BUSINESS ECONOMICS

(MBA 505)

Dr. Jamiu Adetola ODUGBESAN

INTRODUCTION TO BUSINESS ECONOMICS

ECONOMICS It is defined “as a social science which covers the actions of

individuals and groups of individuals in the process of producing, exchanging and
consuming of goods and services to achieve optimization of resource use”

i. Production Decisions

ii. Exchange Decisions
iii. Consumption Decisions

According to Lord Robins, ”Economics is the science which studies human

behavior as a relationship between ends and scarce means which have alternative
uses”.
 BUSINESS ECONOMICS

It deals with the decision making and forward planning in uncertainty and
integrates economic theory with business practice for the purpose of facilitating
decision-making and forward planning by management.

It is a science that deals with the application of various economic theories,

principles, concepts and techniques to business management in order to solve
business and management problems.

According to SPENCER AND SIEGELMAN “Business Economics is the

integration of economic theory with business practice for the purpose of
facilitating decision making and forward planning by management”.
 APPLICATION

 Use of optimum techniques to improve organizational decisions

 Understanding individual and market demand decisions to forecast

demand

 Analyze cost and supply structure to understand supply decisions

 Understanding markets

 Understanding external factors like unemployment, inflation

 CHARACTERISTICS

 Micro Economic Nature: Business Economics is micro economic in its nature

because it deals with matters of a particular business firm only.

 Use of Economic Theories: Business Economics uses all economic theories

relating to the profits, distribution of income etc.

 Normative Science: Business Economics is a normative science. It studies the

matters concerning the aims and objectives of a business firm. It determines the
methods to be adopted for achieving such objectives. It also makes enquiry into
the good and bad in decision making. Hence it is a normative science.
CHARACTERISTICS (2)

 Macro-Economic Uses: Even though Business Economics has the nature of Micro-Economics, it
also uses Macro- Economic approaches frequently. Certain matters in Macro-Economics like
Business Cycles, National Income, Public Finance, Foreign trade etc. are essential for Business
Economics. So, Business Economics uses the macro- economic phenomenon for taking business
decisions.

 Economics is a science or an art. It is considered as science if it is a systemized body of

knowledge which studies the relationship between cause and effect.

 Art is nothing but practice of knowledge.

 Where as science teaches us to know and art teaches us to do.

It is science in which methodology and art in its application.

 SCOPE

i. Demand Forecasting: Every business firm initiates and continues its

production process on the basis of the anticipation of more demand for its
goods in the future.
It makes research and conducts market survey with a view to know the tastes and
fashions of the consumers. It pools up the resources and starts production for
meeting the future demand.
Business Economics analyses the demand behavior and forecasts the quantity
demanded by the consumers.
SCOPE (2)
ii. Cost Analysis: Business Economics deals with the analysis of different costs incurred by
the business firms. Every firm desires to minimize its costs and increase its output by
securing several economies of scale. Business Economics deals with the cost estimates and
acquaints the entrepreneurs with the cost analysis of their firm.

iii. Profit Analysis: Every business firm aims to secure maximum profits. But at the same
time it faces uncertainty and risk in getting profits. Business Economics deals with the
matters relating to profit analysis like profit techniques, policies and break-even analysis.

iv. Capital Management : Capital management is another topic dealt in Business

Economics. It studies matters like cost of capital, rate of return, selection of best project
etc.
IMPORTANCE OF BUSINESS ECONOMICS

Business Economics is a useful subject. In fact it is the most

significant of all social sciences, Its study is highly useful for
analyzing and understanding the various economic problems.
Its study brings utility to all sections of the people.
Business Economics became the intellectual religion of the day.
Business Economics is described as both light giving and fruit
bearing science. It enriches our knowledge (light) and brings results
(fruits).
 SIGNIFICANCE

1. Useful to the Finance Minister : The study of Business Economics is highly

useful to the Finance Minister and the personnel working in the finance
department. It provides a good knowledge about public revenue, public debt and
public expenditure. It helps them in forming a sound financial policy and result
oriented budget.

2. Useful to the Minister for Planning : The study of Business Economics is also
useful to the Minister for planning and his personnel. It furnishes a good
knowledge about the various types of plans, mobilization, plan implementation,
capital output ratio, investment strategy etc.
SIGNIFICANCE (2)

3. Useful to the Banker : Business Economics is also useful to the bankers. It

enables them to understand the nature, purpose and implications of different
economic policies implemented by the business firms.

4. Trade Union Leaders : Knowledge of Business Economics is also significant

for the trade union leaders. The study of Business Economics helps the trade
union leaders to understand the nature and causes of industrial disputes, wage
problem etc.
SIGNIFICANCE (3)

5. Businessmen : Business Economics is also useful to the businessmen.

Businessmen, with the help of Business Economics, can study the fluctuations in
business, prices, production and employment. They can adopt a proper strategy
for producing goods and services according to the changes in demand.

6. Statesmen : Statesmen will also get benefit by studying Business Economics. It

enables them to understand the nature and causes of economic problems. It helps
them to solve the economic problems like unemployment, inflation, scarcity of
goods etc.
SIGNIFICANCE (4)

7. International Economic Problems : International Economics is an important

branch of Economics.
It deals with matters like terms of trade, balance of payments, export and import
regulations etc.
Its knowledge enables the international agencies to determine the foreign
exchange value of various national currencies. Its study is useful to all sections of
the people.
DEMAND
DEMAND

§ The demand for a commodity refers to the amount of it which will be bought per unit
of time at a particular price.

§ Demand in economics means effective demand for a commodity. that is, one should
have

i. Desire for a commodity or service

ii. Willingness to pay its price
iii. Ability to pay its price
DIRECT DEMAND AND DERIVED DEMAND

Direct Demand-for consumption goods

Goods and services that satisfy consumer desires.

Derived Demand-These are sometimes called intermediate goods.

For example, demand for steel (an intermediate good) is derived from the demand
for final goods (e.g., automobiles).
 INDIVIDUAL DEMAND

Individual demand refers to the demand for a commodity from the individual
point of view. That quantity of a good a consumer would buy at a given price
during a given period of time is his individual demand for that particular good.

MARKKET DEMAND
Market demand refers to a total demand of all the buyers taken together.
 LAW OF DEMAND

The general tendency of consumer’s behavior in demanding a commodity in

relation to the changes in its price is described by the law of demand.

It states that the consumer demands more of the good at a lower price and vice
versa, other things being constant. The quantity of a good demanded is negatively
related to price of the good.
LAW OF DEMAND (1)
 LAW OF DEMAND (2)

The law of demand can be illustrated with the help of a demand schedule i.e., as
the price of a commodity decreased the corresponding quantity demanded for that
commodity increases and vice versa.

A demand schedule for wheat. Price of wheat per kg. (in Rs) Quantity demanded
(kgs per week)
DEMAND CURVE
DETERMINANTS OF DEMAND
CHANGE IN QUANTITY DEMANDED
SHIFT IN DEMAND
 ASSUMPTIONS OF THE LAW

 No change in consumer’s income : throughout the operation of the law, the

consumer’s income should remain the same. If the level of a buyer’s income
changes , he may buy more even at a higher price , invalidating the law of
demand

 No change in consumer’s preferences : the consumer’s tastes , habits and

preferences should remain constant

 No change in fashion : if the commodity concerned goes out of fashion, a

buyer may not buy more of it even at a substantial price reduction
 ASSUMPTION OF THE LAW (1)

 No change in weather conditions : it is assumed that climatic and weather

conditions are unchanged in affecting the demand for certain goods.

 No change in government policy : The level of taxation and fiscal policy of the
government remain the same throughout the operation of the law.
Otherwise, the changes in income tax, for instance may cause changes in
consumers income or commodity taxes may lead to distortions in consumers
preferences.
 REASONSN FOR DOWNWARD SLOPING
DEMAND CURVE
i. Income Effect : When price of a commodity falls, consumer's real income rises
that is he can now purchase more of the commodity with the same income.

II. Substitution Effect : When price of a commodity falls, it become cheaper than
its substitute good so the users of substitute good would shift their consumption to
the given good and therefore the quantity demanded of the commodity will rise.

III. Law of Diminishing Marginal Utility : It states that the satisfaction derived
from a commodity will diminish from every successive unit. So the consumer
would be willing to pay less and less for each successive unit.
 EXCEPTIONS

1. Giffen Goods : In case of certain inferior goods called Giffen goods, when
the price falls, quite often less quantity will be purchased than before because
of the negative income effect and people’s increasing preference for a
superior commodity with the rise in their real income.
Few appropriate examples may be listed, such as cheap potatoes, cheap bread,
vegetable ghee, etc., as against superior commodities like good potatoes, cake,
and pure ghee
 EXCEPTIONS (1)

2. Commodities which are used as status symbols: Some expensive commodities like diamonds,
expensive cars, etc., are used as status symbols to display one’s wealth.

The more expensive these commodities become, the higher their value as a status symbol and
hence, the greater the demand for them.

The amount demanded of these commodities increase with an increase in their price and decrease
with a decrease in their price.

Also known as a Veblen good (is a good for which demand increases as the price increases,
because of its exclusive nature and appeal as a status symbol. E.g. Designer jewelry, yachts, and
luxury cars).
 EXCEPTIONS (2)

3. Expectation of change in the price of commodity : If a household expects the

price of a commodity to increase, it may start purchasing a greater amount of the
commodity even at the presently increased price.
Similarly, if the household expects the price of the commodity to decrease, it may
postpone its purchases.
Thus, some argue that law of demand is violated in such cases. In this case, the
demand curve does not slope down from left to right; instead it presents a
backward slope from the top right to down left.

This curve is known as an exceptional demand curve.

SUPPLY
 SUPPLY

Supply of a commodity means quantity of a commodity which is

actually offered for sale at a given price during the particular period
of time.

It is always referred to in relation to price and time.

SUPPLY CURVE
 THE LAW OF SUPPLY

Supply states that all other factors remaining unchanged the supply of a good
increases as its price increases. This can be shown by a supply schedule, a supply
curve or a supply function.

The law of supply states that there is a direct relationship between price and
quantity supplied of a commodity, other things remaining constant.
 UPWARD SLOPING SUPPLY CURVE

The supply is upward sloping because of:

i. the law of diminishing marginal productivity

ii. ii. Goal of profit maximization
 SUPPLY FUNCTION
In a supply function, the determinants of supply can be summarized as under :
Sx=f{Px,Pf,Py,……..,Pz,O,T,t,s}
Where, Sx=the supply of commodity X
Px=the price of X
Pf=the set prices of the factor
Py,….Pz=the prices of the goods
O=factors outside the economic sphere
T=technology used
t=commodity taxation
s=subsidy
DETERMINANTS OF SUPPLY
 PRICE OF THE COMMODITY

At a higher price producer offers more quantity

at a lower price producer offers less quantity
Price of the related good (z)

When price of related good(z) increase and the price of the commodity remain
constant the supply of the commodity(x) decreases and vice versa.
State of technology

Upgradation in the technology leads to reduction in cost of production thus supply

increases and vice versa
 GOVERNEMENT POLICY

If the government policy is favorable the supply is more and if the government
policy is unfavorable the supply is less
 SUPPLY SCHEDULE

The supply schedule refers to a table showing the quantity of a commodity

supplied at various prices during a given period.
There are two types of supply schedules. They are :-

1) The individual seller`s supply schedule and

2) 2) The market supply schedule
THE INDIVIDUAL SUPPLY

An individual supply schedule refers to the table representing the different quantities of a
commodity offered for supply by an individual seller at alternative price.
 THE MARKET SUPPLY

The price-quantity relationship of a commodity in the market is expressed in

terms of the market supply.
A market supply is the aggregate supply schedule of all the sellers or producers in
the market. It refers to the total quantities of a given commodity which the sellers
in the market are willing to offer for sale at various prices.
Thus, the market supply schedule is derived as the sum total of the individual
supply schedules of every seller in the market.
CHANGES IN QUANTITY SUPPLY

It includes expansion and contraction of supply.

A movement along the supply curve is caused by
changes in the price of the goods, other things
remaining constant.
CHANGES IN QUANTITY SUPPLIED
 CHANGES IN SUPPLY (SHIFT)

It includes increase and decrease in supply.

A shift in supply curve is caused by changes in factors other
than the price of the good.
These factors are:
Price of other commodities
State of technology
Cost of Production
Government policies
Shift in Supply
THANKS