CHAPTER 1 (A)

BUSINESS ECONOMICS
Introduction and meaning of concepts

Meaning of Economics
ECONOMICS: is an area of study concerned with the manner in which the existing
resources are used. It is also concerned with the study of distribution of the resources
overtime.

Economics is a branch of social science focused on the production, distribution, and

consumption of goods and services.

Economics can also be defined as a science of how a particular society solves its economic
problems; like scarcity of resources, inflation and unemployment among others.

In a broader perspective, Economics is a science of how man allocates his limited

resources to satisfy his unlimited wants.

Economics is a study of how people make choices under conditions of scarcity and of the
results of those choices for society. Scarcity is one the three basic problems of economics
(scarcity, choice and opportunity cost)

Economics is a social science that studies the production, consumption, and distribution of
goods and services with the aim of explaining how economies work and how their agents
interact.
Economics is a study that provides answers to the three major world problems of scarcity,
choice and opportunity cost.

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Economics can be defined as the study of how to allocate scarce recourses to satisfy unlimited
wants. It is the study of how people, institutions, and society make choices under conditions of
scarcity.
Scarce resources are such things that command price even though they may be in abundance.

Economics can be broken down into a large number of branches;

 Managerial Economics
 Mathematical Economics
 Urban Economics
 Industrial Economics
 Business Economics
 Public Sector economics
 Health Economics
 Engineering Economics
 Agricultural Economics
 Islamic Economics
 ETC

These branches of Economics are further broken down into Micro and Macroeconimics,
Positive and Normative Economics.

Business Economics

Business Economics is a field of applied Economics which uses economic theory and
quantitative methods to analyse business enterprises and the factors contributing to the
diversity of organizational structures and the relationships of firms with labour, capital and
product markets.

Business Economics is a field of applied economics that studies the financial, organizational,
market-related, and environmental issues faced by corporations.

Business Economics, encompasses subjects such as the concept of scarcity, product factors,
distribution, and consumption.

According to Investopedia, Business Economics addresses economic principles, strategies,

standard business practices, the acquisition of necessary capital, profit generation, the
efficiency of production and overall management strategy.

Managerial Economics is one of the important offshoots of Business Economics.

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Business Economics is a field of study that reviews the implementation of the economic
system in business operations.

Business Economics is a study that assists in utilising the nature the nature and importance
of financial analysis to clarify business problems. Moreover the introduction of this
definition helps balance between limited sources and unlimited aspirations.

Scope of Business Economics

 Demand analysis and forecasting

 Cost and Production analysis
 Costing decisions and strategies
 Profit management
 Wealth management

The nature and importance of Business Economics lie in the future prediction and drafting
of several regulations for profit maximization.

The relevant areas pertained to this discipline are demand analysis and forecasting, Cost and
production analysis, Pricing decisions Profit management, and Wealth governance.

Objectives of Business Economics

 Identification and Resolution of Business problems

 Designing numerous profitable business policies
 Making future predictions
 Building relations between distinct financial aspects

The Business Economics definition implies blending business processes with economic
theories to simplify the decision-making procedure.

Business Economics or managerial Economics is a discipline that discusses the usage and
importance of Economic policies and concepts in Business governance.

As a matter of fact, Business Economics analyses economic models, approaches, and

philosophies applied to solve rational business issues.

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World economic Problems
Scarcity is the inadequacy of resources that are needed to satisfy human needs. It is called the
scarcity principle (the no free lunch principle). Although we have boundless needs and wants, the
resources available to us are very limited. This therefore means, we have to make choice.

Choice is the option taken by an individual or economy. Choice has to be made because of the
insufficient resources to satisfy all that is desired by man or economy. There is need to make
choice beginning with the most pressing need or want. In making choice, sacrifice is made.

Opportunity cost refers to the sacrifice made in order to acquire particular goods or services.
It illustrates the effect of choosing between scarce resources. It can be expressed in terms of the
next best alternative allocation which has been sacrificed e.g. a child with 200/= and is faced
with a desire of an ice cream and chocolate may decide to buy the ice cream. The opportunity
cost of that ice cream to him is chocolate which has been sacrificed. The cost of what one buys is
the cost of the other things one could have bought with the same money. Opportunity cost may
also refer to the cost of something in terms of alternatives foregone.

Why we Study Economics

 In the context of Least Developed Countries, the aim of teaching economics is to give
students a grasp of the main issues and problems that LDCs are faced with so that they
can be able to formulate appropriate economic policies designed to achieve rapid
economic development.
 We study economics in order to properly allocate the scarce resources so as to improve
the standard of living.
 The study of economics is also important because it makes us aware of what may happen
when a certain decision is made (deadweight loss).
 The study of economics is vital because it quickly transforms students into better decision
makers. Economics therefore teaches that we take only those actions with positive
economic surplus.

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  Economics enables learners to realise that making wise choices reduces wastage of
resources which are naturally scarce.
 Economics deals with cost-benefit analysis which helps us to weigh. This can be realized
when it says that if the benefits of the action exceed its costs, then you should do it; but if
the benefits fall short of the costs, then you should not do it.

 Whether scarcity, choice or opportunity cost or any other, an economics course equips
the learner with fluency in fundamental terms needed to understand how markets work.
Even when you do not use these terms in your current role, these economic terms will
give you a better understanding of market dynamics as a whole and how they apply to
your organization.
 Econ is not just learning of a fancy set of words, but using them to develop a viable
business strategy. E.g you can use theories and frameworks like SWOT analysis to assess
situations and make variety of economic decisions.

Benefits of Business Economics

Business Economics plays a key role in making sure the world’s economy continues to
prosper and businesses work at their best. Sometimes called managerial Economics, the field
works in collaboration with businesses to find solutions that can be used to meet the economic
goals of the business.
 Career opportunities
Business Economics students have plenty of options when looking for graduate jobs. Not only is
there generally a good availability of jobs in the financial sector, there are lots of
different career paths to be taken, E,g, they can become economists, portfolio managers,
corporate finance analysts, management consultants, financial advisors, etc

 International knowledge
- With knowledge of Business Economics, learners get insights into finance around the
world, including international events like the global financial crash, or how
China’s

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 economy is growing. It may also put the learner in good stead for career
opportunities abroad.

 Provides highly desirable skills

Knowledge of Business Economics will see you develop a range of desirable and useful skills
for you in your personal life such as;
 Research and analysis,
 Advanced mathematics and numeracy skills
 Knowledge of economic systems
 Problem solving and attention to to detail,
 Spoken and written English

 Combine Economics and business

Knowledge of Business economics allows learners have knowledge of two different subjects
at once which brings several benefits;
 You will be able to take learnings from an Economics module and use it in your
business module and vice versa. This will improve your academic work.
 Studying Business economics allows the learner to discover which field you prefer
to study and may help you to decide on your future career aims
 Gives an edge in a competitive job market too.

 Inspire Business success

With knowledge of Business Economics, your future career is likely to have a high level of job
satisfaction. The learner will therefore have up-to-date knowledge of Economics and Business
theory, meaning you can put your ideas into practice right away.

 Knowledge of Important Terminologies

Business Economics helps you get equipped with how to leverage economic tools. Learning
economic theory is one thing, developing the tools to make business decisions is another,
economics teaches you the basics and gives you concrete tools for analysis.

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  Understand you spending habits
Business Economics helps you understand your own spending habits. For example, willingness
to pay (WTP) is the maximum amount someone is willing to pay for a good or service.

 Successful Business strategy

A Business Economics course will equip the learner with tools to develop a successful business
strategy to benefit his organization or career.

More Concepts of economics

Economics as a science, has been categorized into two branches;

Microeconomics and Macroeconomics

Microeconomics
Microeconomics is a branch or a study of economic tendencies or what is likely to happen
when individuals make certain choices or when the factors of production change.

Microeconomics unlike macroeconomics is a science that focusses on the smaller factors

that affect choices made by individuals, communities and companies.

Microeconomics also explains what to expect if certain conditions change. Example, If a

manufacturer raises the price of cars, micro says consumers will tend to fewer cars than
before. Or if a major copper factory collapses in America, the price of copper will tend to
increase, because supply is restricted.

Microeconomics is a study of the economic actions of individuals and small groups of

individuals. It looks at the functions if the individual economic units. It is concerned with
the study of the small elements of the economic system. These may include consumers,
business firms and single prices.

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In micro economics, the major concern is how a specific price is established. The major
importance of micro economics is that it helps us understand the functioning of individual
economic units.

Macroeconomics
Macroeconomics is a branch of economics that studies how the aggregate economy
behaves.
It is a branch that deals with that deals with a variety of economy-wide phenomena such as
inflation, national income, unemployment, and economic growth or GDP.
Macroeconomics refers to the study of the aggregate behavior of all individuals in the
economy. It is concerned with the behavior of large aggregate of the economy and national
income.
Macroeconomics looks at the economy as one functioning item because of two reasons;
 Different sectors of the economy are interrelated e.g. agriculture depends on industry and
vice versa.
 Certain institutions cover the entire economy e.g. money.

The many problems which are traditionally considered in macroeconomics are;

 Problem of economic growth; it is concerned with those factors that determine economic
growth. It is concerned with those factors which bring the economy to the path of stable
economic growth.
 Problem of unemployment; macroeconomics studies the causes of unemployment and
the various determinants of unemployment.
 Inflation; macro studies the effect of money on the economy.
 Problem of Balance of Payment; i.e. foreign exchange earnings and foreign exchange
expenditure.

The major importance of macroeconomics is that it helps us understand the functioning of the
economy.

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Free good and economic good
A free good does exist in such a natural abundance that one’s desire can be satisfied at zero
price. At zero price, one can get as much commodity as one wishes. The cost is zero e.g. fresh
air.

An economic good arises out of scarcity and choice. It must satisfy three conditions;
 Provide satisfaction i.e. utility.
 Relatively scarce.
 Marketable i.e. value.

Public and Private good

Public good is publicly owned; its consumption by an individual does not exclude the
consumption by another individual. Everybody can consume it. Ones consumption of such a
commodity does not reduce the consumption of another individual e.g. it does not pay a private
individual to provide a public good e.g. public road, public clock and streetlights.

Private good are the goods enjoyed exclusively by single individuals. The act of consuming the
good by one individual excludes others from consuming it.

Intermediate and Final good

Intermediate goods are used in the process of production e.g. wheat, steel and final goods are
those which are ready for consumption.

Market Concept
A market is an organization in which sellers and consumers come into a close contact. The
function of a market is to enable an exchange of goods and services to take place. The interaction
of buyers and sellers in a free competitive system results into a price which clears the market i.e.
price at which the quantity demanded is equal to the quantity supplied.

Equilibrium Concept

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This is when the economic forces as they exist at a particular time have no tendency to change.
In the economic analysis, equilibrium is said to exist when the set of variables under
consideration shows no tendency to change, if one of the variables is changed, there will be a
state of disequilibrium. If the original equilibrium position was a stable one, then all the variables
will return to their original position.
There are several types of equilibrium position;
 Market Equilibrium
 Consumers’ Equilibrium
 Producers’ Equilibrium

Fundamental Questions in Economics

The study of economics attempts to answer the following questions which economists are faced
with, given the limited resources.
 What to produce? This address the type of commodity; whether it is a consumer durable
or non durable.

 How to produce? This concerns about the production techniques and it tries to identify
those that minimize costs.

 When to produce? Society is always faced with a problem of choosing between

producing now for consumption or delaying production and have it later.

 For whom to produce? This question addresses the targeted markets; whether
production is for the low income or high income groups, for the young or the old. The
aim is to produce for those who need the good most since they are willing to demand
more and hence pay higher prices for the goods which in turn maximizes the producers’
profits.

 Where to produce? This question is concerned with the location of the firms; is it near to
the source of the raw-materials, energy, transport system or the market.

 How much to produce? This question attempts to determine how much of every
commodity shall be produced depending not only on the needs of society but also on the
resources available to producers and consumers. Depending on the type of economic
system, this question is answered by the price mechanism or by the state or a mixture.

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Scarcity, Choice and Opportunity Cost
Scarce economic resources mean limited goods and service. Resources of decision makers no
matter how large they may be are always limited, thus less than people’s desires.

Scarcity restricts option and demands choices. Choice arises out of scarcity of resources and it
means making a right decision. Because of scarcity of resources, man must make a scale of
preference. A scale of preference is where items are arranged according to order of priority.
When you choose from the scale of preference, then you are said to be making choice.

Opportunity cost is the value of what is given up to obtain something else. When a consumer
uses his scale of preference to make choice because of limited resources, it implies that he is
making a decision to satisfy one set of wants. This means sacrificing some other set. It is this
sacrifice that is referred to as opportunity cost.
To get one of one thing, society forgoes the opportunity of getting something else. So the cost of
that obtained is the value of that sacrificed to get it.

Production Possibility Frontier

Society uses its scarce resources to produce goods and services. The alternatives and choices it
faces can best be understood through a macroeconomic model of production possibilities. To
keep things simple, we assume:
 Full employment The economy is employing all its available resources.
 Fixed resources The quantity and quality of the factors of production are fixed.
 Fixed technology The state of technology (the methods used to produce output) is
constant.
 Two commodities The economy is producing only two commodities: food products and
manufacturing equipment. Food products symbolize consumer goods, products that
satisfy our wants indirectly; manufacturing equipment symbolizes capital goods, products
that satisfy our wants indirectly by making possible more efficient production of
consumer goods.

A production possibility frontier is a curve showing different combinations of two commodities

that can be produced when all resources are fully utilized.

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 The production possibility curve
Manufacturing
equipment Y

Y1 A C

Y2 B
D
PPF

O X1 X2 food products X

Each point on the production possibility curve represents some maximum combination of two
products that can be produced if resources are fully and efficiently employed. When an economy
is operating on the curve, more manufacturing means less food products, and vice versa.
A point outside the curve such as C is desired because it shows more units of food products and
manufacturing equipment produced in an economy. But such a point is unattainable because of
limited resources and a fixed technology.
A point inside the curve is attainable but undesired because it indicates that full employment is
not being utilized.

Shifting of the PPF

A movement from a point on a PPF to a point outside the PPF shows economic growth. This
involves shifting of the PPF outwards to the right.

Shifting of the PPF

Manufacturing
equipment Y

Y1 A C

Y2 B
D
PPF1 PPF2

O X1 X2 food products X

The shifting of the PPF to the right (economic growth) can be brought about by:
 Increase in supply of resources.

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  Improvement in resource quality.
 Technological advancement.
 Improvement in skills of production
 Acquiring of grants from abroad.

Slope and Shape of the PPF

The shape of the PPF is referred to as the marginal rate of product
transformation. It shoes the quantity of the commodity X that must be given up in
order to produce an additional unit of commodity Y. The PPF has a negative
slope. This implies that for an economy to increase on the production of a
commodity, it has to forego the production of some units of the other commodity.

Review Questions
1. a) Distinguish between:
i) microeconomics and macroeconomics.
ii) positive economics and normative economics.
b) Discuss the fundamental problems that economics addresses and show how they
relate.
c) Explain the questions that economics attempts to answer.

2. a) Explain the concept of production possibility frontier and

discuss its underlying assumptions.
b) What would production at a point outside the production possibility
curve indicate? What must occur before the economy can attain
such a level of production?
c) Draw a PPF for an economy producing only food products and
automobiles. Suppose improvement occurs in the technology of producing
food products but not in automobiles. Draw the new PPF. Now suppose
that a technological advancement occurs in producing automobiles but not
in producing food products. Draw the new PPF. Now draw a PPF that
reflects technological improvement in the production of both goods.

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