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Basic economic concepts

1. Invisible hand
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.Opportunity cost principle

The Next Best Thing That a Person Can engage in is referred to as the opportunity cost of doing the best thing. It expresses the basic relationship between scarcity and choice.

It implies the choice between desirables.

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3.Time perspective principle

Opportunity Cost
To get one thing that we like, we usually have to give up another thing that we like. Making decisions require trading off one goal against another. Discount is simply the difference between the original amount owed in the present and the amount that has to be paid in the future to settle.
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4. Discounting

principle
Discount is simply the difference between the original amount owed in the present and the amount that has to be paid in the future to settle the debt. Opposite of discount is the rate of return the person could receive by investing his money.

5.equi-marginal principle

 Be all and end all of all human efforts is consumption. The whole and sole purpose of economy is production of goods/ services for consumption now or in future.
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 Macro economics is the study of the behaviour of the economy as a whole. It contrasts with micro eco which studies: A individual price A individual quantities, markets.
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Basic Economic Problem

Economics

is a science which studies human behaviour as a relationship between ends and human resources which have alternative uses. Prof Robbins
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Wants are unlimited

Means to satisfy wants are limited but means or resources can be put to alternative uses.
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Basic Problems of an Economy

What to produce? How to produce? For whom to produce? What provision be made for economic growth ?
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He who can not see beyond the dawn will have much good wine to drink at noon, much green wine to cure his headache at dusk and only rain water to drink for the rest of the days.
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 Heaven lies at the feet of mothers. Gods pleasure is in a fathers pleasure; and Gods displeasure is in a fathers displeasure. He who wishes to enter Paradise at the best door must please his father and mother. - Al-Quran Quoted by : A.P.J. ABDUL KALAM
In his book : The Family and the Nation
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Economics is the study of how men & society choose, with or without the use of money, to empoy scarce productive resources which could have alternative uses, to produce various commodities over time, and distribute them for consumption now and in the future among various people and groups. Prof. Samuelson
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Micro Economies
1.

Studies the behaviour of individual units and small groups individual consumes, producer, firm. How much to consume What to produce How to produce Where to produce
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Where to sell At what price Production Structure Technology Location How the market functions Working of a free Market Economy Role of price mechanism in allocating productive resources invisible hand.
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 How a completely planned economy works. Scarcity and efficiency economic benefits comes from self-interested actions of individuals.
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Basic issues of micro economies

1. 2. 3. 4. 5. 6. Studies the economic actions and behaviour of individual units such as Individual Consumer Individual Producer (FIRM) Theory of product prices. Study of different type of markets Distributional theories Economic efficiency
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Important and uses of micro Economies

Explains how a free market economy functions. How the goods and services produced are distributed among various people for consumption.
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 How factors of production are paid. What are the gains from international trade.

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Free Market Economy or Capitalist Economy Chief Features Right of private property Freedom of Enterprise Freedom of choice by consumers (consumer sovereignty)
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 Profit Motive Competition Role of Price Mechanism (Impersonal Forces of Market to Solve central problem of Economics). Markets stand for the forces of demand and supply. Each individual knows where his self interest- lies.

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 Deciding what to produce Deciding how to produce Deciding what for whom to produce Deciding what about rate of growth Solving all problems at the same time.
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Consumer Sovereignty
In a face market economy consumer is sovereignty Consumer places the order, decides what should be produced Consumers authority arises from his income. His ability to pay is limited.
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 High pressure salesmanship puts a check on consumer sovereignty- radio, television, newspapers, hoardings at railway stations, airports, colonies, market place all these bombard consumers. Consumer sovereignty is indeed a MYTH.
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Problems of free market economy

Does not ensure maximum social satisfaction. Principle of consumer sovereignty not valid. Economic instability and unemployment
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 Does not ensure high rate of eco growth. Decline of competition and its adverse effects Concentration of wealth and income.
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Role of counter vailing power in correcting the weaknesses of a free market economy
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To day powerful corporate sellers often face equally powerful corporate buyers; the giant steel mill to the giant auto firm, the giant producers to the giant super market chain. The large firms no longer bargain with the individual employees, but with large and powerful unions.
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Issues in Macro Economics

Why a country is poor or rich. How a country can become rich? Road to economic progress and high rate of growth What is inflations; why its takes place How can we achieve full employment Social Responsibility of Business

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How are Basic Problems Solved Price Mechanism Vs Planning

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Macro Economic Aggregates

Aggregation involves adding apples & Oranges
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Solution
Gross Domestic Product (GDP)- A measure of Economic Activity. Aggregate consumptionvolume of goods and services devoted to current consumption during a period.
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 Aggregate investmentVolume of goods and services devoted to capital formation during a period. Whole sale price index Consumer price index Total money supply, bank credit, foreign exchange reserve etc.

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Government in Macro Economy

Classical View Leave the economy to markets Economy is always in full employment Supply creates its own demand
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 Over production & unemployment are short run phenomenon Price & wage flexibility bring about full employment No govt interference or least interference
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Key Nesian View

Investment is highly volatile Govt to actively participate in economic life to correct the fluctuations in investment, consumption , savings, output, employment, incomes, through pro-active monetary and fiscal policy.
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Part - II
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Business Economics Nature, Scope and Importance

Business economics in general sense refers to the integration of economic theory with business practices.
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 Business economics applies economic tools and concepts to the management of business. In this sense business economics is called managerial economics or applied economics.
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Managerial Economics is concerned with exploring real world business application of the logical structure of microeconomics. The development of the discipline of Econometrics over last two decades has important implications for the pursuit of such real world applications of micro-economic concepts and precepts. We are now capable of estimating demand equations, cost functions, production functions and other relations of micro-economic theory into quantifiable form such that we can provide useful information to management for scientific decisionmaking.
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An Overview
Business Economics is both conceptual and metrical. As such the knowledge of a few fundamental concepts and a few measurement techniques, relevant in the process of applying economic analysis in examining business decisions, is basic to the subject of Business Economics.
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 Business economics involves allocation of the resources available to a firm among its activities in a manner that the firm maximizes the profits sales and market share. Its concerned with the application of economics in decision making.
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Business Economics
What is Business Economics You should know compl exitiesof decision making problems of a business entity. You should know principles of economics and how they can be usefully employed is solving business problems and decision making
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MICRO ECONOMICS MACRO ECONOMICS

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Central Problems of Economics

Resources are scarce Wants/ Desires are unlimited Resources can be put to alternative uses Economics is the science of choice making and resource allocation.
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Types of Business Decision

What to produce How to produce For whom to produce Where to produce AT what price to sell How much investment is to be made From where to raise resources to organise production.
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Board classification of Business Decisions

Price output decisions Demand decision Choice of technique of production Long run production decision Advertising decision Investment decision

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Managerial Decision Making Process

Establishing the objective of a firm Profit Maximisation Sales Maximisation
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Alternative Solutions
Expanding the capacity vs setting up a new plant vs any other alternative. Requires data and information Analyse policy environment and regulatory framework. Anticipate problem-areas
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 In nutshell it can be concluded that business economics refers to the application of economic theory and the tools of analysis of decision science to find the optimal solution to business decision problems.
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Features of Business economics

Business economics is concerned with decision making of economic nature. Business economics is goal oriented and prescriptive
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 Business economics is pragmatic. It is concerned with those analytical tools which are useful in improving decision- making Business economics brings forth solutions of problems, provides necessary conceptual tools and helps the decision maker by providing measurement of various economic entities and their relationships.
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Definitions
Managerial economics is concerned with the ways in which managers should make decisions in order to maximize effectiveness or performance of the organisations they manage. Business economics is a fundamental academic subject which helps to understand and to analyse problems of business 56 decision making.

 Business economics is the integration of economic theory with business practices for the purpose of facilitating decision making and forward planning by the management. Management decisions problems can be solved by the application of economic theory and tools of decision sciences.
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Integration of Economic Theory

With the help of economic theory we can understand the actual behavior of business. Business economics attempts to estimate and predict the economic quantities and relationships. Decision making and forward planning is done with the help of estimated economic quantities and relationships. The managers cannot ignore the 58 environment with which they operate.

How does Business economics differ from economics?

Business economics Economics deals with involves application of the body of the economic principles principles itself. to the problems of the Is both macrofirm. economic and micro It is micro- economics economic. in character.

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 In business economics mainly profit theory is used. Other distribution theories are not much used Business economics adopts, modifies and reformulate economic models to suit the specific conditions and serves the specific problem solving process.

All Macro Economic theories like wages, interest and profit are also dealt with in economics. It builds hypothesis and economic models.

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 Though micro Micro in character economics as a deals only with branch of the firm and economics has nothing do deals with both with an economics of individuals the individual economic as well as economics of problems. the firm.
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Scope of Business Economics

Theory of demand analysis and forecasting Theory of production and production decisions Analysis of market structure and pricing theory Cost analysis Profit analysis and profit management Theory of capital and investment decisions Investment management.
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THE MARGINAL PRINCIPLE : LET BYGONES BE BYGONES

One of the most important lessons of economics is that you should look at the marginal costs and marginal benefits of decisions and ignore past or sunk costs. This is the marginal principle, which means that people will maximize their incomes or profits or satisfaction by counting only the marginal cost and marginal benefits of a decision
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RISK AND REWARD

People are generally risk-averse, preferring a sure thing to uncertain levels of consumption or profit: people prefer outcomes with less uncertainly and the same average values. For this reason, activities that reduce the uncertainties of consumption lead to improvements in economic welfare.
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RISK AND RETURN ON DIFFERENT ASSETS

The rate of return is the total rupee gain from a security (measured a percent of the price at the beginning of the period). For saving accounts and short-term bonds, the return would be the interest rate. Investment vary in their average returns and riskiness. Bonds tend to be safe, while stocks have much higher returns but face 65 higher risks.