UNIT – 1 INTRODUCTION ECONOMIC ANALYSIS FOR BUSINESS Dr. A. Mohamed Riyazh Khan DoMS, SNS. College of Engg.

UNIT – 1 INTRODUCTIONECONOMIC ANALYSIS FOR BUSINESS

Dr. A. Mohamed Riyazh Khan

DoMS,

SNS. College of Engg.

Dr. Mohamed Riyazh Khan, SNS college of Engg

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


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


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)


Unlimited wants reflect human nature. The limitation of resources is imposed upon us by nature. Therefore, unlimited wants competing for limited resources creates the basic economic problem scarcity.

Unlimited wants and limited resources has been called economic problem.


Efficiency: it denotes the most effective use of a

society’s resources in satisfying people’s want and needs.

When the maximum number of goods and services are produced with a given limited level of inputs.

It means lowest amount of inputs to create the greatest amount of outputs.


Economic efficiency means the best way while minimizing waste and inefficiency.

In terms of production, goods are produced at their

lowest possible cost, as are the variable inputs of production.


Fundamental problems of Economics

Three fundamental Economic Problems

What to produce

How to produce?

Whom to produce?


Basically three problems occurs in organisation.

1. What to do?2. 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.


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.

In advance countries there are using robots are being used in factories, hospital and office.

If you use modern machinery it will create unemployment problem.


Most of the poor country using labour force due to abundant level of human resource and they give the employment.

Rich country- using technology oriented Poor country- using labour-intensive

technology


Whom to produce?

The rich people think about, who have money and are willing to purchase them. Here there in no hesitation to purchase.

The rich have several cars, mansions and elegant clothes and jewelleries.

Their children are studying foreign university.

They can buy all goods and services that money can buy


The poorest, purchasing goods and services it based on purchasing power.

Some people do not eat three times a day.

First we can identify who is our target group?


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, subject to limited availability of resources.

The alternative combination of two goods that an economy can produce with given resources and technology.


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.


According to Lipsey, “ the production possibility curve is that curve shows the possible combinations of two goods that can be produced by an economy, given available resource and technology”

Two economic goods, guns and butter. The butter stands for civilian gun for military purpose.


Assumption of Production Possibility Curve

1. Resources are used to produce one or both of only two goods.

2. The quantities of labour, capital, land and entrepreneur resources do not change.

3. The maximum possible production is obtained from resource inputs.


PPF SCHEDULE

As we go from A to B…to F, we are transferring labour, machine and land from gun industry to butter and can hereby increase butter production.

Possibilities Butter Guns

A 0 15

B 1 14

C 2 12

D 3 9

E 4 5

F 5 0

Production Possibilities Curve (Frontier)

.I

.E

.F

Butter

0

15

12

9

6

3

1 2 3 4 5

.A.B

.C

.D

.M

Guns



A schedule of possibilities is given in table combination F shows the extreme, where A depicts the opposite extreme, where all resource go into guns. In between at E,D,C and B increasing amounts of butter are given up in return for more guns.

Points outside the frontier “I” are infeasible or unattainable.

Any point inside the curve, such as “M” indicates that the economy has not attained productive efficiency.


. A

Luxury . BGood

.A

Necessary goods

Poor Nations High-income nation


The first curve shows, it must devote almost all its resources to food and enjoy few comforts.

The second curve shows, growth of inputs and technological change shift out the PPF. With economic growth, a nation moves from A to B, expanding its food consumption little compare with its increase luxury consumption.


Economic Efficiency

The term economic efficiency refers to the process by which resources are maximized to generate more productive value than they use,

Every resource is optimally allocated to serve each person in the best way while minimising waste.

the term economic efficiency refers to the use of resources so as to maximize the production of goods and services.


Productive Efficiency

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


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.


Economic Growth & Stability

Economic growth is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.

Factors: 1. Growth of Per capita income 2. The rate of return to capital 3. Providing full employment 4. Capital Formation 5. Technological change and Innovation


Economic Stability: An economy with fairly

constant output growth and low and stable inflation would be considered economically stable.

Spending and tax rates (fiscal policy) or managing the money supply and controlling the use of credit (monetary policy)

1. Balance between full employment and price level stability.


2. High growth: with higher growth, the govt will receive more tax revenue- people earn more and so pay more income tax.

Modify the monetary policy and Fiscal policy.

Accelerate the Productive expenditure (Develop the infrastructure, industry and control the deflation and inflation.


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.

Focus:1. How resource are allocated to the production

of particular goods and service2. How goods services are distributed among

the people, and 3. How efficiently they are distributed.


Definition of micro economics

According to Prof. K.E. Boulding, “Micro-economics is the study of particular firm, particular household, individual price, wages, incomes, industries and particular commodities.”


Important

1.Individual Behaviour Analysis2. Resource allocation3. Price Mechanisation (on basic of demand

and supply) 4. Economic Policy 5. Demand, supply, and equilibrium6. Costs of production7. Consumer demand


Macro Economics

Macro economics is the study of aggregates covering the entire economy, such as total employment, national income, output, total investment, total saving, aggregate supply, aggregate demand and general price level.

It is concerned with the problems of unemployment, economic fluctuations, inflation or deflation, international trade and economic growth.


Important of Macro economics

1. Determination of income and employment

2. Determination of general level of prices 3. Economic growth 4. Macro-economic and Business cycle 5. International Trade 6. Unemployment 7. Macro economic policy 8. Global Economic system


Difference Between Micro & Macro

Difference Micro Macro

Origin Study on: Individual and Small Group. Particular Household

Study on: Aggregate, output and national output.

Objective Demand side is to maximize utility . Supply side is to minimize profit and cost.

Full employment, Price stability, Eco growth and BOP.

Driving Force

Price mechanism which operates with the help of demand & supply forces.

National Income, output & employment determined aggregate demand &supply.

Time element

Equilibrium conditions is analysed at a particular period. Its considered as a static analysis.

Its based on time lags, rates of change.


Role of Market and Government

What is Market? it a mechanism through which buyers and

sellers interact to determine prices and exchange good & service.

Market Equilibrium: A market equilibrium represents a balance

among all the different buyers and sellers. Depending upon the price, household and firms all want to buy or sell different quantities.


Government and market in a country in many ways are interrelated and interdependent on each other.

Role of Market:1. Transaction of product. Service and

money2. Provide place for market3. Generate of Employment4. Supply versus Demand Adjustment


Role of Govt..

Govt.. Plays a crucial role in promoting rapid economic growth.

1. Regulatory role of govt.. 2. Direct Administration 3. Indirect controls (fiscal Monetary) 4. Encourage saving & investment 5. Encourage investment from abroad (FDI,

portfolio investment) 6. Promote health and nutrition.


Role of Govt.. And Market

Both the things are important for market equilibrium.

Govt.. Focus for regulate the market. Market equilibrium is required (Demand &

Supply) Role of the govt.. is levied taxes, regulated

the policy, accelerate the business growth and stabilized the economic growth.


Externalities

Externalities are a loss or gain in the welfare of one party resulting from an activity of another party, without there being any compensation for the losing party.

Externalities are an important consideration in cost-benefit analysis.


They are defined economist as third party effects of any transaction between a consumer and a firm. Externalities can either be positive or negative.

Positive Externalities: The govt.. Invested in the provision of clean

piped water. This had an obvious direct benefit. (contribute better standards of health, less illness and disease, and greater productivity)


Price

S External benefit

D1

D B D1- is external benefit.

P1

a

P2

Q Q1 Quantity


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.

Smoking tobacco and a range of serious diseases.

A negative good, the cost to society is greater than the cost consumer is paying for it.


Price

S1 S

D

External Costs In other words , 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


END

Any Query ???

UNIT – 1 INTRODUCTION ECONOMIC ANALYSIS FOR BUSINESS Dr. A. Mohamed Riyazh Khan DoMS, SNS. College of Engg.

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