As regards the scope of business economics, no uniformity of views exists among various authors. However, the following aspects are said to generally fall under business economics. 1. Demand Analysis and Forecasting 2. Cost and production Analysis. 3. Pricing Decisions, policies and practices. 4. Profit Management. 5. Capital Management.
1. Demand Analysis and Forecasting A business firm is an economic organisation which transform productive resources into goods to be sold in the market. A major part of business decision making depends on accurate estimates of demand. A demand forecast can serve as a guide to management for maintaining and strengthening market position and enlarging profits. Demands analysis helps identify the various factors influencing the product demand thus provides guidelines for manipulating demand. Demand analysis and forecasting provided the essential basis for business planning and occupies a strategic place in managerial economic. The main topics covered are: Demand Determinants, Demand Distinctions and Demand Forecasting.
2. Cost and Production Analysis A study of economic costs, combined with the data drawn from the firm’s accounting records, can yield significant cost estimates which are useful for management decisions. An element of cost uncertainty exists because all the factors determining costs are not known and controllable.
3. Pricing Decisions, Policies and Practices Pricing is an important area of business economic. In fact, price is the genesis of a firms revenue and as such its success largely depends on how correctly the pricing decisions are taken. The important aspects dealt with under pricing include. Price Determination in Various Market Forms, Pricing Method, Differential Pricing, Product-line Pricing and Price Forecasting.
4. Profit Management Business firms are generally organised for purpose of making profits and in the long run profits earned are taken as an important measure of the firms success. If knowledge about the future were perfect, profit analysis would have been a very easy task. However, in a world of uncertainty, expectations are not always realised so that profit planning and measurement constitute a difficult area of business economic. The important aspects covered under this area are : Nature and Measurement of profit, Profit policies
5. Capital Management Among the various types business problems, the most complex and troublesome for the business manager are those relating to a firm’s capital investments. Relatively large sums are involved and the problems are so complex that their solution requires considerable time and labour. Often the decision involving capital management are taken by the top management. The main topics dealt with are: Cost of capital Rate of Return and Selection of Projects.
Significance of Business Economics Business economics helps in reaching a variety of business decisions in a complicated environment. Certain examples are (i) What products and services should be produced? (ii) What input and production technique should be used? (iii) How much output should be produced and at what prices it should be sold? (iv) What are the best sizes and locations of new plants? (v) When should equipment be replaced? (vi) How should the available capital be allocated?
Business economics makes a manager a more competent model builder. Business economics takes cognizance of the interaction between the firm and society, and accomplishes the key role of an agent in achieving the its social and economic welfare goals. It has come to be realised that a business, apart from its obligations to shareholders, has certain social obligations.
WHAT WE WILL STUDY? : )
Introduction Scope and methodology of economics. Tools of economic analysis. Price Determination in a Perfectly Competitive Market Demand, supply and equilibrium. Shifts in demand supply. Elasticity of demand. Theory of Consumer Choice Consumer preferences. Budget бюджета). Optimisation. constraint (ограничение Properties of demand. Consumer surplus (излишек). Uncertainty. Theory of the Firm Profit maximisation. Technology. Cost minimisation. Cost curves. Marginal cost and marginal revenue. Perfect Competition The supply curve of a perfectly competitive firm. Industry supply in short and long term.
Monopoly and Regulation, Characteristics of monopoly. Comparison with perfect competition. Price discrimination. Regulation. Imperfect Competition, Monopolistic competition. Oligopoly. Applications of strategic firm behaviour. The Labour Market Labour supply. Labour demand in short and long term. Equilibrium in the labour market. Unions. Wage differentials. Capital and Investment, Present values. Demand, supply and equilibrium in the market for capital services. Risk and information. Welfare Economics, Pareto efficiency. Conditions for a firstbest Pareto efficient allocation. The fundamental theorems. Sources of market failure and government policy. Government failure.
LEARNING OUTCOMESрезультаты обучения
Forecasting rational consumer’s behaviour and their optimal choices. Ability to analyse markets with the usage of available information. Determination of optimal production of business organisations. Classification of cost from the economic point of view. Ability to compare different market structures. Competence in recognition the consequences of recent economic decisions. Ability to recognise market failures.
Society and Scarce Resources • The management of society’s resources is important because resources are scarce (limited)… • Society has limited resources. . • We can not produce all the goods and services people wish to have… 15
Economists study • How people make decision • How people interact with each other 16
Definition of 'Microeconomics' The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households. It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers. In particular, microeconomics focuses on patterns of supply and demand the determination of price and output in individual markets
The economic way of thinking Economics is a social science that studies individuals' economic behavior, economic phenomena, as well as how individual agents, such as consumers, firms, and government agencies, make trade off choices that allocate (выделять) limited resources among competing uses. 18
• It shows how the individual modern household and firms make decisions to allocate limited resources. • It analyzes market mechanisms, goods and services allocations • It can help to analyze the different type of costs 19
4 basic questions (1) What goods and services should be produced and in what quantity? (2) How should the product be produced? (3) For whom should it be produced and how should it be distributed? (4) Who makes the decision? 20
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We need to choice and make decision! 3 types of resources (factors of production) I. Labour which is the time human beings spend producing products and services II. Capital A Physical capital : Machines, buildings, natural resourcesforests, rivers) Capital B Human Capital: Skills, training III. Land (physical space) 22
The modell of market 23
Features of Microeconomics • Consumer • Firms • Government • Resources 24
Consumer Budget Set • Choice problem… • How we make decision… 25
MEANING OF UTILITY Utility is Subjective : Utility is subjective because it deals with the mental satisfaction of a man. A commodity (товар) may have different utility for different persons. Cigarette has utility for a smoker but for a person who does not smoke, cigarette has no utility. Utility, therefore, is subjective.
UTILITY The util has no concrete numerical value like an inch or a centimeter. It is merely an arbitrary (произвольный), subjective and convenient way to assign value to consumer choices and to measure the consumer utility or utils of one choice against another choice. 27
1. 2. 3. 4. consumer decision-making price of products and services affects demand consumer satisfaction – works in the decisionmaking process, The consumer satisfaction provides useful information to businesses selling products and services 28
• Consumer- they buy and use the goods, services • Stuff –products + services • Demand • Supply • Price • Income: Gross Income Net Income 29
Utility • Utility - a measure of the satisfaction • • (happiness, benefit) that results from the consumption of a good. Total Utility- The total satisfaction a person receives from consuming a product. Marginal Utility- The utility a person receives from consuming an additional unit of a good. 30
Total and Marginal Utility TU Beer TU MU 1 2 3 4 5 6 7 8 11 11 20 9 27 7 32 5 35 3 36 1 35 -1 33 -2 0 MU 0 x x 31
Positive Marginal Utility : If by consuming additional units of a commodity, total utility goes on increasing, marginal utility will be positive. Zero Marginal Utility : If the consumption of an additional unit of a commodity causes no change in total utility, marginal utility will be zero. Negative Marginal Utility : If the consumption of an additional unit of a commodity causes fall in total utility, the marginal utility will be negative.
GOSSEN’s First Law Hermann Gossen (1810 -1858) Gossen’s First Law: The principle of diminishing (уменьшение) marginal utility. The Law of Diminishing Marginal Utility The marginal utility gained by consuming equal successive units of a good will decline as the amount consumed increases. 33
Gossen’s Second Law Consumers will maximize their total utility by purchasing so that the last unit of money spend for any one good gives the same marginal utility as the last unit spent for any other. 34
Gossen’s Second Law Consumers will maximize their total utility by purchasing so that the last unit of money spend for any one good gives the same marginal utility as the last unit spent for any other. MU 1/P 1 = MU 2/P 2 =. . = MUn/Pn 35
Consumer Theory: Summarized • People buy what they want with what they have. • People make decisions according to the dictates of cost-benefit analysis where the cost of buying a product is its price and the benefit is the utility a person derives from the products consumption. 36
DEMAND SUPPLY
Consumer demand • Consumer wants and in what quantity Price of an Apple Pie (Price) Number of Apple Pies People want to buy (Quantity) $1. 00 5 $2. 00 4 $3. 00 2 $4. 00 1 38
Supply 39
Supply and Demand determine the market • Supply and demand determine the equilibrium price • • for a good. Note the following The graph's axes are Price and Quantity. The slope of the supply and demand lines (curves) show the amount of a good that will be supplied and demanded at a certain price. The intersection of the lines establishes a market clearing equilibrium price (Equilibrium 1 on the graph). If the demand for a good increases (the demand curve shifts to the right, D 1 to D 2), and supply remains the same, the price of the good will rise (P 1). When the price of a good increases, suppliers have incentive to produce more of that good, and the supply curve shifts to the right (S 1 to S 2). This increase in supply establishes a new equilibrium price at an overall higher quantity of goods sold (Q 1 to Q 2) 40
Equilibrium Price and Quantity 41
End of Lesson I. 42
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