Economics of Business

1. Economics for Business
Wealth
Economics Welfare
scarcity
Micro Economics
Study of the actions of individual units and small groups of individuals.
Eg:- Particular firms, Particular households, individual prices, wages, income.
-It is a microscopic study of the economy
-We study the interrelationships of individual households and individual firm
and individual firm and individual industries etc.
Scope
-How resources are allocated to production of particular goods &
services – on relative prices
- allocation of resources, determines, what, how and how much
-Thus it is a study of price theory
-Price of particular commodity

2. Wages – for a particular labour
Interest – for capital
Rent – for Land
Profit – for a particular entrepreneur
Price determination & allocation of resources - studied in three
stages
i) Equilibrium of individual consumers and producers
- price is given - buy that much of a commodity which maximizes
his utility.
ii) Equilibrium of a single market
- price is determined by buyers & sellers
iii) Simultaneous, equilibrium of all markets-
- determined by aggregated demand & aggregated supply

3. Importance
1) To understand the working of the economy
2) To provide tools for Economic Policies
3) Helpful in efficient employment of resources
4) Help to business executives
5) Helpful in understanding the problems of taxation
6) Helpful in international trade
7) To examine the condition of Economic welfare
8) The basis for prediction
9) Construction and use of models
Limitations
1) Based on unrealistic assumption of full employment
2) Based on Laissez faire
3) Studies only the part and neglects the whole
4) Not only adequate, but also misleading

4. Macro Economics
•Study of aggregates covering the entire economy
Eg:- Total employment, unemployment, national input, national output,
total consumption, aggregate supply, demand, general price level etc.
• It is also known as the theory of income and employment.
• Concerned with problem of unemployment, economic fluctuation,
inflation, instability, stagnation, international trade, economic growth.
Scope & Importance
1.To understand the working of the economy
2.In economic policies
3.In general unemployment
4.In National Income
5.In Economic growth
6.In monetary problem
7.In Business cycles
8.For understanding the behaviour of individual units

5. Limitations
1. Fallacy of composition
2. To regard aggregates as homogeneous
3. Aggregate variables may not be an important necessity
4. Indiscriminate use of macro economics misleading
5. Statistical and conceptual difficulties.

6. Distinction between Micro & Macro Economics
Broadly - Micro….. is individualistic
- Macro….. is aggregative
1. Difference in Nature
2. “ in Methodology
3. “ in Economic Variables
4. “ in the field of interest
5. “ outlook and scope
6. Demarcation in area of study

7. Subject matter & scope
Micro economics
Pricing
(Theory of value)
Distribution
(factor pricing)
Welfare
(Welfare Economics)
Theory
of
Demand
Theory
of
Product
ion
Theory
of
Pricing
General
Theory of
Distribution
Theories
of
Rent Wages Interest Profit

8. Micro – Macro Paradoxes
- Paradox mean an absurd or self contradictory eg:- behaviour of an
individual when he is alone and when he is in a group
- What is true of an individual parts is not true of the whole of it.
1) Paradox of thrift
2) Paradox pertaining cash holding
3) Paradox of wage employment
Variables & Differences
Macro economics aggregates are called macro economic variables
Stock variables
Micro economic variables
Flow variables
Stock variables – measured with reference to a point of time
eg. 31st march 2010 eg. No. of books in a library, water stored in tank
Flow variables - per unit of time, per hour, per week

9. Stock variables Flow variables
Stock of capital Gross national product
Money supply Consumption
expenditure
Business Inventories Savings and
Investments
Accumulated savings Exports & Imports
Labour Force Government Revenue
Total employment Government
Expenditure

10. Equilibrium & Disequilibrium
-widely used concepts
-In- micro - partial equilibrium
-In macro - general
-Equilibrium - to a position in which opposite economic forces are in
balance and there is no inbuilt tendency to deviate from the path
Equilibrium at macro level means – aggregate demand = aggregate
supply and Total Investment = Total saving
Disequilibrium: opposite forces (demand & supply) are in imbalance
why ? -Because – the working of a market economy is governed by such
a large number of interrelated and interacting forces. Hence a continuous
balance between market forces – demand & supply cannot be expected –
Reason – Economic activities are undertaken by millions and millions of
decision makers – consumers, producers, workers etc.

11. Partial equilibrium analysis
-when only part of the economy is the analyzed in isolation of the rest of
the economy –
-Widely used in micro economic analysis
-It is based on – ‘Cetris Paribus’ – other things being equal.
eg. Determination of car price, supply on the basis of demand & supply
We take other parameters as constant – eg. Public transport, petrol price,
income, interest rate etc.
General Equilibrium Analysis
-used to find out the equilibrium of the economic system as a whole
- Deals with the inter relationship and interdependence between the
various elements of the economy.
-Takes a comprehensive and realistic view of the economic system
-It is of immense importance in identifying and explaining the causes and
effects of any economic disturbances and in the formation of growth,
employment and income determination theories.

12. Business Environment
It refers to the sum of all factors - economical, political, social and
cultural – which are external to an beyond the control of the business
enterprises and their management.
-It furnishes the macro context, while the business firm is a macro –unit.
Environment
Local National International Market Non Market
-When business environment is influenced by market forces- then market
environment
-When influenced by custom, traditions, labour, then non market
environment

13. Business Environment is influenced by
Economic Non economic
Monetary Tax Industrial Political Social Cultural Historical
Policies Policies Policies
-Highly useful to the manager –
-Helps him to know which factors are favouring and which are not in his
business
-If he identifies the bad elements, he will adopt alternative course of
action.
Techniques of Scanning business Environment
Changing the economic activity Change the decision
making process

14. Components of business environment
- Any business unit is in constant interaction with its environment
They are :-
1) Micro Environment – Eg:- Suppliers, customers, competitors,
workforce etc.
2) Macro Environment – Eg:- Economic environment, Natural
environment, Political environment, Demographic environment,
International environment,
- No comprehensive definition
‘A business environment is the sum of those inputs to an organisation
which are under the control of other organisation or interact groups or
are influenced by interaction of several groups, such as the economy’
Paire and Anderson

15. Micro environment
- Those forces in the immediate vicinity of an organisation that influence
its functioning. Eg. Suppliers, marketing, intermediaries, competitors,
customers and the public
- They affect different firms in different ways.
1) Suppliers
2) Customers
3) Labour
4) Business partners
5) Competitors
Share of vallets Generic Product Brand
competition variants Competitors
6) Regulatory agencies

16. Emerging Indian Scenario (New Economic Policies)
-Started by Rajeev Gandhi – “ The public sector has entered into many
areas where it should not be… we shall therefore open the economy to
the private sector in several areas hitherto restricted to it”
-But steps adhoc & half - hearted
-Started in 1991
Liberalisation
Aims Globalisation
Privatisation
Background
For 40 years - planned growth followed
Features
1) Public sector- dominant role – main instrument of growth
2) Fiscal policy – it mobilized resources from the private sector to
finance development Programme & public investment in infrastructure.

17. 3) Monetary policy – to regulate financial flows in accordance with the
needs of the industry and to keep inflation under control.
4) Foreign Trade Policy - to protect domestic industry and keep trade
balance in manageable limits
-It was noticed in 1980’s that
a) Excess consumption & expenditure over revenue - so heavy
borrowing
b) Growing ineffiency in the use of resources
c) Over protection to industry
d) Mismanagement of firms and the economy
e) Mounting losses of public sector enterprises
f) Poor technological development, shortage of foreign exchange,
imprudent borrowings from abroad.
Economic Reforms – introduced on a model scale
- but adhoc & half hearted

18. Economy In deep crises
1) Low foreign exchange
2) National debt burden – 60% of GNP in 1991
3) Inflation – Gulf war, hike in administrative prices excess liquidity –
average rate 12 %
Liberalization
- Relaxation of previous governments’ restrictions in areas of social and
economic policies
- Free the economy from licence – permit – control raj
- Aim - to save the entrepreneur from unnecessary and irksome controls
- Dismantled the regime of industrial licensing and control except for a
set of 18 industries
- At present only 6 industries

19. Globalisation
- Integrating the domestic economy with the rest of the world
- Aims at treating the entire world as one village
- Four parameters
1) Reduction of trade barriers - free flow of goods & services between
nation
2) Free flow of capital
3) Free flow of technology
4) Free movement of labour
Following measures are taken
1) Reduction of import duties
2) Encouragement of foreign investment
3) Encouragement of foreign technology

20. Privatisation
Refers to the transfer of assets or services, functions from public to private
ownership or control and the opening the hitherto closed areas to private
sector entry.
Three forms
a Total denationalization
1) Ownership measures Joint Venture
Liquidation
Workers’ cooperation
Decentralisation pattern
2)Organisation measures leasing
Restructuring
3) Operational measures

21. Aims of LPG
1) To achieve high rate of growth and Per Capita income
2) Full employment
3) Self reliance
4) To reduce inequality of income and wealth
5) To reduce the number of people living below the poverty line
6) To develop a pattern of society based on equality and absence of
exploitation
Problems in the operation of the public sector and the regulatory frame work
1) Excessive bureaucratic controls acted as shackles on growth
2) Over staffing of the public sector
3) Low return on investment in public sector
4) Poor work ethic in public sector a) excessive job security
b) No incentives
5) Entry of public sector in unnecessary areas
6) Huge loss in PSUs – therefore LPG a panacea.