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Book summary of business economics
- Economics can be defined as the study of optimum utilisation of scarce resources by individuals, households, organisations, and nations to satisfy their wants and needs. Economics is defined by taking four viewpoints, namely wealth viewpoint, scarcity viewpoint, welfare viewpoint, and growth viewpoint.
- The scope of economics includes various fields, such as public finance, health, welfare, environmental studies, and international area.
- The nature of economics cannot be defined in a single term. It can be considered as science, social science and art.
- Business economics can be defined as an application of economic concepts, theories, and tools for effective decision making in organisations.
- The scope of business economics covers various areas, such as demand analysis and forecasting, cost and benefit analysis, pricing decisions, and profit maximisation. Both economics and business economics are different from each other. In economics the focus is on the optimum utilisation of scarce resources, whereas business economics emphasises on the managerial decision making in organisations.
- Micro economics is a branch of economics wherein economic behaviour of individual organisations or consumers in an economy is studied.
- The branch of economics that deals with economic behaviour of various units combined together for the growth of an economy. (Message not clear)?
- In economics, there are two basic laws, namely law of demand and law of supply.
- Economic laws are used for formulating economic policies in countries as well as organisations
- In economics, the various laws and phenomena are studied under two conditions, namely static and dynamic. In economic static, the factors which are not subject to change are studied, whereas in economic dynamics changes are studied.
- In economics, numerous concepts, theories and tools are used by managers for solving organisational problems and effective decision making.
- Social accounting helps I measuring the impact of business activities of an organisation on community or its stakeholders. It is also known as social auditing and social responsibility accounting.
- GNP can be defined a measure of country’s income which includes market value of all products and services that are produced in a particular year by a country.
- Business cycles can be described as change in business activities due to fluctuations in economic activities over a period of time. It consists of four phases, namely expansion, peak, contraction, and trough.
- Inflation can be defined as the continuous increase in the price level of goods and services in an economy over a period of time.
- Demand refers to the willingness or effective desire of individuals to buy a product supported by their purchasing power.
- Demand for a commodity must include details about the quantity to be purchased, the price at which the commodity is to be purchased, and the time period when the commodity is purchased.
- There are different types of demands, such as price demand, income demand, cross demand, individual demand, market demand, joint demand, composite demand, and direct and derived demand.
- Determinants of demand are the factors that influence the decision of consumers to purchase a commodity or service.
- The quantity demanded for a commodity or service is influenced by various factors, such as price, consumers’ income and preferences, and growth of population.
- Determinants of individual demand are price of a commodity, price of related goods, income of consumers, tastes and preferences of consumers, consumers’ expectations, credit policy, etc.
- Determinants of market demand are size and composition of population, income distribution, climatic factors, and government policy.
- An inverse relationship between the demand and price of a commodity is called the law of demand.
- The law of demand represents a functional relationship between the price and quantity demanded of a commodity or service.
- A demand schedule is a tabular representation of different quantities of commodities that consumers are willing to purchase at specific price and time while other factors are constant. It is of two types, individual demand schedule and marker demand schedule.
- A demand curve is a graphical representation of the law of demand. The demand schedule can be converted into a demand curve by graphically plotting the different combinations of price and quantity demanded of a product.
- An individual demand curve shows different quantities of a commodity which an individual is willing to purchase at all possible prices in a given time period with an assumption that other factors are constant.
- Market demand curve shows different quantities of a commodity that all consumers in a market are willing to purchase at different price levels at a given time period while other factors remain constant.
- Demand function represents the relationship between the quantity demanded for a commodity (dependent variable) and the price of the commodity (independent variable).
- There a few exceptions to the law of demand, such as Giffen goods, Veblen goods, conspicuous necessities, consumers’ ignorance, situations of crisis, and future price expectations.
- Change in quantity demanded can be measured by the movement along the demand curve, while change in demand is measured by shifts in demand curve.
- A shift in demand curve takes place due to changes in other factors, such as change in income, distribution of income, change in consumer’s tastes and preferences, change in the price of related goods, while the price of a commodity remains unchanged.
- The change in the quantity demanded of a product with change in its price, while other factors are at constant is called a movement in demand curve.
- Supply refers to the willingness of a seller to offer a particular quantity of a product in the market for sale at a specified price and time.
- Supply is always referred in terms of price, time, and quantity. It can be of two types: individual supply and market supply.
- The supply of a product is dependent on many factors such as price of the product, cost of production, natural conditions, transportation conditions, and taxation policies.
- The law of supply states that supply decreases with a fall in price and increases with a rise in price, assuming all other factors remain unchanged. Thus, there is direct relationship between supply and price.
- Law of supply is often represented by supply schedule and supply curve.
- A supply schedule is a tabular representation of the quantity of a product supplied by a supplier at different price and time, keeping all other factors constant.
- A supply curve is a graphical representation of the supply schedule. It is classified into two categories: individual supply curve and market supply curve.
- Supply function states the functional relationship between supply and various determinants of supply.
- The law of supply is based on certain assumptions, such as no change in the income of buyers and sellers, no change in the factors of production, and stability of natural factors.
- The law of supply fails under certain cases such as agricultural products, expectation of change in price in the future, and labour supply.
- Change in quantity supplied occurs as a result of rise or fall in product prices while other factors are constant. It is also expressed in terms of expansion or contraction of demand, while Change in supply can be defined as increase or decrease in the supply of a product due to various determinants and is expressed in terms of increase or decrease in demand.
- Market equilibrium is a stage where both the opposite forces, i.e. demand and supply meet. It is expressed as Qd (P) = Qs (P).
- The price at which both demand and supply intersect is known equilibrium price.
- Utility can be defined as a measure of satisfaction received by a consumer on the consumption of a good or service.
- Total utility is defined as the sum of the utility derived by a consumer from different units of a commodity or service consumed at a given period of time.
- Marginal utility is defined as the utility derived from the marginal or additional unit of a commodity consumed by an individual.
- The law of diminishing marginal utility states that as the quantity consumed of a commodity continues to increase, the utility obtained from each successive unit goes on diminishing, assuming that the consumption of all other commodities remains the same.
- According to the ordinal utility approach, utility can be measured in relative terms.
- An indifference curve can be defined as the locus of points each representing a different combination of two substitutes, which yield the same level of utility to a consumer.
- Marginal rate of substitution (MRS) refers to the rate at which one commodity can be substituted for another commodity maintaining the same level of satisfaction.
- A budget line represents various combinations of two commodities, which can be purchased by a consumer at the given income level and market price.
- A change in the consumer’s income or the prices of commodities would result in a shift in the budget line.
- A consumer reaches a state of equilibrium when he/she attains maximum total utility at the given income level and market price of commodities.
- Income effect on consumer’s equilibrium can be defined as the effect caused by changes in consumer’s income on his/her purchases while the prices of commodities remain unchanged.
- When a consumer tends to purchase more units of commodity X and fewer units of commodity Y, it is called substitution effect on consumer’s equilibrium.
- The revealed preference theory states that consumers’ preferences can be revealed by the purchases they make under different income and price circumstances.
- The elasticity of demand is a measure a change in the quantity demanded of a product in response to its determinants, such as price of products.
- There are three types of elasticity of demand, namely price elasticity of demand, income elasticity of demand, and cross elasticity of demand]
- Price elasticity of demand can be defined as a measure of a change in the quantity demanded of a product as a result of a change in the price of the product in the market.
- Price elasticity is classified into five types, namely perfectly elastic demand, perfectly inelastic demand, relatively elastic demand, relatively inelastic demand, unitary elastic demand.
- In order to measure price elasticity, four methods are used namely total outlay method, percentage method, point elasticity method, and arc elasticity method.
- The price elasticity of demand is influenced by various factors, such as relative need for the product, availability of substitute goods, impact of income, and time under consideration.
- Income elasticity of demand can be defined as measure of quantity demanded with respect to the income of consumers.
- The income elasticity of demand is classified into three groups; namely positive income elasticity of demand, negative income elasticity of demand, and zero income elasticity of demand.
- The cross elasticity of demand can be defined as measure of change in the demand for a good as a result of change in the price of related goods.
- Cross elasticity of demand is classified into three groups; namely positive cross elasticity of demand, negative cross elasticity of demand, and zero cross elasticity of demand.
- The advertisement elasticity of demand is a measure of change in the sales of a product with respect to a proportionate change in advertisement expenditure.
- The elasticity of supply is a measure of change in the quantity supplied of a product in response to a change in its price.
- The elasticity of supply is categorised into five types, namely perfectly elastic supply, perfectly inelastic supply, relatively elastic supply, relatively inelastic supply, and unitary elastic supply.
- The elasticity of supply is measured using two methods namely proportionate method and point method
- Demand forecasting can be defined as a process of predicting the future demand for an organisation’s goods or services.
- Demand forecasting helps an organisation to take various business decisions, such as planning the production process, purchasing raw materials, managing funds, and deciding the price of its products.
- Factors affecting demand forecasting are prevailing economic conditions, existing conditions of the industry, existing conditions of the organisation, prevailing market conditions, sociological conditions, psychological conditions, and competitive conditions.
- Demand forecasting methods are broadly categorised into two types qualitative techniques (surveys and opinion polls) and quantitative techniques (time series analysis, smoothing techniques, barometric methods, and econometric methods)
- Regression analysis may be used to establish a relationship between two economic variables.
- The limitations of demand forecasting are a lack of historical sales data, unrealistic assumptions, cost incurred, change in fashion, lack of expertise, and psychological factors.
- The effectiveness of demand forecasting depends on the selection of an appropriate demand forecasting technique.
- The criteria for the selection of demand forecasting technique are accuracy, timeliness, affordability, ease of interpretation, flexibility, ease in using available data, ease of use, and ease of implementation, etc.
- Production is an act of creating value or utility that can satisfy the wants of individuals. The production process is dependent on a number of inputs, such as raw materials, labour, capital and technology. These inputs are also known as factors of production.
- Production possibility curve can be defined as a graph that represents different combinations of quantities of two goods that can be produced by an economy, under the condition of limited available resources.
- Production function represents the maximum output that an organisation can attain with the given combinations of factors of production (land, labour, capital and enterprise) in a particular time period with the given technology.
- On the basis of the time period, production function can be classified in two types, namely, short-run production function and longrun production function.
- In short-run, the supply of capital is inelastic (except for individual organisation in perfect competition). This implies that capital is constant. In such a case, the organisation only increases labour to increase the level of production.
- In the long-run, the organisation can increase labour and capital both for increasing the level of production.
- The law of production studied under short-run production is called the law of variable proportions or law of diminishing marginal returns, whereas the law of production studied under long-run production function is called the law of returns to scale.
- The relationships between changing input and output are studied in the laws of returns to scale, which is based on production function and the isoquant curve.
- A producer can attain equilibrium by applying the least cost combination of factors of production to attain maximum profit. Therefore, he/she needs to decide the appropriate combination among different combinations of factors of production to get the maximum profit at the least cost.
- Law of returns can be classified into three categories, namely, increasing returns to scale, constant returns to scale and diminishing returns to scale.
- Different types of production function are Cobb-Douglas Production Function, Leontief Production Function and CES Production Function.
- Inputs produced multiplied by their respective prices, when added together constitute the money value of these inputs referred to as the cost of production.
- The different types of cost concepts in an organisation are opportunity costs, accounting costs, economic costs, business costs, full costs, explicit costs, implicit costs, fixed costs, variable costs and incremental costs.
- In the short-run period, an organisation cannot change the fixed factors of production, while the variable costs change with the level of output.
- Long-run costs are incurred by a firm when production levels change over time and all the factors of production are variable.
- Economies of scale result in cost saving for a firm as the same level of inputs yields a higher level of output.
- Diseconomies of scale refer to the disadvantages that arise due to the expansion of a firm’s capacity leading to a rise in the average cost of production.
- Economies of scope refer to the decrease in the average total cost of a firm due to the production of a wider variety of goods or services.
- Revenue is the total amount of money received by an organisation in return of the goods sold or services provided during a given time period.
- The different types of revenue are total revenue, average revenue and marginal revenue.
- Market can be defined as a system, wherein buyers and sellers interact to establish a price and quantity of a product for making transactions.
- Markets are generally classified on the basis of geographical area and degree of competition.
- Market structure is a group of industries characterised by the number of buyers and sellers in the market, level and type of competition, degree of differentiation in products and entry and exit of organisations from the market.
- Market structure is classified into three categories, namely, pure competition, perfect competition and imperfect competition.
- Under pure competition, there is large number of sellers offering homogenous products to equal population of buyers.
- Under perfect competition various firms exist offering identical products for sale along with a large number of buyers who are well aware of the prices.
- Under imperfect competition, there are three categories: monopolistic competition, oligopoly and monopoly.
- In monopolistic competition, a large number of sellers exist in the market offering heterogeneous products for sale to buyers.
- In oligopoly, few sellers are present in the market dealing either in homogenous or differentiated products. Organisations form cartel under oligopoly to make decisions for attaining high profits.
- Under monopoly, a single producer or seller has a control on the entire market.
- Profit maximisation is a long-run or short-run process, wherein price and output levels are determined to increase the profits.
- Market power can be defined as an organisation’s ability to increase the market price of a good or service over marginal cost to achieve profits. It is also considered as a measure of the degree of control an organisation has over the price and output of a product in the market.
- The determinants of market power mainly include economies of scale, governmental regulations, control of raw materials and customer loyalty.
- A market failure can be defined as an inability of markets in allocating resource efficiencies. In a market failure, equilibrium between supply and demand of products is not reached.
- There are mainly four causes of market failures, namely externalities, public goods, asymmetric information, and imperfect competition.
- Price regulations can be described as governmental measures to decide the quantities of a commodity to be sold at specified price both in the retail market and at other stages in the production process.
- Commonly two price regulations are used namely price ceiling and price floors.
- A price ceiling is the price that has been set by the government below the equilibrium price and cannot be allowed to rise above that.
- A price floor occurs when the price is set above the equilibrium price and is not allowed to fall.
- Government uses various methods to regulate monopoly, such as the price capping method, mergers and acquisitions, and rate of return method.
- As the firm retains the benefits of cost reduction under the price cap regulation, it receives dominant efficiency incentives.
- A price floor encourages firms to increase their output beyond the consumers’ demand.
Important Keywords
- Capital resources: These refer to the assets like tools, machines and factories, utilised in the production of goods or services as part of a business operation.
- Cartel: It is a group of organisations or countries that collectively attempts to influence the prices by controlling production and marketing.
- Competition: It can be defined as a type of rivalry in which a seller makes an attempt at obtaining the same profits, market share, quality, etc., sought by other sellers.
- Consumer equilibrium: It refers to the point at which a consumer attains optimum utility from goods and services purchased with the given income and market price.
- Consumption: It is a process of using the goods and services by the public.
- Cost budget: It refers to the allocation of different costs to individual business activities, such as allocation of administrative cost, financing cost, production cost, etc.
- Cost Price: It refers to the price at which the product is bought from a manufacturer by sellers and retailers.
- Deadweight loss: It refers to a loss of economic efficiency with respect to the utility for consumers/producers such that the optimal efficiency of a firm is not achieved.
- Demonstration effect: It refers to the tendency of people to purchase influence of other people.
- Dependent variable: It refers to the output or effect of an experiment or modelling test. A dependent variable relies on other factors and corresponds to the changes in other factors.
- Disequilibrium state of economy: It is the state of economy wherein market forces of supply and demand do not reach a balance and there exist a strong possibility of change.
- Economic efficiency: It refers to the use of organisations’ resources to maximise the production of goods and services.
- Economic variable: It is a measure to determine the functioning of an economy. Examples of economic variables include population, poverty rate, inflation, etc.
- Economies of scale: It is the cost advantages, which an organisation derives as a result of increased size, output or scale of operations.
- Elasticity of demand: It is a measure of responsiveness of the quantity demanded for a product with respect to a change in its price.
- Elasticity of supply: It is a measure of responsiveness of the quantity supplied for a product with respect to a change in its price.
- Equilibrium: It is a stage where both opposite forces, i.e. demand and supply meet.
- Factors of production: These are inputs used in the production of goods or services in an attempt to earn an economic profit. These factors are land, labour, capital, and enterprise.
- Fast Moving Consumer Goods (FMCG): These are goods that are sold frequently at relatively low prices. Examples are cold drinks, biscuits, etc.
- Forecasting: It is a process of predicting the future trends based on the analysis of past and present trends in the market.
- Foreign exchange: It is an international trading system, wherein local currencies are exchanged with foreign currencies.
- Homogeneity: It refers to a state or quality of substances of being similar in composition, characteristics, and state, etc.
- Independent variable: It refers to the inputs or causes in an experiment or modelling test. An independent variable does not depend on any other factor.
- Inferior goods: These are goods whose demand declines when an individual’s income increases.
- Iso-cost line: The line that represents the price at which various factors of production are purchased by an entrepreneur.
- Isoquant: It depicts equal quantity of total product that can be produced with different combinations of capital and labour.
- Labour resources: These refer to the human capital utilised in the production of goods or services. This includes both the efforts and skills required to produce a commodity.
- Long-run period: It refers to the conceptual time period in which there are no fixed factors of production with respect to the changes in output level.
- Manufacturers’ goods: These goods are used for the production of other complex products, such as leather (which is used in the manufacturing of shoes and handbags).
- Market price: It refers to the price at which a product is available for sale in the market.
- Mergers and acquisitions: It is a term used to denote the consolidation of organisations. A merger is an amalgamation of two organisations to form a new organisation whereas; an acquisition is the procurement of one organisation by another without the formation of a new organisation.
- Monopolist: It can be an individual or organisation that controls the production and price of a good or service in the market.
- MRTS: It is a rate at which one input can be substituted by the other input.
- Normal profit: Normal profit is the minimum earning, which a firm must receive to remain in its present occupation. It is the minimum level of profit required by an organisation to remain competitive in the market.
- Over-employment: It refers to a situation where individuals are inadequately employed with respect to long working hours and greater output. The situation arises due to the inadequacy of labour compared to the labour demand.
- Perfect Competition: In this market, there are a large number of buyers and sellers in the market. These buyers and sellers cannot influence the market price by increasing or decreasing their purchases or output, respectively.
- Price cap: It refers to a form of price ceiling limiting the price an organisation can charge for its product or services.
- Production Function: It implies functional relationship between inputs and output of production.
- Profit maximisation: It is a process in which organisations determine the best output and price levels to maximise its profits/returns.
- Rate of consumption: It is the quantity of goods and services that are used by consumers over a period of time and measurable.
- Rate of return: It refers to the profit on an investment expressed as a percentage of the total amount invested.
- Return on Investment (ROI): It is a performance measure that helps in evaluating and comparing the efficiency of an investment with other investments.
- Semi-finished goods: These goods are used as inputs in the production of other goods, such as consumer goods.
- Short-run period: It refers to the conceptual time period in which at least one factor of production is fixed in amount, while others are variable.
- Sponsorship: It refers to a form of marketing in which a government or private corporation pays for all or some of the costs associated with a given project.
- Supply curve: It is a graphical representation of the supply schedule that states the law of supply.
- Transitivity: It refers to the property through which preferences are transferred logically. According to this property, if a product A is preferred to product B, and product B is preferred to product C, then product A is also preferred to product C.
- Under-employment: It refers to a situation where an individual is employed but not in the desired capacity, whether in terms of compensation, work-hours, or level of skills and experience.
- Unemployment: It is an economic condition where individuals constantly seek jobs and do not get full time jobs. It also indicates the health of an economy.
- Utility: It refers to the ability of a good or service to satisfy consumers’ needs or wants.
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