business economics chapter 1 Nature and scope of business economics

fundamental facts 

• unlimited wants 
• relatively scarce resources (it is also known as the subject matter of economics )

(a scarce resource) --------------- (goods and services) ----- (to satisfy the most pressing wants)

• the word 'economics' comes from ''the Greek language'' the word that is ''OIKONOMIA'' (means household)
• first modern books of economics written by ''adam smith'' that is  "The Wealth of Nations,"
• business economics = economic theory + business practises it is called business economics (it is also known as marginal economy or applied economy)

scope of economy

1. micro-economy
2. macro-economy

micro-economy

• product pricing
• factor pricing
• consumer behaviour 
• location of industry
• firms behaviour
• the economic condition of a section of people

macro-economy

• national income, national output
• general price level, interest rate 
• the external value of the currency
• balance of trade, the balance of payment
• overall savings and investments 
• level of employment
• economic growth

nature of business economics

1. the economy as a science (study about applied theory, cause and effect)
2. the economy as an art (element of creativity involved )
3. based on microanalysis
4. based on macro analysis
5. use of the theory of the market and private enterprise
6. pragmatic in approach in nature 
7. interdisciplinary
8.  it is normative in nature 

difference between positive and normative

Normative 

1. The word norm. norm means rules and regulation
2. what ought to be 
3. welfare consideration
4. value judgement
5. not in a scientific manner

positive

1. it is pure science (cause and effect relationship)
2. pure science 
3. descriptive in nature 
4. scientific in manner 
5. what is

application of business economics 

micro-economics

• applied to operational or internal issues 
• choice of business its size and product decision, technique 
• demand analysis and forecasting 
• product and cost analysis 
• inventory management 
• market structure and pricing policy 
• allocation of resources 
• product and risk analysis

macro-economics

• applied to environmental or external issues
• type of ecosystem
• stage of the business cycle
• the social and political environment
• socio eco organisation (trade union)
• working in the financial sector and capital market

                                            unit-2

                       the central problem of the economic

the resource is scared and limited, wants-unlimited infinite competing

central problems 

1. what to produce = what type of goods and services are produced in the economy
2. how to produce = (a) capital intensive technique (b) labour-intensive technique
3. for whom to produce = how much of particular goods or services shall be distributed to a particular individual or to different-different people in the society.
4. further provision for economics growth

limited sources ---- scarcity of goods and services --- unlimited wants

that are economizing problem (must make a choice)

what is the economics system 

economics system means that the sum of the total arrangements for the production and distribution of product and services in the society.

classification of economics

there are three types of the economy that are given below.

1. capitalistic economy 
2. socialistic economy
3. mixed economy

capitalist economy  = it is also known as the free market /market economy /free-market economy and we also say Laissez fare economy.

features of the capitalist economy (profit maximization is the main point of the capitalist economy)

1. P- the profit motive 
2. P- private ownership
3. C- consumer sovereignty (consumer king )
4. C- competition (very important feature)
5. F- freedom of enterprise (economic activity )
6. F- freedom of economic choice 
7. G- government interference (nil or minimum)  

how capitalistic economy solve their basic problems 

• what to produce - consumer decides what to produce because of the consumer is the king in the capitalistic economy.
• how to produce - there are two types of technology that is (a) capital intensive technique (b) labour-intensive technique 
• for whom to produce - it depends on the buying capacity of the consumer, purchasing power and the income of the consumer.
• future provision for growth - (a) consumption - is directly related to consumer and savings. 

(b) savings - savings are depending on the rate of interest when the rate is more than in this case more savings, and in case of low-interest rate then there are less than savings.

(c) investments - it depends on rate of return on investment.

merits of the capitalistic economy

P - greater efficiency, the incentive to work 

P - entrepreneurship, innovation, hard work 

C - risk-taking  

C - consumer welfare, optimum allocation of resources, minimizing the cost of production 

F - improve standard of living 

F - innovation, technological progress, fundamental rights

• in the capitalistic economy, the price works automatically it is self-regulatory. 
• the reward is an efficient one, punishment inefficient one.
• vast economic inequality plus social injustice.

merit goods 

merit goods are those goods that the government feels that people will under consume, and which ought to be subsidized or prove free at the point of use so that consumption does not demand primarily on the ability to pay for the goods or services.

the demonstration effect  

a person may demand goods by seeing others using the goods or a person figure out that his neighbour or friend can afford it then he too can, it is known as demonstration effect.

socialistic economy

the concept of socialistic economy is given by Karl Marx, everyone in the society equally own the factor of production, how equality  ''the communist manifesto'' aim welfare of the community.

features of socialistic economy

• there is the collective ownership, not private ownership, social ownership, socio eco objectives (set by certain authority) socialistic economy also known as the centrally planned economy or command economy or controlled economy.
• competition - it is absent in the socialistic economy.
• consumer choice - consumer sovereignty is restricted.
• price mechanism - minimum.
• economic planning - centrally planned economy.
• equal distribution of income and wealth.

merits of socialistic economy

1. collective ownership - the welfare of society, the minimum standard of living, right to work, it eliminates poverty.
2. equal distribution of income and wealth, eco and social justice, no labour exploitation.
3. there is no competition.
4. economic planning -(a) planned economy there is minimum unemployment, (b) rapid + balanced eco growth (c) better utilisation of resources. 

 demerits of the socialistic economy

• there is no consumer choice, individual freedom is restricted and there is no right to private ownership.
• red-tapism - excessive regulation/rigid conformity to formal rules that is considered redundant and hinders.
• no competition no innovation.
• equal income distribution no incentive for hard-work.
• administrated price - which is set by the planning authority on the basis of socio-economic objectives.

the mixed economy

mixed economy is a mixture of capitalist economy and socialistic economy.

merits of mixed economy

• eco freedom private property - the incentive to work, consumer rights, capital formation + risk-taking.
• consumer rights - freedom of choice.
• planned eco - rapid and planned eco growth.
• competition - better allocation of resources and efficient decision making.
• government legislative measures - environmental and labour regulation are made by the government.

demerits of mixed economy

1. restriction on private sector
2. planned economy - poor implementation of the policy.
3. lack of efficiency.
4. wastage of resources.
5. state monopolies - poor performance.