Business Economics – I (Micro)
Code: CLNL1014
Dr. Mir Khursheed Alam
PhD Indian Institute of Technology Mandi, Program: BA LLB (H)
(H.P), India
Semester II:
Cohort: B1 and B4
Assistant Professor (Senior Scale) of Economics,
UPES School of Business Year: 2024-25
Office Address: K1103 Classroom: K2002, K2003
Email: [email protected]
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Business Economics – I (Micro) (Module 1)
▪ Unit I: Introduction to Economics & Business Economics; 9 lecture
hours
▪ Introduction to Economics,
▪ Definition of Economics,
▪ Branches of Economics,
▪ Meaning of Business Economics,
▪ Nature, Scope & Objective of Business Economics
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An Introduction to Economics
Book: Wealth of Nations
Father of Economics
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Introduction to Economics
Adam Smith (Father of Economics) stated that economics is the science of wealth and Economy
is concerned with the production, consumption, distribution and investment of goods and
services.
He titled his famous book, in 1776, as An Inquiry into the Nature and Causes of the Wealth of
Nations.
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Introduction to Economics
▪ Economics is a “Social Science” concerned with the description and analysis of Production,
Distribution and Consumption of Goods and Services.
▪ Economics is an important branch of social science which deals with the behavior of human
beings in relation to economic activities.
▪ Derived from two Greek words “Okios” – Household, “Nomia” – Management. Hence
economics can be understood as “Household Management” – Managing a household with
limited resources available in an economical manner.
▪ Till 19th century, Economics was known as ‘Political Economy’.
▪ First Modern work of Economics by Adam Smith is named as ‘An Enquiry into the Nature and
Causes of the Wealth of Nations’ (1776), abbreviated as ‘The Wealth of Nations’.
▪ There are two fundamental facts that can be concluded with the concept of Economics: (i)
Human beings have unlimited wants; and (ii) The means to satisfy these unlimited wants are
relatively scarce forms the subject matter of Economics.
▪ Later the scope of Economics has been extended to Nation’s Management, and Economics is
regarded as “Queen of Social Sciences” since it has more applicability in our practical life.
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Learn language of economics
1. Economic activities
An economic activity is a systematic endeavor to satisfy a material need.
The vital processes or essential functions:
• Production,
• Consumption,
• Investment and
• Distribution,
are those economic activities which are necessary for the working or survival of an economy.
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2. Factors of production 3. Factors of production and factor
payments
Production: Production as a process of creation of utility or
value in goods or services (or both). Anatol Murad defined this
as: “Production may be defined as the creation of utilities.”
Factors of Production: Factors of production are the essential
elements that cooperate with one another in the process of
production. These are inputs needed for creating goods and
services, that include:
Land: It is that factor of production that is available to
humankind as a free gift of nature.
Labor: It is the physical or mental effort of human beings in
the process of production. Services of a doctor, lawyer,
teacher, and worker in the factory, all constitute labor.
Capital: Capital is a man-made material and is a source of
production. It consists of the part of production which is used
for further production.
Entrepreneurship: Entrepreneurship refers to the skills of the
entrepreneur:
(a) to organize business 7
(b) to undertake risks of business
Evolution of Economics
Mercantilism (16th–18th centuries)
▪ Emerged during the Age of Exploration.
▪ Advocated that national wealth was based on the accumulation of precious metals.
Key ideas:
• Positive balance of trade. Trade is a zero-sum game
• State intervention in the economy.
• Notable thinkers: Thomas Mun, Jean-Baptiste Colbert.
The Birth of Modern Economics: Classical Economics (18th–19th centuries)
1. Adam Smith (1723–1790): Often called the "Father of Economics.“ His seminal work, The
Wealth of Nations (1776), introduced the idea of the "invisible hand" guiding free markets.
2. David Ricardo (1772–1823): Developed the theory of comparative advantage in international
trade.
3. Thomas Malthus (1766–1834): Known for his theory on population growth outstripping food
supply, leading to periodic crises.
4. John Stuart Mill (1806–1873): Advocated for the inclusion of social justice in economic policies.
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Evolution of Economics
Marxian Economics (19th century)
▪ - Karl Marx (1818–1883):
▪ - Critiqued capitalism in Das Kapital (1867).
▪ - Focused on class struggle, exploitation, and the dynamics of capital accumulation.
Marginal Revolution and Neoclassical Economics (Late 19th century)
1. Marginal Utility Theory:
- Shifted focus from labor theory of value to the utility derived from goods.
- Thinkers: William Stanley Jevons, Carl Menger, and Léon Walras.
2. Alfred Marshall (1842–1924):
- Synthesized classical and marginalist ideas in Principles of Economics (1890).
- Introduced concepts like supply and demand, elasticity, and consumer surplus.
Keynesian Revolution (20th century)
• John Maynard Keynes (1883–1946):
• Challenged classical economics with The General Theory of Employment, Interest,
and Money (1936).
• Advocated government intervention to stabilize economies during recessions.
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Recent development of Economics (Optional)
Modern Developments
1. Post-Keynesian and Monetarism:
- Milton Friedman (Monetarism): Emphasized the role of money supply in controlling inflation.
2. Development Economics:
- Addressed issues in developing nations (Amartya Sen, Joseph Stiglitz).
3. Behavioral Economics:
- Explores psychological aspects influencing economic decisions (Daniel Kahneman, Richard Thaler).
4. Environmental and Ecological Economics:
- Examines sustainability and the interplay between economy and ecology.
5. Globalization and International Economics:
- Focused on trade, multinational corporations, and the global economic system.
Interdisciplinary Connections
▪ Economics today blends with other disciplines like:
▪ Law and Economics
▪ - Sociology (economic behavior).
▪ - Political science (public policy).
▪ - Law (climate and environmental law).
▪ - Mathematics (game theory, econometrics).
▪ This historical progression illustrates how economics evolved from philosophical reflections to a structured
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discipline addressing global challenges.
Definitions of Economics
• Wealth Definition (Adam Smith)
• Welfare Definition (Alfred Marshall)
• Scarcity Definition (L. Robbins)
• Growth Oriented Definition (Paul A. Samuelson)
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Definitions of Economics
Wealth Concept Adam Smith, who is generally regarded as the father of economics, defined economics as “a science
which enquires into the nature and cause of wealth of a nation.”
He emphasized the production and growth of wealth as the subject matter of economics. This definition takes into
account only material goods.
Welfare Concept According to A. Marshall, “Economics is a study of mankind in the ordinary business of life; it
examines that part of individual and social action which is most closely connected with the attainment and with the
use of material requisites of well-being”. Thus, it is on one side a study of wealth; and on other; and more important
side, a part of the study of man.
Scarcity Concept According to Lionel Robbins, “Economics is the science which studies human behavior as a
relationship between ends and scarce means which have alternate uses.”
Growth and Development Concept According to Paul A. Samuelson, “Economics is the study of how men and
society choose, with or without the use of money, to employ the scarce productive resources which have alternative
uses, to produce various commodities over time and distribute them for consumption now and in future among
various people and groups of society.”
Basic Premise of Economics
Human wants (Ends) are unlimited 12
Resources (Means) of satisfying these wants are scarce and have alternative uses.
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Scarcity: Basic Economics Problem
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Scarcity: Basic Economics Problem
Scarcity the gap between the limited
resources and virtually limitless human
wants
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Scarcity and choice as fundamental economic Problems
Scarcity: Basic Economics Problem Scarcity give rise to the problem of choice
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Rational And Economic Decision Making In Economics
Economics studies problem of choice: Scarcity and
Study of wants >> efforts >> wealth >> choice go together. If things were available in
satisfaction: abundance, then there would have been no problem
of choice; the point is that “problems of choice” arise
Every human being is doing some business and because of scarcity. We can summarize the basic
every human being has some wants and these wants economic problems by means of a chart shown in the
are unlimited. To fulfill these wants a person does figure
efforts, by doing efforts he gets wealth and with this
earned wealth he satisfies
his wants.
Study of human behavior with relation to ends and
scarce means:
As long as a person is alive, his wants go on
increasing. But the person cannot fulfill all the
wants. The reason is that the resources required to
fulfill these wants are limited. Besides the fact of
scarcity of resources, we also find that resources
have alternative uses. Hence economics is a subject
which studies human behavior as a relationship
between ends and scarce means which have
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alternative uses.
Scarcity leads to the concept of choice and Opportunity cost
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OPPORTUNITY COST (OC)
OC: Cost associated with opportunities forgone when a firm’s resources are not put
to their best alternative use.
OC is the Value of next best alternative foregone
Let us take the example of a farmer. He can produce either rice or wheat on a piece
of land. If he has decided to produce wheat on this piece of land, he has to forego the
production of rice for producing wheat. So, the value of rice foregone (next best
alternative) is the opportunity cost of producing wheat.
Eg: a person chooses to forgo his present lucrative job which offers him Rs.50000
per month, and organize his own business. The opportunity lost (earning Rs. 50,000)
will be the opportunity cost of running his own businesss.
Production Possibilities Frontier (PPF) Highlights
Problem Of Scarcity And Choice
Four assumptions in the model:
• The economy is assumed to have only two
goods that represent the market
• The supply of resources is fixed or constant
• State of Technology remain constant
• All resources are efficiently and fully used. 20
Production Possibilities Frontier/Curve (PPF)
PPF is a graph that shows the combinations of
output that the economy can possibly produce
given the available factors of production and
the available production technology
PPF Curve showing the combinations of two
goods that can be produced with fixed
quantities of inputs.
Represents one extreme, in which only clothing
is produced, and OC represents the other
extreme, in which only food is produced.
Points B, C, and D correspond to points at
which both food and clothing are efficiently
produced.
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MARGINAL RATE OF TRANSFORMATION (MRTS)
MRT: Amount of one good that must be given
up to produce one additional unit of a second
good.
As we increase the production of food by
moving along the PPF, the MRT increases
>>concave PPF
MRT of food for clothing is the magnitude of
the slope of the frontier at each point
The MRT measures how much clothing must be
given up to produce one additional unit of food.
The curvature of follows directly from the fact
that the marginal cost of producing food relative
to the marginal cost of producing clothing is
increasing.
At every point along PPF holds a condition: 2
MRT= MCF/MCC
A SHIFT IN THE PRODUCTION POSSIBILITIES FRONTIER
Clothing
Growth of resources occurs
when the physical quantum of
resources increases or when
there is a rise in the productivity
level of resources
Food
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A SHIFT IN THE PRODUCTION POSSIBILITIES FRONTIER
A technological advance in the
computer industry enables the
economy to produce more computers
for any given number of cars. PPF
shifts outward.
If the economy moves from point A to
point G, then the production of both
cars and computers increases
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Classroom Exercise:
Plot Production Possibilities
Frontier (PPF)
Branches of Economics
Economics is divided into two main parts.
MICRO ECONOMICS: MACRO ECONOMICS
• Divides the economy into • Studies the performance of an
small Units and studies economy at the aggregate level.
Individually. • Macro Economics is called as
“Income Theory” as it deals with
• Microeconomics is called determination of Income and
“Price Theory” as it deals employment.
with the determination of
prices of commodities and
factors.
Microeconomics Macroeconomics
Scope of Study: Microeconomics focuses
Scope of Study: Macroeconomics, on the
on individual economic agents such as
other hand, deals with the broader
households, firms, and industries.
economy as a whole. It studies
aggregates such as national income,
It examines how these agents make
unemployment rates, inflation, and
decisions regarding resource allocation,
overall economic growth.
production, consumption, and pricing of
goods and services.
Variables: Deals with aggregate variables
such as
Variables:
• gross domestic product (GDP),
• Individual consumer preferences,
• aggregate demand and supply,
• supply and demand for particular goods,
• inflation rates, unemployment rates,
• individual firm costs and revenues, and
and
market structures
• overall price levels.
Microeconomics is called “Price Theory” as
Macro Economics is called as “Income
it deals with the determination of prices of
Theory” as it deals with determination of
commodities and factors.
Income and employment 2
Microeconomics Macroeconomics
Policy implications: Macroeconomic
Policy implications: Microeconomic analysis guides policies aimed at managing
the overall economy, such as fiscal policies
analysis informs policies targeted at specific
(government spending and taxation) and
market interventions or regulations, such as monetary policies (central bank actions
taxation policies on specific goods, affecting money supply and interest rates) to
subsidies, or price controls. stabilize inflation, unemployment, and
economic growth.
Methodology: Microeconomics often
employs partial equilibrium analysis, Methodology: Macroeconomics typically
focusing on the behavior of individual uses general equilibrium analysis, which
considers the interactions of all markets
agents and specific markets.
simultaneously.
It utilizes tools like supply and demand It utilizes models like the Aggregate
curves, consumer theory, and production Demand-Aggregate Supply (AD-AS)
theory to understand market outcomes. model.
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Positive Economics
Normative Economics
Economics is a Positive Science as it studies
things as they are. Economics is a Normative Science as it prescribes
certain norms.
Positive statement is associated with "what
it is” statements and are based on Normative statement is associated to “what
facts/observable phenomenon. "ought to be” statements and based on value
judgments/ fairness/equity/justice.
Example: Current wage rate of labour is
400 INR Per day. Example: Minimum wage of labour should be
over and above 500 INR per day.
Positive economics describes and explains
economic phenomena in objective and Normative economics focuses on subjective
measurable terms. statements about economic fairness or how the
economy should be organized.
Description, quantification, and explanation
of economic phenomenon by relying on Aims at examining real economic events from the
objective data analysis, relevant facts, and moral and ethical point of view. It is used to judge
associated figures. whether the economic events are desirable or not.
It is subjective and value-based, originating from
Establish any cause-and-effect relationships personal perspectives or opinions involved in the
or behavioral associations that can help decision-making process. The statements of this
ascertain and test the development of type of economics are rigid and prescriptive29 in
economic theories. nature.
Business Economics: An introduction
Business Economics may be defined as the use of
economic analysis to make business decisions
involving the best use of an organization’s scarce
resources.
In 1951 Joel Dean published a book entitled
Business Economics is essentially a component "Managerial Economics." The subject
of Applied Economics as it includes the Managerial Economics has gained popularity.
application of selected quantitative techniques
such as linear programming, regression Definition:
analysis, capital budgeting ,break-even
analysis and cost analysis. "Managerial Economics is the integration of
economic theory with business practice for
Business Economics: How economic analysis is
the purpose of facilitating decision making
used to formulate economic policies in respect to
the business firms. and forward planning.
H. Spencer' and 'L. Siegelman’
“Business Economics in terms of the use of
economic analysis in the formulation of 30
business policies (Joel Dean)
Business Economics
Business economics is a field of applied economics that studies the financial, organizational, market-
related, and environmental issues faced by corporations.
Business economics assesses certain factors impacting corporations—business organization,
management, expansion, and strategy—using economic theory and quantitative methods.
Managerial economics is one important offshoot of business economics.
However, we will use the term managerial economics and business economics interchangeably in
this course
The field of business economics addresses economic principles, strategies, standard business practices,
the acquisition of necessary capital, profit generation, the efficiency of production, and overall
management strategy. Business economics also includes the study of external economic factors and
their influence on business decisions such as a change in industry regulation or a sudden price shift in
raw materials
Research topics in the field of business economics might include how and why corporations expand,
the impact of entrepreneurs, interactions among corporations, and the role of governments in
regulation.
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Characteristics of Business Economics
• Business Economics is the application of economic concepts, theories and
principles to the business activities.
• It is related with the micro-economics. It is micro in nature. It is mainly related
with the problems of individual unit.
• However, it deals with the macro-economics. Manager of the firms has to study the
macro economic concepts like National Income, Business Cycles, Labour Relations,
Government Policies on taxation, budget, monetary issues and international trade
etc. By studying these macro economic concepts Manager of a business firm takes
the decisions in respect of his firm.
• Business/Managerial economics deals with the theory of firm (pure theory of
economics). The economic principles of this theory are applied to firms to decide
profit. It means that managerial economics deals with the theory of distribution
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Key objectives of Business Economics
Nature of Business Economics
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Economics vs Business Economics
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Scope of Business Economics
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Scope of Business Economics
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Scope of Business Economics
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Types Of Economies (Optional)*
On the Basis of Ownership and Control over Means of Production or Resources
(A) Capitalist or free enterprise economy
(B) Socialist or centrally planned economy
(C) Mixed economy
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Capitalist Economy
Capitalist Economy The capitalist or free enterprise economy is the oldest form of economy. Earlier economists
supported the policy of ‘laissez-faire’ meaning leave free. They advocated minimum government intervention in
economic activities.
Features:
• Private property: In a capitalist system all the individuals have the right to own property. An individual can
acquire property and use it for the benefit of his own family. There is no restriction on the ownership of land,
machines, mines, factories and to earn profit and accumulate wealth.
• Freedom of enterprise: Business firms are free to acquire resources and use them in the production of any good
or service. The firms are also free to sell their product in the markets of their choice. A worker is free to choose
his/her employer.
• Absence of government interference: The role of government is to help in the free and efficient functioning of
the markets.
• Market mechanism and prices: Private property, freedom of choice, profit motive, and competition make
room for the free and efficient functioning of price mechanism. Capitalism is essentially a market economy
where every commodity has a price. The forces of demand and supply in an industry determine this price. Firms
that can adjust at a given price earn normal profit and those who fail to do so often quit the industry. A producer
will produce those goods, which give him more profit.
• Other features: Consumer’s Sovereignty; Profit motive and competition
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Socialist Economy or centrally planned economies
In the socialist or centrally planned economies, all the productive resources are owned and
controlled by the government in the overall interest of the society. A central planning authority
makes the decisions.
Collective Ownership of Means of Production: Means of production are owned by the
government on behalf of the people.
Social Welfare Objective: Decisions are taken by the government at macro level with the
objective of maximization of social welfare in mind rather than maximization of individual profit.
The forces of demand and supply do not play any important role. Careful decisions are taken with
the welfare objectives in mind.
Role of Central Planning Authority: The Central Planning Authority keeping the national
priorities and availability of resources in mind allocates resources. Government takes all economic
decisions regarding production, consumption and investment keeping in mind the present and
future needs. The planning authorities fix targets for various sectors and ensure efficient utilization
of resources.
Other features: Reduction in Inequalities; No class conflict
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Mixed Economy
Mixed Economy combines the best features of capitalism and socialism. Thus mixed economy has some elements
of both free enterprise or capitalist economy as well as a government-controlled socialist economy. The public and
private sectors co-exist in mixed economies.
Co-existence of public and private sectors. The private sector consists of production units that are owned
privately and work based on profit motive. The public sector consists of production units owned by the government
and works based on social welfare. The areas of economic activities of each sector are generally demarcated.
Government uses its various policies e.g. licensing policy, taxation policy, price policy, monetary policy and fiscal
policy to control and regulate the private sector.
(Economic Planning The government prepares long-term plans and decides the roles to be played by the private
and public sectors in the development of the economy. The public sector is under direct control of the government
as such production targets and plans are formulated for them directly. The private sector is provided encouragement,
incentives, support and subsidies to work as per national priorities.
Price Mechanism: Prices play a significant role in the allocation of resources. For some sectors, the policy of
administered prices is adopted. The government also provides price subsidies to help the target group. The
government aims to maximize the welfare of the masses. For those who can not afford to purchase the goods at
market prices, the government makes the goods available either free of cost or at below-market (subsidized) prices.
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