and their significance
in subsequent analysis

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7. PRICE
Money value of all economic goods/ services. What
are non-economic goods?
Factors that determine price

Cost

of production (all material inputs, other factors like


transportation, tax, climate, etc)
Demand (why gold price shot up to 6-year high?)

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8. COMPETITION
In economics, competition is judged on the basis of
number of sellers in the market for a product or
service
A continuum from Monopoly to perfect competition
Worldwide, the trend is to ensure greater
competition
What are merits and limitations of competition?

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9. MONOPOLY
In Greek, Mono means single, Poly means seller.
In contrast to PC, Monopoly is an extremely
imperfect competition
Monopoly is a market form in which a single
producer/ firm supplies a good/ service which has
no close substitute.
The monopolist is a price-maker
He can virtually decide to fix any price/ supply but
not both of them simultaneously

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FEATURES OF MONOPOLY
1.
2.
3.
4.
5.
6.
7.

Single seller
No close substitutes
No variation between firm and industry
Entry is fully restricted
Product is unique
Huge profits is common phenomenon in LR.
But, Normal Profits/ occasionally even losses are
not ruled out in short run

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10. PROFIT
Difference

between total revenue and Total

cost
Profit is reward for organizing other factors
of production and also for taking business
risks
Profits arise in a dynamic world due to the
presence of uncertainty.
Do profits conflict with societal interest?
No. Primary responsibility of a business firm
is to ensure its own economic performance
which is to utilize resources optimally.
If a firm does not do so, no only it collapses,
in the process, it ruins society also by adding
to unemployment/ low demand for material 22
inputs/ fall in investments, etc.

11. OPTIMIZATION
Fundamental

rule of economics is to
conserve resources which are all scarce.
Optimum utilization is a relative term. It
depends on the existing know-how at a point
in time.
For instance, when the 2-stroke engines
alone were there, a mileage of about 40-45
kmpl was a better utilization.
Faster trains/ data transmission rates/
search engines on Internet, etc. are
optimizing out time and cost.
Division of labour and specialization lead to 23
optimum use of resources

12. MARGINAL AND AVERAGE


CONCEPTS
The rate of increase matters to make some
judgments about inputs
Marginal product is the change in total product for
a unit change in one input
Average product talk about how efficiency in inputs
is varying as one input gets added
Declining average cost is good/ increasing average
product is preferred

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13. ELASTICITY
Degree of responsiveness of some dependent
variable like demand/ supply/ output given some
change in one of the variable input.
It could be positive/ negative

Example

of price elasticity of demand

This concept is used in managerial economics to


give us hint as to when the price needs to be
reduced.

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14. MICRO AND MACRO ANALYSIS

Microeconomics deals with constituent units of an


economic system like
Consumer/

One firm/ price of a product/ wage paid to


workers in a firm/ etc.

Macroeconomics deals with the aggregates like


National

income, money supply, level of employment,


inflation, trade balance, public debt, etc.

Both are complimentary and can not be substituted


one for the other

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CONCLUSION
Good

business climate is essential for economy


to flourish
Some economic concepts were discussed to
highlight their role in business
A business analysis remains incomplete without
proper use of relevant economic concepts
Economic activities/ Costs/ optimization/
elasticity/ micro and macro analyses were some
concepts covered here that give enough clarity
for the topics to be covered, and improve
understanding of business in general.

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