105-BUSINESS ECONOMICS

B.COM I YEAR
1. Micro and macro economics
Ans) The difference between micro and macro economics is simple. Microeconomics is the
study of economics at an individual, group or company level. Macroeconomics, on the
other hand, is the study of a national economy as a whole.
Microeconomics focuses on issues that affect individuals and companies. This could mean
studying the supply and demand for a specific product, the production that an individual or
business is capable of, or the effects of regulations on a business.
Macroeconomics focuses on issues that affect the economy as a whole. Some of the most
common focuses of macroeconomics include unemployment rates, the gross domestic
product of an economy, and the effects of exports and imports.
2. Consumer surplus
Ans) Consumer surplus is a measure of the welfare that people gain from consuming goods
and services
 Consumer surplus is defined as the difference between the total amount that
consumers are willing and able to pay for a good or service (indicated by the demand
curve) and the total amount that they actually do pay (i.e. the market price).
 Consumer surplus is shown by the area under the demand curve and above the price.
3. income demand
Ans) Income elasticity of demand refers to the sensitivity of the quantity demanded for a
certain good to a change in real income of consumers who buy this good, keeping all other
things constant. The formula for calculating income elasticity of demand is the percent
change in quantity demanded divided by the percent change in income. With income
elasticity of demand, you can tell if a particular good represents a necessity or a luxury.
4. cost function
Ans) Management uses this model to run different production scenarios and help predict
what the total cost would be to produce a product at different levels of output. The cost
function equation is expressed as C(x)= FC + V(x), where C equals total production cost, FC
is total fixed costs, V is variable cost and x is the number of units.

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Understanding a firm’s cost function is helpful in the budgeting process because it helps
management understand the cost behavior of a product. This is vital to anticipate costs that
will be incurred in the next operating period at the planned activity level. Also, this allows
management to evaluate how efficiently the production process was at the end of the
operating period.
5. price discrimination
Ans) Price discrimination is a pricing strategy that charges customers different prices for the
same product or service. In pure price discrimination, the seller charges each customer the
maximum price that he is willing to pay. In more common forms of price discrimination, the
seller places customers in groups based on certain attributes and charges each group a
different price.
6. quasi rent
Ans) Quasi-rent is a term in economics that describes certain types of returns to firms.
Quasi-rent differs from pure economic rent in that it is a temporary phenomenon. It can arise
from the barriers to entry that potential competitors face in the short run, such as the granting
of patents or other legal protections for intellectual property by governments.
In Industrial Organizations field, Williamson points "The joining of opportunism with
transaction-specific investments (or what Klein, Crawford, and Alchian refer to as
"appropriable quasi rents") is a leading factor in explaining decisions to vertically integrat

7. economic activities
Ans) Economic activities create economic or financial gain by producing goods or services.
Economic consideration is paramount in these activities because human beings want to
satisfy their biological needs like food, shelter etc.
Economic activities are performed for the purpose of making money, gaining wealth, and
creating and producing items that can be offered to the public for sale. Restaurants, large
retailers and even small businesses engage in economic activities every day. The outcome of
economic activities is measured monetarily.

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 8. Functions:
The main functions of WTO are discussed below:
1. To implement rules and provisions related to trade policy review mechanism.
2. To provide a platform to member countries to decide future strategies related to trade and
tariff.
3. To provide facilities for implementation, administration and operation of multilateral and
bilateral agreements of the world trade.
4. To administer the rules and processes related to dispute settlement.

9. objectives of the firm

Ans) The main objectives of firms are:
1. Profit maximisation
2. Sales maximisation
3. Increased market share/market dominance
4. Social/environmental concerns
5. Profit satisficing
6. Co-operatives/

10. kinky demand curve

Ans)The Kinked-Demand curve theory is an economic
theory regarding oligopoly and monopolistic competition. Kinked demand was an initial
attempt to explain sticky prices.
The kinked demand curve model assumes that a business might face a dual demand
curve for its product based on the likely reactions of other firms to a change in its price or
another variable
11. The law of equi marginal utility was presented in 19th century by an Australian
economists H. H. Gossen. It is also known as law of maximum satisfaction or law of
substitution or Gossen's second law. A consumer has number of wants. He tries to spend
limited income on different things in such a way that marginal utility of all things is equal.
When he buys several things with given money income he equalizes marginal utilities of all
such things. The law of equi marginal utility is an extension of the law of diminishing
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marginal utility. The consumer can get maximum utility by allocating income among
commodities in such a way that last dollar spent on each item provides the same marginal
utility.
Explanation With Schedule and Diagram:
The law of substitution can be explained with the help of an example. Suppose consumer has
six dollars that he wants to spend on apples and bananas in order to obtain maximum total
utility. The following table shows marginal utility (MU) of spending additional dollars of
income on apples and bananas:
Money (Units) MU of apples MU of bananas
1 10 8
2 9 7
3 8 6
4 7 5
5 6 4
6 5 3

The above schedule shows that consumer can spend six dollars in different ways:
1. $1 on apples and $5 on bananas. The total utility he can get is:
[(10) + (8+7+6+5+4)] = 40.
2. $2 on apples and $4 on bananas. The total utility he can get is:
[(10+9) + (8+7+6+5)] = 45.
3. $3 on apples and $3 on bananas. The total utility he can get is:
[(10+9+8) + (8+7+6)] = 48.
4. $4 on apples and $2 on bananas. This way the total utility is:
[(10+9+8+7) + (8+7)] = 49.
5. $5 on apples and $1 on bananas. The total utility he can get is:
[(10+9+8+7+6) + (8)] = 48.
Total total utility for consumer is 49 utils that is the highest obtainable with expenditure of
$4 on apples and $2 on bananas. Here the condition MU of apple = MU of banana i.e 7 = 7 is

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also satisfied. Any other allocation of the last dollar shall give less total utility to the
consumer.
12. demand function
Ans) Demand Function
The demand function is what the consumer prefers regarding goods and services. Every
person has an individual demand for the goods and services available in the market. The
level of demand depends on the value a specific consumer places on the product and its
product. If the purchase and consumption of the product satisfy the consumer, the business
has successfully met the demand.
13. Internal economics
Ans) Economies of scale are the unit cost advantages from expanding the scale of production
in the long run.
 These lower costs represent an improvement in long run productive efficiency and can
give a business a significant competitive advantage in a market.
 They also lead to lower prices and higher profits
 If long run average total cost curve (LRAC) is declining, then internal economies of
scale are being exploited
14. Normal profits
Ans) Normal profit is an economic condition occurring when the difference between
a firm’s total revenue and total cost is equal to zero. Simply put, normal profit is the
minimum level of profit needed for a company to remain competitive in the market.
In economics, normal profit is the minimum compensation that a firm receives for operating.
The compensation is higher than the opportunity cost that the firm loses for using its
resources effectively and producing a given product. If a firm’s profits are lower than
its revenues, the firm incurs losses. It must meet a minimum threshold to stay in business.
15. gorss national product
Ans) Gross national product (GNP) is the market value of all the products and services
produced in one year by labor and property supplied by the citizens of a country.
Unlike gross domestic product (GDP), which defines production based on the geographical
location of production, GNP indicates allocated production based on location of ownership.

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In fact it calculates income by the location of ownership and residence, and so its name is
also the less ambiguous gross national income.
GNP is an economic statistic that is equal to GDP plus any income earned by residents from
overseas investments minus income earned within the domestic economy by overseas
residents.
16. disposable income
Ans) Disposable income, also known as disposable personal income (DPI), is the amount of
money that households have available for spending and saving after income taxes have been
accounted for. Disposable personal income is often monitored as one of the many
key economic indicators used to gauge the overall state of the economy.
Disposable income is total personal income minus personal current taxes.In national
accounts definitions, personal incomeminus personal current taxes equals disposable
personal income.
17. balance of trade
Ans) The balance of trade (BOT) is the difference between a country's imports and
its exports for a given time period. The balance of trade is the largest component of the
country's balance of payments (BOP). Economists use the BOT as a statistical tool to help
them understand the relative strength of a country's economy versus other countries'
economies and the flow of trade between nations. The balance of trade is also referred to as
the trade balance or the international trade balance.
18. wto
Ans) The World Trade Organization (WTO) is the only global international organization
dealing with the rules of trade between nations. At its heart are the WTO agreements,
negotiated and signed by the bulk of the world’s trading nations and ratified in their
parliaments. The goal is to help producers of goods and services, exporters, and importers
conduct their business.
19. elasticity of demand
Ans) 001:47
Demand elasticity refers to how sensitive the demand for a good is to changes in other
economic variables, such as the prices and consumer income. Demand elasticity is calculated
by taking the percent change in quantity of a good demanded and dividing it by a percent
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change in another economic variable. A higher demand elasticity for a particular economic
variable means that consumers are more responsive to changes in this variable, such as price
or income.
20. National income is an uncertain term which is used interchangeably with national
dividend, national output and national expenditure. On this basis, national income has been
defined in a number of ways. In common parlance, national income means the total value of
goods and services produced annually in a country.
Concepts of National Income:
There are a number of concepts pertaining to national income and methods of measurement
relating to them.
(A) Gross Domestic Product (GDP):
GDP is the total value of goods and services produced within the country during a year.
There are three different ways to measure GDP:
Product Method, Income Method and Expenditure Method.
These three methods of calculating GDP yield the same result because National Product =
National Income = National Expenditure.
1. The Product Method:
In this method, the value of all goods and services produced in different industries during the
year is added up..
2. The Income Method:
The people of a country who produce GDP during a year receive incomes from their work.
Thus GDP by income method is the sum of all factor incomes: Wages and Salaries
(compensation of employees) + Rent + Interest + Profit.
3. Expenditure Method:
This method focuses on goods and services produced within the country during one year.
(B) GDP at Factor Cost:
GDP at factor cost is the sum of net value added by all producers within the country. Since
the net value added gets distributed as income to the owners of factors of production, GDP is
the sum of domestic factor incomes and fixed capital consumption (or depreciation).

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(C) Net Domestic Product (NDP):
NDP is the value of net output of the economy during the year. Some of the country’s capital
equipment wears out or becomes obsolete each year during the production process. The
value of this capital consumption is some percentage of gross investment which is deducted
from GDP. Thus Net Domestic Product = GDP at Factor Cost – Depreciation.
(D) Nominal and Real GDP:
When GDP is measured on the basis of current price, it is called GDP at current prices or
nominal GDP. On the other hand, when GDP is calculated on the basis of fixed prices in
some year, it is called GDP at constant prices or real GDP.
(E) GDP Deflator:
GDP deflator is an index of price changes of goods and services included in GDP. It is a
price index which is calculated by dividing the nominal GDP in a given year by the real GDP
for the same year and multiplying it by 100. Thus,

It shows that at constant prices (1993-94), GDP in 1997-98 increased by 135.9% due to
inflation (or rise in prices) from Rs. 1049.2 thousand crores in 1993-94 to Rs. 1426.7
thousand crores in 1997-98.
(F) Gross National Product (GNP):
GNP is the total measure of the flow of goods and services at market value resulting from
current production during a year in a country, including net income from abroad.
21. Marginal utility
Ans) Marginal utility is the additional satisfaction a consumer gains from consuming one
more unit of a good or service. Marginal utility is an important economic concept
because economists use it to determine how much of an item a consumer will buy. Positive
marginal utility is when the consumption of an additional item increases the total utility.
Negative marginal utility is when the consumption of an additional item decreases the total
utility.

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22. Perfect competition refers to a market situation where there are a large number of buyers
and sellers dealing in homogenous products.
Moreover, under perfect competition, there are no legal, social, or technological barriers on
the entry or exit of organizations.
Demand under Perfect Competition:
Demand refers to the quantity of a product that consumers are willing to purchase at a
particular price, while other factors remain constant. A consumer demands more quantity at
lower price and less quantity at higher price. Therefore, the demand varies at different prices.
Figure-1 represents the demand curve under perfect competition:

As shown in Figure-1, when price is OP, the quantity demanded is OQ. On the other hand,
when price increases to OP1, the quantity demanded reduces to OQ1. Therefore, under
perfect competition, the demand curve (DD’) slopes downward.
Supply under Perfect Competition:
Supply refers to quantity of a product that producers are willing to supply at a particular
price. Generally, the supply of a product increases at high price and decreases at low price.
Figure-2 shows the supply curve under perfect competition:

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In Figure-2, the quantity supplied is OQ at price OP. When price increases to OP1, the
quantity supplied increases to OQ1. This is because the producers are able to earn large
profits by supplying products at higher price. Therefore, under perfect competition, the
supply curves (SS’) slopes upward.
23. balance of payments
Ans) A statement that summarizes an economy’s transactions with the rest of the world for a
specified time period. The balance of payments, also known as balance of international
payments, encompasses all transactions between a country’s residents and its nonresidents
involving goods, services and income; financial claims on and liabilitiesto the rest of the
world; and transfers such as gifts. The balance of payments classifies these transactions in
two accounts – the current account and the capital account. The current account includes
transactions in goods, services, investment income and current transfers, while the capital
account mainly includes transactions in financial instruments.
24. marginal cost
Ans) In economics, marginal cost is the change in the opportunity cost that arises when the
quantity produced is incremented by one unit, that is, it is the cost of producing one more
unit of a good. Intuitively, marginal cost at each level of production includes the cost of any
additional inputs required to produce the next unit. At each level of production and time
period being considered, marginal costs include all costs that vary with the level of
production, whereas other costs that do not vary with production are considered fixed.
25. Law of Variable Proportions occupies an important place in economic theory. This
law is also known as Law of Proportionality.

Keeping other factors fixed, the law explains the production function with one factor
variable. In the short run when output of a commodity is sought to be increased, the law of
variable proportions comes into operation.

Therefore, when the number of one factor is increased or decreased, while other factors are
constant, the proportion between the factors is altered. For instance, there are two factors of
production viz., land and labour.

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Land is a fixed factor whereas labour is a variable factor. Now, suppose we have a land
measuring 5 hectares. We grow wheat on it with the help of variable factor i.e., labour.
Accordingly, the proportion between land and labour will be 1: 5. If the number of laborers
is increased to 2, the new proportion between labour and land will be 2: 5. Due to change in
the proportion of factors there will also emerge a change in total output at different rates.
This tendency in the theory of production called the Law of Variable Proportion.

Assumptions:
Law of variable proportions is based on following assumptions:
(i) Constant Technology:
The state of technology is assumed to be given and constant. If there is an improvement in
technology the production function will move upward.

(ii) Factor Proportions are Variable:

The law assumes that factor proportions are variable. If factors of production are to be
combined in a fixed proportion, the law has no validity

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