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

 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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 Efficiency:
it denotes the most effective use of a societys resources
in satisfying peoples 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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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.

Dr. 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

 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..

Dr. Mohamed Riyazh Khan, SNS college of Engg

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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 How to produce?

Although the rich countries use advance technology in

their production of good and services, in fact most of
the UDCs 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.
Dr. Mohamed Riyazh Khan, SNS college of Engg
 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

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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?

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 Dr. Mohamed Riyazh Khan, 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 Bto F, we are transferring labour, machine

and land from gun industry to butter and can hereby increase
butter production.
Production Possibilities Curve (Frontier)

15 .A
.B

12
.C

.D .I
Guns 9

.M
6
.E
3

0 .F
1 2 3 4 5

Butter
Dr. Mohamed Riyazh Khan, SNS college of Engg
 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.
Dr. Mohamed Riyazh Khan, SNS college of Engg
Poor Nations High-income nation

Luxury .B
Good

.A
.A

Necessary goods

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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.
Dr. Mohamed Riyazh Khan, SNS college of Engg
 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).

Dr. Mohamed Riyazh Khan, SNS college of Engg

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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

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
Dr. Mohamed Riyazh Khan, SNS college of Engg
 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.
Dr. Mohamed Riyazh Khan, SNS college of Engg
 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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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 service
2. How goods services are distributed among the
people, and
3. How efficiently they are distributed.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 Important

1.Individual Behaviour Analysis

2. Resource allocation
3. Price Mechanisation (on basic of demand and supply)
4. Economic Policy
5. Demand, supply, and equilibrium
6. Costs of production
7. Consumer demand

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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

Dr. Mohamed Riyazh Khan, SNS college of Engg

Difference Between Micro & Macro

Difference Micro Macro

Origin Study on: Individual and Small Group. Study on: Aggregate, output
Particular Household and national output.

Objective Demand side is to maximize utility . Full employment, Price stability,

Supply side is to minimize profit and cost. Eco growth and BOP.

Driving Force Price mechanism which operates with the National Income, output &
help of demand & supply forces. employment determined
aggregate demand &supply.

Time element Equilibrium conditions is analysed at a Its based on time lags, rates of
particular period. Its considered as a change.
static analysis.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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.
Dr. Mohamed Riyazh Khan, SNS college of Engg
 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 money
2. Provide place for market
3. Generate of Employment
4. Supply versus Demand Adjustment

Dr. Mohamed Riyazh Khan, SNS college of Engg

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.
Dr. Mohamed Riyazh Khan, SNS college of Engg
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.

Dr. 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,
without there being any compensation for the losing
party.

Externalities are an important consideration in cost-

benefit analysis.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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)

Dr. Mohamed Riyazh Khan, SNS college of Engg

 Price
S
External benefit
D1
D B D1- is external benefit.
P1
a
P2

Q Q1 Quantity
Dr. Mohamed Riyazh Khan, SNS college of Engg
 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.

Dr. Mohamed Riyazh Khan, SNS college of Engg

 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
Dr. Mohamed Riyazh Khan, SNS college of Engg
Dr. Mohamed Riyazh Khan, SNS college of Engg