Business Economics

Kedar Subramanian Asst. Prof, MPSTME.

Unit 1 : Introduction to Economics

Economics is the study of how societies use scarce

resources to produce valuable commodities and distribute them among different people. Scarcity is one in which goods are limited relative to desires. (needs & wants).Commodities include both physical goods as well as services. Ultimate goal of economists is to improve the living conditions of people in their everyday lives is to solve the three problems of an economic organisation
WHAT commodities to produce and in what quantity. HOW these commodities are to be made or provided. FOR WHOM are these commodities provided. i.e. who

should receive these goods.

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Economics Definition Revisited

Economics is the study of how societies

(ECONOMIC ORGANISATION) use scarce resources (RELATIVE TO NEEDS & WANTS) to produce valuable commodities (WHAT GOODS & SERVICES) and distribute them among different people. (FOR WHOM)
Types of Economic Systems which are prevalent :
Command Economy

Mixed Economy

Market Economy

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Command Economy Characteristics

The GOVERNMENT owns most of the means of

production. (land and capital). The GOVERNMENT owns and directs the operation of enterprises in most industries. The GOVERNMENT is the employer of most workers and tells them how to do their jobs. The GOVERNMENT decides how output of society is to be divided among different goods and services.

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Market Economy Characteristics

INDIVIDUALS and PRIVATE FIRMS make the

major decisions about production and consumption. WHAT goods to produce : That which yields highest profits. HOW to produce : Using techniques which are least costly. FOR WHOM to produce : Based on consumption demand of goods determined by individual preferences. Mixed Economy is a combination of role played by both GOVERNMENT as well as INDIVIDUALS and PRIVATE FIRMS in Business Economics 8/18/2012 addressing the 3 problems of economic

Related Concepts : Capitalism

Also called Free Market Economy or Free

Enterprise Economy. An economic system, dominant in the Western world since the breakup of feudalism, in which most of the means of production are privately owned and production is guided and income distributed largely through the operation of markets. (http://www.britannica.com)
Capitalism is a social system based on the
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principle of individual rights. (http://www.capitalism.org/)

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Related Concepts : Socialism

System of social organization in which private

property and the distribution of income are subject to social control; also, the political movements aimed at putting that system into practice. (http://www.britannica.com)
A theory or system of social organization that

advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the Business Economics community as a

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Related Concepts : Communism

The political and economic doctrine that aims to

replace private property and a profit-based economy with public ownership and communal control of at least the major means of production (e.g., mines, mills, and factories) and the natural resources of a society. Communism is thus a form of socialisma higher and more advanced form, according to its advocates. Exactly how communism differs from socialism has long been a matter of debate, but the distinction rests largely on the communists adherence to the revolutionary socialism of Karl Business Economics 8/18/2012 Marx.

Inputs & Outputs of an Economy

Inputs are commodities or services used to produce

goods and services. Inputs are also called FACTORS OF PRODUCTION. Outputs are various useful g + s that result from production processes that are either consumed or employed in further production. The 3 Factors of Production are as follows :
Land : Used more generally to refer to all NATURAL RESOURCES which are broadly divided into ENERGY and NON-ENERGY resources. 2. Labor : Refer to human capital and skills of labor. 3. Capital : Refer to durable goods of an economy such as machines, roads, computers, hammers, trucks, steel mills, automobiles, washing machines, buildings, etc. Business Economics 8/18/2012
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Opportunity Cost and Efficiency

How much the decision will cost in terms of forgone

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opportunities is the forgone opportunity cost of the decision. OR Opportunity cost of a decision is the value of the good or service forgone. Efficiency : It denotes the most effective use of a societys resources in satisfying peoples wants & needs. Production Efficiency : It occurs when an economy cannot produce more of one good without producing less of another good. Substitution is the law of life in a full-employment economy. To Ponder : We say that an economy is producing efficiently when it cannot make anyone economically Business Economics better off without making someone else worse off. 8/18/2012

Production Possibility Frontier (PPF)

It shows the maximum amount of production that

can be obtained by an economy, given its technological knowledge & quantity of inputs available.
PPF represents the menu of goods and services

available to society.

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Production Possibility Frontier (PPF)

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Production Possibility Frontier (PPF)

In the below diagram Butter broadly represent

Essentials and Guns broadly represent NonEssentials.

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Production Possibility Frontier (PPF)

In the above PPF, U represent an inefficient

economy. i.e. an economy that has not attained full production efficiency. I represent an unfeasible or unattainable production efficiency.

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Economic Growth and PPF

Diagram (a) represents a Poor Nation and

Diagram (b) represents a High-Income Nation. Observe the slope of the graph for a Poor Nation as compared to that of an H-I Nation. It indicates that the poor nation uses almost all its resources for Necessities and enjoy few comforts. A H-I Nation expands its food consumption LITTLE compared to its increased consumption of luxuries.

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Business Economics, SPTM, 2009

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Economic Growth and PPF..

Countries that invest heavily i.e. sacrifice their

current consumption for creating more future consumption expand their PPF. Country 1 : Does not invest for future, rather merely replace existing machines. Country 2 : Makes a modest sacrifice of current consumption and invests modestly. Country 3 : Sacrifices a great deal of current consumption and invests heavily.

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