ECONOIMIC ANALYSIS FOR BUSINESS UNIT I INTRODUCTION ECONOMICS was formerly called political economy.

The term Political economy means the management of the wealth of the state. ADAM SMITH, the FATHER OF MODERN ECONOMICS, in his book entitled 'An Enquiry into the Nature and Causes of the Wealth of Nations (Published in 1776) defined ECONOMICS AS A STUDY OF WEALTH. DEFINITION According to Adam Smith, Economics is Science of wealth Science of material well-being Science of choice making and Science of dynamic growth and development "Political Economy or Economics is a study of mankind in the ordinary business of life. It examines that part of individual & social action which is most closely connected with the attainment & with the use of material requisites of well-being".", Alfred Marshall DEFINITION - CONCEPT The definition deals with the following four aspects:

Economics is a science: Economics studies economic human behaviour scientifically. It studies how humans try to optimise (maximize or minimize) certain objective under given constraints. For example, it studies how consumers, with given income and prices of the commodities, try to maximize their satisfaction.

Unlimited ends: Ends refer to wants. Human wants are unlimited. When one want is satisfied, other wants crop up. If man's wants were limited, then there would be no economic problem.

Scarce means: Means refer to resources. Since resources (natural productive resources, man-made capital goods, consumer goods, money and time etc.) are limited economic problem arises. If the resources were unlimited, people would be able to satisfy all their wants and there would be no problem.

Alternative uses: Not only resources are scarce, they have alternative uses. For example, coal can be used as a fuel for the production of industrial goods, it can be used for running trains, it can also be used for domestic cooking purposes and for so many purposes. Similarly, financial resources can be used for many purposes. The man or society has, therefore, to choose the uses for which resources would be used. If there was only a single use of the resource then the economic problem would not arise.

NATURE

Economics is a Science:

It is a systematized body of knowledge studies the relationship between cause and effect.

 It is capable of measurement. It has its own methodological apparatus. It should have the ability to forecast.

Economics is an art:

Art is nothing but practice of knowledge. Whereas science teaches us to know art teaches us to do. Unlike science which is theoretical, art is practical. If we analyse Economics, we find that it has the features of an art also. Its various branches, consumption, production, public finance, etc. provide practical solutions to various economic problems. It helps in solving various economic problems which we face in our day-to-day life. PROBLEMS OF ECONOMICS What to Produce? How to Produce? Whom to Produce? When to Produce? ECONOMICS ANALYSIS MICRO-ECONOMIC ANALYSIS: "Micro" is derived from the Greek word Mikros" meaning small.

According to K.E. Boulding, "Micro economics is the study of particular firms, particular households, individual prices,

wages, incomes, individual industries, particular commodities". Thus, it deals with the analysis of small individual units of the economy such as individual consumers, firms and small groups of individual units such as various industries and markets; it is a microscopic study of the economy. Product pricing; Consumer behaviour Factor pricing; Economic conditions of a section of the people; Study of firms; and Location of a industry MACRO ECONOMIC ANALYSIS: Macro is derived from the Greek word "Makros" meaning large. Macroeconomics is the study of aggregates; hence called Aggregative Economics. In the words of K.E. Boulding, "Macroeconomics deals not with individual quantities as such but with aggregates of these quantities; not with individual incomes, but with the national income; not with individual prices but with the price levels; not with individual outputs but with the national output. It is the study of overall economic phenomena as a whole rather than its individual parts. National income and output; General price level; Balance of trade and payments; External value of money;

 Saving and investment; and Employment and economic growth. SCARCITY & EFFICIENCY SCARCITY occurs when people want more of something than is readily available. In economics, scarcity forces people to make choices, as everyone cannot have everything. Without scarcity, an economy cannot exist. EFFICIENCY is the use of resources so as to maximize the production of goods and services. An economic system is said to be more efficient than another (in relative terms) if it can provide more goods and services for society without using more resources. In absolute terms, a situation can be called economically efficient if: No one can be made better off without making someone else worse off. No additional output can be obtained without increasing the amount of inputs. Production proceeds at the lowest possible per-unit cost.

Economic Efficiency refers to the use of resources so as to maximize the production of goods and services. An economic system is said to be more efficient than another (in relative terms) if it can provide more goods and services for society without using more resources. In

absolute terms, a situation can be called economically efficient if: No one can be made better off without making someone else worse off. No additional output can be obtained without increasing the amount of inputs. Production proceeds at the lowest possible per-unit cost.

Productive

efficiency

(also

known

as

technical

efficiency) occurs when the economy is utilizing all of its resources efficiently, producing most output from least input.

This takes place when production of one good is achieved at the lowest cost possible, given the production of the other good(s). Productive efficiency requires that all firms operate using best-practice technological and managerial processes.

BUSINESS ECONOMICS

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".

According to Mc Nair and Meriam, "Business economics deals with the use of economic modes of thought to analyze business situation".

CONCEPTS Explanation of nature and form of economic analysis Identification of the business areas where economic analysis can be applied CHARACTERISTICS Micro economics Normative science Pragmatic Prescriptive Uses macro economics Uses theory of firm Management oriented Multi disciplinary Art and science OBJECTIVES To integrate economic theory with business practice To apply economic concepts: and principles to solve business problems To employ the most modern instruments and tools to solve business problems To allocate the scarce resources in the optimal manner To make overall development of a firm.

 To help achieve other objectives of a firm like attaining industry leadership To minimize risk and uncertainty To help in demand and sales forecasting To help in operation of firm by helping in planning, organizing, controlling etc. To help in formulating business policies To help in profit maximization. USES It provides tools and techniques for managerial decisions It gives answers to the basic problems of business management It supplies data for analysis and forecasting It provides tools for demand forecasting and profit planning It guides the business economist SCOPE Demand analysis and forecasting Cost and production analysis Pricing decisions, policies and practices Profit management Capital management Inventory management Linear programming and theory of games Environmental issues

 Business cycles FUNDAMENTAL CONCEPTS Principle of opportunity cost Principle of incremental cost and revenue Principle of incremental cost and revenue Discounting Principle Equi-marginal principle Optimization BUSINESS ECONOMIST - ROLE Study of the business environment Business Plan and Forecasting Study of business operations Economic intelligence Specific functions Participation in Public Debates BUSINESS ECONOMIST - RESPONSIBILITIES Making successful Forecasts Maintaining Relationships Earning full Status on the Managerial team PRODUCTION POSSIBILITY FRONTIER

 The assortment of goods & services the economy can produce within the resources

A curve showing all the possible combinations of two goods that a country can produce within a specified time period with all its resources fully and efficiently employed

Gives choice - rational choice that involves weighing up the benefits of any activity against its opportunity cost

Shows scarcity

Opportunity cost - is the cost of any activity measured in terms of the best alternative/s forgone. Increasing opportunity cost of production when additional production of one good involves ever increasing sacrifices of another

Growth in potential output