BA7103 ECONOMIC ANALYSIS
FOR BUSINESS
UNIT I - INTRODUCTION
-Themes of economics
-Scarcity and Efficiency
- Economic problems
- Production Possibility Frontiers
-Economic growth and Stability
-Microeconomics and Macroeconomics
-Role of markets and government
-Positive and Negative Externalities.
Define Economics
“ Managerial Economics is the integration of
economic theory with business practice for the
purpose of facilitating decision making and
forward planning by management”
Business
Economic
Manageme
Theory
nt
Managerial Economics
Various Forms of Economics
Various Forms of Economics
Various Forms of Economics
Nature of Economics
• Micro economic in nature
– Deals with individual units of economy.
• Pragmatic
– Rigid and abstract theoretical framework for
managers
• Related to normative economics
– Distinguishes the ideal from actual management
work.
• Conceptual in nature
– Based on a sound framework of economic concepts.
• Utilises some theories of Macroeconomics
– Macro economic theories to understand the
environment
• Problem solving in nature
– Finding out optimal solutions to the business problems
• Interdisciplinary
Scope of Economics
• Demand analysis and forecasting
– Transforming productive resources into goods
• Cost and production analysis
– Cause variations in cost estimates
• Pricing decisions policies and practices
– Price giving income to the firm
• Profit management
– Element of uncertainty about profits because of
variation in cost and revenues.
• Capital management
– Planning and control of capital expenditure.
• Analysis of business environment
– Influence the working and performance of a
business undertaking.
• Allied disciplines
– Helps the management in decision making are
qualitative in nature.
Importance of macro economics
1. Determination of income and employment
– Forces or factors which determine the level of aggregate
employment
2. Determination of general level of prices
– How the general price level is determined
3. Economic growth
– Formulate the economic policies for achieving long term
economic growth.
4. Macro economics and business cycles
– Fluctuations in the national income are analysed.
5. International trade
– Analyse the various aspects of international trade
6. Income shares from the national income
– Wages and profit depend upon the ratio of investment to national
income
7. Unemployment
– Keynesian and post Keynesian causes of cylindrical
unemployment
8. Macro economic problems
– Monetary and fiscal policies affect the performance of the country.
9. Global economic system
– Nations economy is a part of global system
[Link] dimensional study
– Beneficial in determining the fluctuations in macroeconomic
factor.
Scarcity
“Scarcity is a relationship between how much
there is of something and how much of it is
wanted”
Efficiency
“Efficiency suggests that being able to make a
judgment about when resources are, or are
not, being used in this best possible way is
important”
Types of economic efficiency
• Static efficiency
– Exists at a point of time and focuses on how much
output.
• Dynamic efficiency
– Productive efficiency of a firm over a period of
time.
• X inefficiency
– Little incentive to control costs
• Social efficiency
– Optimal distribution of resources in the society.
• Technical efficiency
– Given set of inputs is used to produce an output
• Pareto efficiency
– Resources are distributed in the most effective
way.
• Distributive efficiency
– Goods and services are consumed by those who
need them most.
Productive vs. Economic Efficiency
• It is a part of economic efficiency
• It refers to the firms cost of production and can be
applied to both long and short run.
• It exists when producers minimize the wastage of
resources.
• Productive efficiency supports the “perfectly
competitive” market.
• It happens when the firm is exploiting the
available economies of scale.
3 fundamental economic problems
There are three fundamental problems of
economic, what , how and for whom,they are
1. What to produce?
2. How to produce?
3. For whom to produce?
What to produce?
• Certain goods and services becomes profitable
or not in a given market
• Simply conduct a market study or feasibility
study
• Not possible always to produce all the goods
and services
• Need to establish certain priorities.
How to produce?
• Problem of production technology or methods
of production.
• Maximum output with minimum input
without sacrificing quality
• There are still goods and services which they
do not know how to produce efficiently
• Requires modern machines which are
considered to be expensive.
For whom to produce?
• A problem of distribution who gets goods like
rice, cloths, shoes and services.
• Goods and services are for those who have
money
• Rich acquire more goods and services than the
poor.
• Western nation indulge in giving free
education.
Measures to overcome economic problems
by price mechanism
• Solution of central problems in a capitalist
economy
• Solution of central problems in a socialist
economy
• Solutions of central problems in a mixed
economy.
Society’s capability
1. What to produce and in what quantities it has to be
produced?
– Central planning authority of the country decides what to
produce and how much quantity has to be produced.
2. How shall goods be produced and how to use the society?
- trial and error method, input output method and shadow
price mechanism method.
3. For whom shall the goods be produced
- decision taken by the government in a socialist
economy
Production possibility frontier
“This is also called as a
-transformation curve:
- is a graph that shows the different combination of the
quantities of two goods
-that can be produced in an economy at any point of
time, subject to limited availability of resources”
“ The curve which shows the possible combinations of two
goods that can be produced by an economy, given
available resources and technology”
Possible Combination
Limitations of Production Possibility
Curve
• Hypothetical and static
• No practical use
• Irrelevant assumptions
• No analytical device
• Environmental consequences
• Downside effects
• Short run phenomena
Economic growth and Stability
• Elements of economic growth
– Human resources
• High birth rates with stagnant income
– Natural Resources
• Government not providing necessary resources for
exploring
– Capital formation
• Developing countries have to build up their infrastructure
– Technological change and innovations
• Have a potential advantage in the economic development.
Balance Between Economic Growth &
Stability
• Internal Balance
– Balance between full employment and price level
stability
– Waste and hardship that occur when resources
are underemployed is clear
– Workers on overtime and might prefer to be
working less and enjoying leisure.
– Machines worked more will tend to suffer more.
Balance Between Economic Growth &
Stability
• External Balance
– Optical level of the current account
– External balance is more difficult to define than
internal balance
– Economic trade with the outside world poses
macro economic problems.
Long Run Economic Growth
Role of Market and Government in
stability
• Role of markets
– Transaction of product services and money
• Flow of goods and services between households and business in
market.
– Provide place for market
• Buyers can get their goods for the satisfaction of their wants.
– Generation of employment
• Repeated buying and selling of goods.
– Index of economic situation
• Presence of international or global market for its products or services
– Supply versus demand adjustment
• Existence of a market creates demand for goods and services
• Role of Government
– Regulatory role of government
• Various segments of the economy either directly or
indirectly.
– Encourage saving and investment
• Saving is admittedly the non receipt of income
– Encourage investment from abroad
• Capital accumulation and long term economic growth by
encouraging investment
– Promote education
• Enhance the standard of living to provide schools and
encourage population
– Promote health and nutrition
• Efficiency of workers depends considerably on their health.
– Secure property rights and political stability
• Ability of people to exercise authority over the resources
they own.
– Promote free trade
• Free international trade allows the residents of countries to
use more resources
– Research and development
• Advance of technological knowledge has led to higher
standards of living .
– Control population growth
• Population is key determinant of a country’s labourforce.
– Planning role of government
• Directly participates in planned economic development
Positive Externalities
• Unintended external effects do not
automatically lead to greater costs for society
as a whole.
• Some economic transactions generate
beneficial third party effects.
• Economists call it as positive externalities
Negative Externalities
“A Negative externality occur when an
individual or firm making a decision does not
have to pay the full cost of the decision”
- If a good has a negative externality then the
cost to the society is greater than the cost
consumer is paying for it.
Negative Externalities Graph
S1
PRICE
D S
b
P1
a
P
S1
D
S
Q1 Q QUANTITY
Uses of Managerial Economics
• Used for integration of economic theory
• Used as solution to practical business
problems
• Optimum use of scarce resources
• Used for other objectives
• Used for overall development
• Used in making right decisions
Limitations in Managerial economics
• Emergence of monopolies
• Emergence of oligopoly
• Exploitation of workers
• Cut throat competition
• Limited focus
Micro vs Macro Economics
Basis Micro economics Macro economics
Origin Micro means small, it Macro means large, it
includes households, don’t deal with
particular industries, individuals but on a
commodities and nation as awhole.
prices
Objective Maximise utility Full employment price
stability
Driving forces Price mechanism is National income
the one which helps output and
employment
Basis Micro economics Macro economics
Assumptions Assumptions based on Assumptions on such
rational behavior of variables as the
individuals aggregate volume of
output and output of
an economy.
Equilibrium analysis Partial equilibrium General equilibrium
analysis which helps analysis which is an
to explain the extensive study of a
conditions of number of economic
individual variables
Time element The study of Macro economics is
equilibrium condition based on time lags,
is abalysed at a rates of change, and
particular period. past and expected
value of the variabls