INTRODUCTION TO BUSINESS ECONOMICS

Table of Contents

1) Discuss scope and importance of business economics.

Answer: Business economics is a field of study that reviews the implementation of the economic system in business operations. It assists in utilizing the nature and importance of financial analysis to clarify business problems.

Scope is nothing but the subject matter of business economics. Scope of Business Economics is very wide

1) Market Demand and Supply
In economics both demand and supply are the important forces through which market economy functions. Individual demand
for a product is based on an individual’s choice / Preferences among different products, price of the product, income etc.

Individual demand is nothing but desire backed by individual’s ability and willingness to pay. By summing up the demand of all the
consumers or individuals for the product we get market demand for that particular product.

Individual Supply is the amount of a product that producer is willing to sell at given prices. By summing up the supply of all the producers for the product we get market supply for that particular product.

The market price where the quantity of goods supplied is equal to the quantity of goods demanded is called as equilibrium price. Existence, growth and future of business or firm depends on what price market determines for its product.

2) Production and Cost Analysis
Knowledge of business economics helps manager to do production and cost analysis. Production analysis helps to understand process of production and to make optimum utilisation of available resources.

Cost analysis on the other hand helps firm to identify various costs and plan budget accordingly. Both production and cost analysis will help firm to maximize profit.

3) Market structure and Pricing Techniques
Markets are very important in business economics. Study of markets such as perfect completion, monopoly, oligopoly, monopolistic market etc. is very significant for producers. It is very imperative for manager or producer to identify type of market that will be there for their products.

Knowledge of markets and competition will help them to take better decision regarding pricing of the product, marketing strategies etc. Pricing techniques, on the other hand, helps the firms to decide best remunerative price at different kinds of markets.

4) Forecasting and coverage of risk and uncertainty.
Knowledge of business economics helps manager to forecast future. For example Demand forecasting. It means estimation of demand for the product for a future period.

Demand forecasting enables an organization to take various decisions in business, such as planning about production process, purchasing of raw materials, managing funds in the business, and determining the price of the commodity. Likewise forecasting future helps firm to take important decisions and cover risk and uncertainty associated with those decisions.

5) Inventory Management
Knowledge of business economics will help producer to reduce costs associated with maintenance of inventory such as raw materials, finished goods etc.

6) Allocation of resources
Business Economics provides advanced tools such as linear programming which helps to achieve optimal utilisation of available resources.

7) Capital Budgeting
Capital budgeting or investment appraisal is an official procedure used by firms for assessing and evaluating possible expenses or investments. It is a process of planning of expenditure which involves current expenditure on fixed/durable assets in return for estimated flow of benefits in the long run.

Investment appraisal is the procedure which involves planning for determining whether firm’s long term investments such as heavy machinery, new plant, research and development projects are worth the funding or not.

Knowledge of business economics helps producer to take appropriate investment decisions with the help of capital budgeting.

2) Why knowledge of Business Economics is important ?

Knowledge of business economics helps business organization to take important decisions as it deals with application of economics in real life situation.
It helps manager or owner of firm to design policies suitable for their firm or business.
Business economics is useful in planning future course of action.
It helps to control cost and monitor profit by doing cost benefit analysis.
It helps in forecasting future for taking important decisions in present.
It helps to set appropriate prices for various products by using available pricing techniques.
It helps to analyse effects of various government policies on business and take appropriate decision.
It helps to degree of efficiency of firms by using various economic tools.

3) Write short note on Opportunity Cost.

Answer: Individuals face Trade-offs in day to day life. It is a conflicting situation where people have to make decision or make choices among available alternatives. The moment selection takes place, the counterpart becomes opportunity cost. Opportunity lost is nothing but opportunity cost. If you decide to attend lecture, then you have to sacrifice on time that you could have spent otherwise.

If you plant potatoes in your field, you must forego the chance of planting another crop because your resources are limited.
Opportunity cost plays very important role in decision making. Doing one thing excludes doing something else. In other words,
when we select something, we pay a cost, which is the cost of not being able to do the next best thing.

4) Write short note on Marginalism

Answer: Rational decision makers will always think in terms of marginal quantities. One should compare the cost of an additional chocolate with the benefits of an extra chocolate in order to decide whether to have it or not. If the additional revenue that the producer is going to get by producing one more car is greater than the cost of producing the extra car, only then the seller will produce an extra car.

Let us take one example, an additional car sells for Rs. 10 lacks while it costs only Rs. 8 lakhs to produce the additional car. Clearly, a rational producer will decide to produce the car because he will make profit of Rs. 2 lakhs per car.

On the other hand, if the price of car falls to Rs.7 lakhs while the cost of producing it remains Rs. 8 lakh, it will not make sense to produce the additional car since the cost surpasses the revenue to be earned from it.

The cost of producing the extra car is called as marginal cost while the revenue obtained from selling an extra car is called as marginal revenue. If marginal revenue exceeds marginal cost, it obviously makes sense to produce the extra car. If the marginal revenue is less than marginal cost, it not advisable to produce the extra car.

5) Write short note on Incrementalism.

Answer: Marginalism represents small unit change in the concerned variables. But many times in real life situations changes takes place in chunks or batches. For example firm producing car will not generally increase its production by one unit, but by a batch of additional units. Here we use concept of incrementalism instead of marginalism and decision will be taken by comparing incremental cost and incremental revenue.

6) Explain following concepts-

1) Variables

A variable is magnitude of interest that can be measured. Variables can be endogenous and exogenous variables. Variables can be independent and dependent.

2) Functions

Function shows existence of relationship between two or more variables. It indicates how the value of one variable depends on the value of another one. It does not give any direction of relation.

3) Equations

An equation specifies the relationship between the dependent and independent variables. It specifies the direction of relation.

4) Graph

Graph is a geometric tool used to express the relationship between variables. It is a pictorial representation of data which shows how two or more sets of data or variables are related to one another.

5) Curves

The functional relationship between the variables specified in the form of equations can be shown by drawing line or outline which gradually deviates from being straight for some or all of its length in the graph.

6) Slopes

Slopes show how fast or at what rate, the dependant variable is changing in response to a change in the independent variable.

INTRODUCTION TO BUSINESS ECONOMICS | FYBCOM Business Economics Chapter 1