Business Economics

Foundation Lecture
 Index
Chapter No . Chapter Name
1 Introduction to Business Economics
2 Demand Analysis
3 Supply Analysis
4 Consumer Demand Analysis
5 Elasticity of Demand Supply
6 Demand Forecasting

7 Production Theory
8 Cost and Revenue Analysis
9 Market Structure
10 Market Failure
 Lecture Content
• What is Economics

• Scarcity and Economics

• Fundamental Problems

• Opportunity Cost

• Different Economic Systems

• Circular flow of Economy

• Macro economic Factors Costs

 Economy and Modern economy
• Produces millions of goods
• Provides jobs for most people who want to work
• Allows travel and communication anywhere
• Makes growth in output possible
All this happens without detail planning basically through economic forces
• Therefore , economy is the result of trillion decisions made individually by people
acting as households employees, employers and managers trading in markets
involving products, labour services, land and other resources.
Study of how economy works, why it does not work sometimes and how to
improve its performance is the subject matter of Economics.
 Economics

• Economics is defined as the study of how goods and services are produced and
distributed. It is derived from the Greek word “Oikonomiko” means “managing
home”
• Adam Smith is known as the “Father of Economics”
• There are usually not enough essentials or luxuries to satisfy all the needs and wants
of a whole society.
• This leads to the economic principle of scarcity.
• The study of how people allocate their limited resources to satisfy their unlimited
wants
• The study of how people make choices
 Evolution of Subject Economics

Economics as a subject began

•Out of curiosity to find how such a complex set of transactions is Organised
•Who coordinates production, employment and consumption decisions
•Who ensures jobs
•How goods and services are delivered wherever people want
•As and when complexity of economies started, the evolution of economics started.
Barter system- exchange of goods, few goods were produced and exchanged .
•People wants and desires increased complexity evolved, money was invented.
Discuss : Economics as a social
Science
 Scarcity and Economics
•Government agencies work with limited budgets and must carefully choose which
goals to pursue

•Economists study these decisions to

•Explain how our economic system works

•Forecast the future of our economy

•Suggest ways to make that future even better

 Scarcity and Economics
•The scarcity of resources—and the choices it forces us to make—is the source of all of
the problems studied in economics

•Households allocate limited income among goods and services

•Business firms choices of what to produce and how much are limited by costs of
production
Lets Think !!! – Concept Building
Lets Discuss…
 Fundamental Problems In Economy:
What to produce?
Quantity and range of goods to produce
Resources are limited, we must choose between different alternative collection of
goods and services that may be produced
How to produce?
Techniques of production e.g. labor intensive, capital intensive
For whom to produce?
It means that how the national product is distributed i.e. who should get how
much
Are the resources economically used?
No wastage of resources since they are limited
How much to produce ?
how many units to produce
Who will make economic Decisions ?
Concept Building – Match the
Column
Column 1 Column2
A. What To Produce 1. Determined by purchasing
power
B. How To Produce 2. Determined by producers
seeking profit
C. For whom To Produce 3. Determined by consumer’s
preferences
 Answers
A. 3.
B. 2
C. 1.
Opportunity Cost
 Different
Economic Systems
 Traditional economic system
• An economic system in which decisions are made on the basis of customs,
beliefs, religion, habit, and so on.

• In traditional societies, scarce goods are often shared evenly, or else on the
basis of age and gender.

Market Command Mixed

Economy Economy Economy
 Market economy
• An economic system in which individual producers own and determine
the production, distribution, and consumption of goods and services.

• In market economies, products and services generally go to those who

can afford to pay for them.

• Hong Kong, Singapore, Australia and the United States

Which kind of Economy ?

Command Economy
 Command Economy
• An economic system in which the government owns and controls all facets of the
economy

• Command economies usually satisfy the needs and wants of an elite class which
controls the government and decision making.

• The command economy is a key feature of any communist society. Cuba, North

Korea and the former Soviet Union are examples of countries that have command
economies, while China maintained a command economy for decades before
transitioning to a mixed economy
Which kind of Economy ?

Mixed Economy
 Mixed economy
• An economic system that uses aspects of more than one of the three
basic types of economic systems (subsistence, command, and market).
• India, USA, England, and Canada.

• A subsistence economy is a non-monetary economy which relies on

natural resources to provide for basic needs, through hunting, gathering,
and subsistence agriculture.
 Economic Systems-Summary
On the basis of who takes the decisions in economy, there are different types of
economic systems
1.Market economy – Demand supply forces
2.Command economy – Central authority
3.Mixed economy – Both
Today every economy is mixed economy with variation in proportions of mixture of
free-market and government control.
Recap
Lets Think !!! – Concept Building

How government regulations affects

you as a consumers /employees ?
 Case Study – Great Depression
The role of Government and Market
Discuss – Great Depression
Debate on Keynesians and classical /monetarists.
Micro and Macro Economics
 Microeconomics
vs Macroeconomics
Microeconomics
The study of decision making undertaken by individuals (or households) and by firms

Like looking though a microscope to focus on the smaller parts of the economy
• Decision of a worker to work overtime or not
• An individual firm advertising
 Microeconomics
vs Macroeconomics
Macroeconomics
The study of the behavior of the economy as a whole

Deals with economy wide phenomena

• The national unemployment rate
• The rate of growth in the money supply

Macroeconomics deals with aggregates, or total—such as total output in an economy.

Modern economic theory blends micro and macro concepts.

 Importance of Macro-economics

• It is helpful in understanding and functioning of a complicated economic system

• It gives bird’s eye view of the economic world
• It is useful in framing economic policies for the nation
• Macro-analysis also occupy an important place in economic theory in its pursuit of
the solution of urgent economic problems
• These problem relate to aggregate output, employment and national income
Summary – Micro and Macro
Economics
Which of the following areas of economic theory is the single most important
element of managerial economics?
 a. Mathematical economics 
 b. Econometrics 
 c. Macroeconomics 
 d. Microeconomics 

Which of the following is defined as the study of the aggregate economy studied as a
whole?
  a. Mathematical economics 
 b. Econometrics 
 c. Macroeconomics 
 d. Microeconomics 
Identify Micro and Macro Economics
• What determines how households and individuals spend their budgets? What
determines what prices a firm will charge? 
• What determines how many workers it will hire?
• What determines how many jobs are available in an economy?
• What causes firms to hire more workers or to lay workers off? Finally, what causes
the economy to grow over the long term?
• What causes the economy to speed up or slow down?
 Answers

Identify Micro and Macro Economics

• What determines how households and individuals spend their budgets? -Micro
Economics
• What determines what prices a firm will charge? - Micro Economics
• What determines how many workers it will hire? – Micro Economics
• What determines how many jobs are available in an economy? - Macro Economics
• What causes firms to hire more workers or to lay workers off? Finally, what causes
the economy to grow over the long term? - Macro Economics
• What causes the economy to speed up or slow down? -Macro Economics
Macroeconomic Factors
 Macroeconomic Concepts
• Circular Flow
• Inflation
• GDP/GNP
• Business Cycle
 Circular flow of economy
• A continuous flow of production, income and expenditure is known as circular flow
of income. It is circular because it has neither any beginning nor an end. The
circular flow of income involves two basic assumptions

• Two Type of Economic Transactions can take Place :

1. Real Flow
2. Money Flow
Two sector model
Refers to a simple economic
model which describes the
reciprocal circulation of income
between producers and
consumers.

In the circular flow model, the

inter-dependent entities of
producer and consumer are
referred to as "firms" and
"households" respectively and
provide each other with factors in
order to facilitate the flow of
income.
 Circular Flow of income and
expenditure
Economy is an integrated system of production, exchange and consumption
Two types of economic transactions take place in the process:

1.Real flows or flow of goods and services

2.Money flows or flow of money
•Entire system can be viewed as a circular flow.
•Four sectors in the economy – household, business, govt and foreign sector
•All of them are combined to have 3 models of circular flow
Importance of the Circular Flow ??
1. Study of Problems of Disequilibrium
2. Effects of Leakages and Inflows
3. Link Between producers and consumers
4. Creates network of markets
5. Inflationary and Deflationary Tendencies
6. Important in Trade Policies
Identify the below:

INFLATION
 Inflation
• Inflation is defined as a sustained increase in the price level or a fall in the value of
money.
• When the level of currency of a country exceeds the level of production, inflation
occurs.
• Value of money depreciates with the occurrence of inflation.
Types of Inflation Based on Rates
of Inflation
 Causes of Inflation

Increase in money supply.

Increase in exports.

Black money(fake currency).

Increase in public expenditure

Decrease in the aggregate supply of goods and services.
Inflation rate in India from 2010 to 2024 (compared to the previous year)

https://www.statista.com/statistics/271322/inflation-r
ate-in-india/
Identify the below:

DEFLATION
 Deflation
• It refers to continuous fall in price level. This happens in recession period. If it last
for longer period, it harms the growth & development of the economy.
• Deflation is generally caused by reduced demand and consumption in the
economy.  
• Reduced expenditure by consumers, business people and government brings down
demand and thus causes deflation.
• Lower demand means reduced takers for goods and services and in this way prices
of commodities will come down to make them saleable
Gross Domestic Product
• GDP is one of the primary indicators used to gauge the health of a country’s
economy
• GDP is the sum of money value of all goods and services produced within the
domestic territories of a country during an accounting year.
• It includes income from exports and payment made on imports during the year.
• GDP = C + I + G + (X – M) or ,
• GDP = private consumption + gross investment + government investment +
government spending + (exports – imports)
• When GDP rises, economic activity is increasing. This is called economic growth.
The level of activity fluctuates over time. Periods of high growth are followed by
periods of slow growth. Sometimes the economy experiences negative growth
when there is a fall in GDP. These fluctuations are known as the business cycle.
Gross National Product
 GNP/National Income
•  GNP is an estimate of total value of all the final products and services turned
out in a given period by the means of production owned by a country's
residents. Net exports represent the difference between what a country
exports minus any imports of goods and services.
• It measures country’s Economic performance
• Components of GNP are consumption , investment, government
Expenditure ,export and imports
• GNP = GDP + net property income from abroad
 Difference between Economics
and Managerial Economics
Economics Managerial Economics
1. Deals with applications of
1. Deals with the body of principles.
principles.
2. Characteristics of both micro and 2. M E is micro in nature.
macro in nature.
3. Economics is based on certain 3. In M E these assumption disappear
assumptions. due to practical situation.
4. In economics different theories of 4. Only the study of theory of project.
distribution are studied.
5. It is both normative and positive 5. It is mainly normative science
science.
 Business Cycles
• Business cycle is the periodic up and down movements in economic activities
(production, employment and income)
 Business Cycle
Peak
Peak

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pa

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Ex

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Ex
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Trough
Phases of the Trade/Business Cycle
• Expansion (Growing)- increased consumer confidence, which translates into higher
levels of business activity.
• Peak (Top)- The economy has reached its peak.
• Contraction (Shrinking)/Recession- It is a period of decrease in consumer
confidence and Economic activity-Depression
• Trough (Bottom)
• Recovery
 Case Study
• Alison Mitchell joined The Look three months back .The Look is a high street
clothes retailer that is mainly based in the UK, but has some stores in continental
Europe. Alison is a management trainee who recently finished her history degree
at university. She has just come back from a management presentation in which
the annual result of the company were announced.
• Alison is aware of the recent market condition and about the macro factors that
are hitting the economy harder .

• Ques .Discuss the probable factors that might have impacted the industry harder
in the recent times
• Ques. Which countries apart from the existing countries, The Look can target upon
for their expansion program and increasing their revenue?
 Quiz
1. Study of what should be and used to make value judgments, identify problems,
and prescribe solutions ________.
2. In _______people feel confident about their jobs and incomes, they make
decisions to spend more money
3. In ______ people feel less confident about their jobs, incomes and the future,
then spending will reduce.
4. Fluctuations in the level of economic activity over a period of time is called
______.
 Quiz
1. Study of what should be and used to make value judgments, identify problems,
and prescribe solutions- Normative.
2. In Boom economy people feel confident about their jobs and incomes, they make
decisions to spend more money
3. In Recession people feel less confident about their jobs, incomes and the future,
then spending will reduce.
4. Fluctuations in the level of economic activity over a period of time is called
Business cycle.
THANK YOU