Economic analysis of business decisions

Lecture 1
 Course outline
1.Introduction :
Nature of economic analysis arising from scarcity problem.
2.Definition of business economics:
What aspects involves.
3.Demand analysis.
Demand as a force in market.
4.Supply analysis.
 Course outline (cont.)
5.Market mechanism:
How it operates – functions – some applications
6.Consumer behavior: (Theories ).
7.Firm theory.
8.Cost theory.
9.Market structure.
10.Tools of optimization.
Nature of business economics
• It utilizes the economic theory and economic
framework to analyze the process of decision
making.
• Economic theory involves some assumptions
and generalizations about a certain economic
phenomena.
• Steps to build a theory:
1.Identification of the phenomena being studied.
2.Advance assumptions about the problem
example of assumptions:
Quantities of vegetables increase during winter
Assumptions of Economic man:
This denotes or states that individuals behave in a way whereby they
enjoy private interest with the minimum cost and effort.
 3.To derive results attendant to the assumptions raised.
4.Testing the result to see whether they are confirmed with reality
or not.(whether they are true or false)

Function of the theory

1.Explanation:
Means determining factors that affect the phenomena.
( if this factor change the phenomena will change)
The theory shows the relationship between any factor and the
phenomena
2.forecasting.
• Economic decisions taken by business arise or
emanate from having resources being scarce while
alternative uses are existing for these resources.
Similarly as the assumptions level, resources are
scarce relative to human needs.
• Problems of decision:
#problems of pricing.
#problems of technology used.
#problems of marketing.
#problems of advertising.
#problems of finance.
 Central problems of scarcity
1.What to produce? In what quantity?
2.How to produce? (that is the techniques of production).
3.Are the resources fully used ?(full employment).
4.Are resources used in their optimal use?
(economic efficiency)
Optimal use: using resources in activities that will give you the maximum
outcome or the minimum cost.
 Production possibility curve (PPC)
• That is the boundary of output in an economy when resources
are fully used( economic capacity)
• Construction of the PPC is based on assumptions that:
a) Resources are utilized fully.
b) The technology used is fixed.
c) The economy used its resources to produce only two commodities (say X and Y).
A two commodity model of an economy
According we have the following combinations of X and Y units:

Units of X Units of Y
0 6
1 5
2 4
3 3
4 2
5 1
6 0
 • Any point on the curve
like a , b or c represents
Units of Y efficiency and full use
of resources.
e • Any point inside the
6 a curve like d reflects
inefficiency (resources
b are not fully used)
• Any point outside the
d c curve like e is
unattainable under the
available resources .

Units of X
6
Y

N X

If there is improvement in technology used in Y,X the curve will move like this:

• Curve MN` represents

improvement in technology
used to produce X.
• Curve M`N represents
improvement in technology
used to produce Y.
 Economic concepts used
1. Pricing theories.
2. Consumer behavior.
3. Firm theory.
4. Market structure.
5. Investment theories.
 References
1. Slomen, J. mark, S. economic of business
2. David, M economic for managers
3. Jonson K, managerial economic, Macmillan India
4. Cyert,R. Behavioral theory of the firm