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UNIT – 1 INTRODUCTION

ECONOMIC ANALYSIS FOR
BUSINESS

Economics
 Its deals with Production, Consumption, Distribution &
Exchange.
 Major discussion:
1. Financial Market (Including interest)
2. Country position (high income .. Poor..)
3. Business Cycle
4. Inflation.. Unemployment
5. International Trade
6. Govt Policies

Dr. Mohamed Riyazh Khan, SNS college of Engg

The themes of economics

 Economics is the study of how societies use scare
resources to produce valuable commodities and
distribute them among difference people.

 Good are scare and that society must use its resource
efficiently.
 1. Scarcity
 2. Efficiency

Dr. Mohamed Riyazh Khan, SNS college of Engg

 Scarcity: good are more scare due to huge demand
and less quantity level.
 If the good is available through value of money that
we can call as a Economic good.
 With the use of small quantity resources we will
gain fuller satisfaction,
 Eg (Cure oil, Essential food and water also)

Dr. Mohamed Riyazh Khan, SNS college of Engg

Dr. unlimited wants competing for limited resources creates the basic economic problem scarcity.  Unlimited wants and limited resources has been called economic problem. Mohamed Riyazh Khan. Therefore. The limitation of resources is imposed upon us by nature. SNS college of Engg . Unlimited wants reflect human nature.

 Efficiency: it denotes the most effective use of a society’s resources in satisfying people’s want and needs. Mohamed Riyazh Khan. It means lowest amount of inputs to create the greatest amount of outputs. When the maximum number of goods and services are produced with a given limited level of inputs. Dr. SNS college of Engg .

SNS college of Engg .  In terms of production. Dr. as are the variable inputs of production. Mohamed Riyazh Khan. Economic efficiency means the best way while minimizing waste and inefficiency. goods are produced at their lowest possible cost.

Mohamed Riyazh Khan. SNS college of Engg .Fundamental problems of Economics Three fundamental Economic Problems What to produce How to produce? Whom to produce? Dr.

Mohamed Riyazh Khan. SNS college of Engg . What to do? 2.. Basically three problems occurs in organisation. 1. Dr. How to do? 3. Whom to do? These are the crucial problems in organisation.

What commodity? And what quantity?  Will we produce pizzas or shirts today?  A few high quality shirts or many cheap shirts?  Will we use scare resource to produce many consumption good or investment goods?  Most of the investors are willing to produce profitable business. SNS college of Engg . Dr. Mohamed Riyazh Khan.

 If you use modern machinery it will create unemployment problem. How to produce?  Although the rich countries use advance technology in their production of good and services. in fact most of the UDC’s countries using labour effort to produce the goods and services. Mohamed Riyazh Khan. SNS college of Engg . hospital and office. Dr.  In advance countries there are using robots are being used in factories.

Mohamed Riyazh Khan.using technology oriented  Poor country.using labour-intensive technology Dr.  Rich country. Most of the poor country using labour force due to abundant level of human resource and they give the employment. SNS college of Engg .

Whom to produce?  The rich people think about.  Their children are studying foreign university. Here there in no hesitation to purchase. Mohamed Riyazh Khan.  They can buy all goods and services that money can buy Dr. SNS college of Engg . who have money and are willing to purchase them. mansions and elegant clothes and jewelleries.  The rich have several cars.

 The poorest. purchasing goods and services it based on purchasing power.  Some people do not eat three times a day. Mohamed Riyazh Khan.  First we can identify who is our target group? Dr. SNS college of Engg .

Dr. Production Possibility Frontier  It shows the different combination of the quantities of two goods that can be produced (or consumed) in an economy at any point of time.  The alternative combination of two goods that an economy can produce with given resources and technology. subject to limited availability of resources. SNS college of Engg . Mohamed Riyazh Khan.

SNS college of Engg . Mohamed Riyazh Khan. Dr.The Production Possibility Curve for an Individual  A production possibility curve measures the maximum combination of outputs that can be achieved from a given number of inputs.  It slopes downward from left to right.

given available resource and technology”  Two economic goods. Dr. SNS college of Engg . Mohamed Riyazh Khan. According to Lipsey. “ the production possibility curve is that curve shows the possible combinations of two goods that can be produced by an economy. guns and butter. The butter stands for civilian gun for military purpose.

Resources are used to produce one or both of only two goods. The quantities of labour. Assumption of Production Possibility Curve  1.  2. SNS college of Engg . Mohamed Riyazh Khan. land and entrepreneur resources do not change. The maximum possible production is obtained from resource inputs.  3. Dr. capital.

. machine and land from gun industry to butter and can hereby increase butter production. we are transferring labour. Mohamed Riyazh Khan. Dr. SNS college of Engg PPF SCHEDULE Possibilities Butter Guns A 0 15 B 1 14 C 2 12 D 3 9 E 4 5 F 5 0 As we go from A to B…to F.

F 1 2 3 4 5 Butter Dr.D . SNS college of Engg .E 3 0 .B 12 .A .Production Possibilities Curve (Frontier) 15 .C . Mohamed Riyazh Khan.I Guns 9 .M 6 .

In between at E.  Points outside the frontier “I” are infeasible or unattainable. where A depicts the opposite extreme.C and B increasing amounts of butter are given up in return for more guns. where all resource go into guns. Mohamed Riyazh Khan.D. A schedule of possibilities is given in table combination F shows the extreme.  Any point inside the curve. such as “M” indicates that the economy has not attained productive efficiency. SNS college of Engg . Dr.

Mohamed Riyazh Khan.Poor Nations High-income nation Luxury .A .B Good . SNS college of Engg .A Necessary goods Dr.

SNS college of Engg . a nation moves from A to B. expanding its food consumption little compare with its increase luxury consumption. Dr.  The second curve shows. The first curve shows. With economic growth. growth of inputs and technological change shift out the PPF. it must devote almost all its resources to food and enjoy few comforts. Mohamed Riyazh Khan.

Mohamed Riyazh Khan. Dr. Economic Efficiency  The term economic efficiency refers to the process by which resources are maximized to generate more productive value than they use.  the term economic efficiency refers to the use of resources so as to maximize the production of goods and services.  Every resource is optimally allocated to serve each person in the best way while minimising waste. SNS college of Engg .

Productive Efficiency  Productive efficiency occurs when the economy is utilizing all of its resources efficiently..e. no more output can be achieved from the given inputs). SNS college of Engg . Mohamed Riyazh Khan. Dr. The concept is illustrated on production possibility frontier (PPF) where all points on the curve are points of maximum productive efficiency (i.

Opportunity cost  the opportunity cost of a choice is the value of the best alternative forgone. in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made. it is the "cost" incurred by not enjoying the benefit that would be had by taking the second best choice available. Mohamed Riyazh Khan. Dr. SNS college of Engg .

Capital Formation 5. Providing full employment 4.  Factors: 1. SNS college of Engg . or real GDP.Economic Growth & Stability  Economic growth is the increase in the amount of the goods and services produced by an economy over time. Growth of Per capita income 2. It is conventionally measured as the percent rate of increase in real gross domestic product. Mohamed Riyazh Khan. The rate of return to capital 3. Technological change and Innovation Dr.

SNS college of Engg . Economic Stability: An economy with fairly constant output growth and low and stable inflation would be considered economically stable. Mohamed Riyazh Khan. Spending and tax rates (fiscal policy) or managing the money supply and controlling the use of credit (monetary policy) 1. Dr. Balance between full employment and price level stability.

industry and control the deflation and inflation. the govt will receive more tax revenue. High growth: with higher growth. Mohamed Riyazh Khan. SNS college of Engg .people earn more and so pay more income tax.  Modify the monetary policy and Fiscal policy. Dr. 2.  Accelerate the Productive expenditure (Develop the infrastructure.

How goods services are distributed among the people. How efficiently they are distributed. Micro Economics  It is the is a branch of economics that studies the behaviour of individual households and firms in making decisions on the allocation of limited resources. Dr. SNS college of Engg . and 3. How resource are allocated to the production of particular goods and service 2. Focus: 1. Mohamed Riyazh Khan.

Mohamed Riyazh Khan. wages. SNS college of Engg . Boulding.” Dr. individual price. “Micro-economics is the study of particular firm. K. industries and particular commodities.E. particular household. incomes. Definition of micro economics  According to Prof.

Demand. Consumer demand Dr. SNS college of Engg . Resource allocation 3. Price Mechanisation (on basic of demand and supply) 4. Costs of production 7. and equilibrium 6.Individual Behaviour Analysis 2. Mohamed Riyazh Khan. supply. Economic Policy 5. Important 1.

Dr. economic fluctuations. SNS college of Engg . output. Macro Economics  Macro economics is the study of aggregates covering the entire economy. aggregate supply.  It is concerned with the problems of unemployment. international trade and economic growth. total saving. total investment. Mohamed Riyazh Khan. such as total employment. aggregate demand and general price level. national income. inflation or deflation.

Global Economic system Dr. SNS college of Engg . Mohamed Riyazh Khan. Important of Macro economics  1. Unemployment  7. Macro economic policy  8. International Trade  6. Macro-economic and Business cycle  5. Determination of income and employment  2. Economic growth  4. Determination of general level of prices  3.

Supply side is to minimize profit and cost. Eco growth and BOP. SNS college of Engg . output Particular Household and national output. Objective Demand side is to maximize utility . Study on: Aggregate. Driving Force Price mechanism which operates with the National Income. static analysis. Dr. output & help of demand & supply forces. employment determined aggregate demand &supply. Mohamed Riyazh Khan. Time element Equilibrium conditions is analysed at a Its based on time lags. Price stability. rates of particular period. Its considered as a change.Difference Between Micro & Macro Difference Micro Macro Origin Study on: Individual and Small Group. Full employment.

Depending upon the price. household and firms all want to buy or sell different quantities. Dr. Role of Market and Government  What is Market? it a mechanism through which buyers and sellers interact to determine prices and exchange good & service. Mohamed Riyazh Khan. SNS college of Engg . Market Equilibrium: A market equilibrium represents a balance among all the different buyers and sellers.

SNS college of Engg . Mohamed Riyazh Khan. Service and money 2. Transaction of product. Generate of Employment 4. Provide place for market 3. Government and market in a country in many ways are interrelated and interdependent on each other. Role of Market: 1. Supply versus Demand Adjustment Dr.

. portfolio investment)  6. Promote health and nutrition. Mohamed Riyazh Khan.  2. Direct Administration  3. Plays a crucial role in promoting rapid economic growth. Dr.Role of Govt. Indirect controls (fiscal Monetary)  4. Encourage saving & investment  5.  Govt. SNS college of Engg . Regulatory role of govt... Encourage investment from abroad (FDI.  1.

Focus for regulate the market.  Govt... Mohamed Riyazh Khan.. And Market  Both the things are important for market equilibrium. SNS college of Engg . regulated the policy.  Market equilibrium is required (Demand & Supply)  Role of the govt. Dr.Role of Govt. is levied taxes. accelerate the business growth and stabilized the economic growth.

Mohamed Riyazh Khan. SNS college of Engg .Externalities Externalities are a loss or gain in the welfare of one party resulting from an activity of another party. Dr. without there being any compensation for the losing party. Externalities are an important consideration in cost- benefit analysis.

less illness and disease. Mohamed Riyazh Khan.. They are defined economist as third party effects of any transaction between a consumer and a firm. and greater productivity) Dr. Invested in the provision of clean piped water. (contribute better standards of health.  Positive Externalities: The govt. SNS college of Engg . Externalities can either be positive or negative. This had an obvious direct benefit.

SNS college of Engg .is external benefit. Mohamed Riyazh Khan. Price S  External benefit D1 D B D1. P1 a P2 Q Q1 Quantity Dr.

SNS college of Engg . Mohamed Riyazh Khan.  Smoking tobacco and a range of serious diseases. Dr. the cost to society is greater than the cost consumer is paying for it.  A negative good. Negative Externalities  Negative externalities are significant to economic arguments about the strengths and weakness of the market system because their existence places additional costs on other member of society.

SNS college of Engg . Mohamed Riyazh Khan. a freely operating B market would lead to lower price and P1 higher output of goods which have A harmful environment and social P consequences. Q1 Q Quantity Dr. Price S1 S  D External Costs In other words .

Mohamed Riyazh Khan. SNS college of Engg .Dr.