FACULTY OF LAW

TOPIC :INTRODUCTION TO
ECONOMICS &BUSINESS
ECONOMICS
SUBJECT :BUSINESS ECONOMICS
COURSE :BBA.., LL.B.(5-YDC)
 SYLLABUS

PAPER – III : BUSINESS ECONOMICS

Unit – I: Business Concepts, Precepts and economic rationale of optimization. Nature and scope of
Business economics. Basic problems of an economy – basic concepts and precepts Marginalism,
equimarginalism opportunity cost, time prespective, discounting, risk and uncertainty, Efficiency,
externality, and trade off, Constrained and unconstrained optimization.
Unit – II : Theory of demanf. Factors affecting demand. Demand Function. The law of demand.
Demand Schedule – Individual demand schedule and demand curve, market demand schedule and
market demand curve. Exceptions to the law of demand. Measurement of elasticity. Point elasticity of
demand. Price elasticity, income elasticity and cross elasticity of demand. Factors determining
elasticity of demand and demand forecasting.
Unit – III : Meaning of Supply. Law of supply. Elasticity’ of supply. Measurement of elasticity of supply.
The theory of production. Production function. Equal production curves of isoquants. Marginal rate ofr
technical substitution. Law of diminishing returns. Law of variable proportions. Returns to scale.
Meaning of cost of production. Prime and supplementary costs. Opportunity cost. Total average and
marginal costs.
Unit-IV: Short run and long run price determination under perfect, monopoly, monopolistic and
oligopoly markets ( competition). Criterion of pricing under various market structures. Pricing
strategies and practices.
Unit-V: Macro economics and business – Nature, concepts and measurements of national income.
Determination of national income. Classical and Keynesian approaches. Types of inflation – Demand
pull and cost push inflation. Phillips curve, stagflation. Concepts of economic growth and
development. Factors determining growth of an economy Obstacles to development.
• A. DEFINITION,
NAURE OF ECONOMICS
SCOPE OF ECONOMICS

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 I. DEFINITION
Meaning of the word ‘Economics’

• The word ‘Economics’ originates from a Greek word ‘Oikonomikos.’ This

Greek word has two parts: – ‘Oikos’ meaning ‘Home’ –and ‘Nomos’ meaning
‘Management.’ Hence, Economics means ‘Home Management.’

• To arrive at the current definition of economics, it has taken almost 235 years.
 DEFINITION
• Adam Smith, who is regarded as Father of Economics, published a book
titled ‘An Inquiry into the Nature and Causes of the Wealth of Nations’
in 1776.
• Economics is the study of wealth only and deals with
consumption, production, exchange, and distribution of
wealth.
Economics & Business Economics

Those activities of mankind are studied which are concerned with

earnings and spending of money.

For the successful handling of these activities certain laws and

rules are formulated which are known as various theories of
economics.

Use of these rules & tools provided for analysing business

conditions and applying them for arriving at various economic
decision is known as business economics.
 NATURE OF ECONOMICS

There is a great controversy among the economists regarding the

nature of economics, whether the subject ‘economics’ is
considered as science or an art. If it is a science, then either
positive science or normative science.

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ECONOMICS AS SCIENCE
‘Economics’ has several characteristics similar to science.
1. Economics is also a systematic study of knowledge and facts
2. Economics deals with the correlation-ship between cause and effect.
3. All the laws in economics are also universally accepted.
4. Theories and laws of economics are based on experiments.
5. Economics has a scale of measurement.

However, the most important question is whether economics is a positive science or

a normative science?
Positive science deals with all the real things or activities. It gives the solution
what is? What was? What will be? It deals with all the practical things. For example,
poverty and unemployment are the biggest problems in India.
Normative science deals with what ought to be? What ought to have happened?
Normative science offers suggestions to the problems. These statements give the
ideas about both good and bad effects of any particular problem or policy. For
example, illiteracy is a curse for Indian economy.

.
ECONOMICS AS ART

According to Т.К. Mehta, ‘Knowledge is science, action is art.’

According to Pigou, Marshall etc., economics is also considered as
an art. In other way, art is the practical application of
knowledge for achieving particular goals. Science gives us
principles of any discipline however, art turns all these
principles into reality. Therefore, considering the activities in
economics, it can claimed be as an art also, because it gives
guidance to the solutions of all the economic problems.
1. Solution of problem
2. Verification of economic laws

Conclusion: From all the above discussions we can conclude that

economics is neither a science nor an art only. However, it is a
golden combination of both. According to Cossa, science and art
are complementary to each other. Hence, economics is
considered as both a science as well as an art.
 III. SCOPE OF ECONOMICS

The scope of economics means the area of the economics study.

Economics can be studied through a) Traditional Approach and
(b) Modern Approach.

a) Traditional Approach: In the traditional approach, Economics is

studied under five major divisions namely:
1. Consumption.
2. Production.
3. Exchange.
4. Distribution.
5. Public finance.
 SCOPE OF ECONOMICS

The scope of economics means the area of the economics study.

Economics can be studied through a) Traditional Approach and
(b) Modern Approach.

a) Traditional Approach: In the traditional approach, Economics is

studied under five major divisions namely:
1. Consumption.
2. Production.
3. Exchange.
4. Distribution.
5. Public finance.
b) Modern Approach: In the modern approach, the study of economics is divided
into: i) Microeconomics and ii) Macroeconomics.

i. Microeconomics analyses the economic behaviour of any particular decision

making unit such as a household or a firm. Microeconomics studies the flow of
economic resources or factors of production from the households or resource
owners to business firms and flow of goods and services from business firms to
households. It studies the behaviour of individual decision making unit with
regard to fixation of price and output and its reactions to the changes in demand
and supply conditions. Hence, microeconomics is also called price theory.
ii. Macroeconomics studies the behaviour of the economic system as a whole or
all the decision-making units put together. Macroeconomics deals with the
behaviour of aggregates like total employment, gross national product (GNP),
national income, general price level, etc. So, macroeconomics is also known as
income theory.
• B. BASIC CONCEPTS & PRECEPTS:
I. ECONOMIC PROBLEMS,
II. ECONOMIC AGENTS,
III. ECONOMIC ORGANIZATIONS,
IV. MARGINALISM,
V. TIME VALUE OF MONEY,
VI. OPPORTUNITY COST
 I. ECONOMIC PROBLEMS

The economic problem – sometimes called the basic or central economic problem
– asserts that an economy's finite resources are insufficient to satisfy all human wants
and needs. It assumes that human wants are unlimited, but the means to satisfy
human wants are limited. The economic problem is the problem of rational
management of resources or the problem of optimum utilization of resources. It
arises because resources are scarce and resources have alternative uses. Had there
been unlimited resources to satisfy unlimited wants, there would have been no
economic problem. But resources are scarce in relation to the demand of the people.
Economic problem is to match limited resources to unlimited wants and needs. Three
questions arise from this:
• What to produce? - - Problem of allocation of resources
• How to produce? – Problem of choice of technique
• For whom to produce? – Problem of Distribution
What to produce? - 'What and how much will you produce?‘ e.g. "What should I
produce more; laptops or tablets?" The decision to produce one good will reduce the
production of the other goods. The economy has to decide based on the basis of
importance of various goods.
How to produce? This question deals with the assets and procedures used while
making the product, also focusing on efficiency. It is the problems of selection of
factor combination, labour intensive or capital intensive. The decision is made
considering the resources available with the country and the need of its economy. A
producer also considers prices and productivities of alternative factors. He chooses
that technique which economizes the use of scarce resources.
For whom to produce? - 'To whom and how will you distribute the goods?' and 'For
whom will you produce this for?' – whether to produce goods for more poor and less
rich or vice versa. Good are produced for those people who have paying capacity,
which depends upon their income.
Economics revolve around these fundamental economic problems.
 II. ECONOMIC AGENT

Economic agents are any individuals, institutions or groups of institutions that play
a part in any economic circuit through their rational actions and decisions. In general,
economists consider three or four types of economic agents:
1. Households (Consumers)
2. Firms (Producers)
3. Governments
4. Central Bank
i. Households - Ones who consume a produced good or service,
generally by financial purpose. They have a dual role in the economy.
On one side, they are consumers, they demand goods and services;
and on the other, they own the means of production through which
the goods and services are produced.
ii. Firms - Economic agents whose role is to transform factors of
production into goods and services to sell. Firms use factors of
production (land, labor, and capital) to produce goods and services,
creating value and wealth. They demand labor from families for a
salary, also they employ capital in exchange for an interest, and land
for a rent. Finally, They offer goods and services for the households,
others firms or the government.
iii. Government – An economic agent which provides rules for how firms
and consumers should interact. Government offer goods and
services (mostly public goods and services like roads or national
security) through national companies or in association with private
firms. Governments demand goods from firms and labor from
households. They levy taxes. They regulate prices, etc. They also
distribute the wealth through social services in education, health and
poverty programs.
iv. Central Banks – Some economists also consider Central Banks as
fourth economic agent. Central Banks manage country currency, money
supply, and interest rates. Through monetary policies, they can increase
the money supply in the economy or modify the interest rates to
 III. ECONOMIC ORGANIZATIONS

It refers to the way in which the means of production and

distribution of goods are organized, such as capitalism or socialism
or a mixture of both.

Capitalism - In capitalist economies, governments play a minimal role

in deciding what to produce, how much to produce, and when to
produce it, leaving the cost of goods and services to market forces.
Capitalism is based around a free market economy, meaning an
economy that distributes goods and services according to the laws
of supply and demand.
Socialism –In socialist economies, important economic decisions
are not left to the markets or decided by self-interested individuals.
Instead, the government—which owns or controls much of the
economy's resources—decides the what, when, and how of
production. This approach is also called "centralized planning.“
Mixed – A mixed economy is variously defined as
an economic system blending elements of market economies with
elements of planned economies, free markets with state
interventionism, or private enterprise with public enterprise.
 IV. MARGINALISM

Marginalism generally includes the study of marginal theories and relationships

within economics. The key focus of marginalism is how much extra use is gained
from incremental increases in the number of goods created, sold, etc. and how these
measures relate to consumer choice and demand.

Marginalism covers such topics as marginal utility, marginal gain, marginal rates of
substitution, and opportunity costs,
One of the key foundations of marginalism is the concept of
marginal utility. The utility of a product or service is its usefulness
in satisfying our needs. Marginal utility extends the concept to the
additional satisfaction derived from the same product or service.

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 V. TIME VALUE OF MONEY

The time value of money (TVM) is the concept that money available
at the present time is worth more than the identical sum in the
future due to its potential earning capacity. The time value of
money is the greater benefit of receiving money now rather than
later. It is founded on time preference. The principle of the time
value of money explains why interest is paid or earned: Interest,
whether it is on a bank deposit or debt, compensates the depositor
or lender for the time value of money. It also underlies investment.
Investors are willing to forgo spending their money now if they
expect a favorable return on their investment in the future. TVM is
also sometimes referred to as present discounted value or future
compounded value.

In TVM, we deal with four terms, interest rate, time period, future
(compounding) value, and present (discounting) value.

Interest - Interest is charge against use of money paid by the

borrower to the lender in addition to the actual money lent. It can
be Simple vs. Compound Interest
 VI. OPPORTUNITY COST

As our resources are limited, we are always forced to make choices between alternate
commodities. The amount of goods and services that must be sacrificed to obtain
more of any good is called the opportunity cost of that good. Opportunity cost is also
known as alternate cost. To sum up,
• It is the value of the second best alternative forgone.
• It is the benefit that is lost in making a choice between two competing uses of
scarce resources.
• It is the amount of other product that must be forgone or sacrificed to produce a
unit of a product.
Example- You are working in bank at salary of Rs 40000 a month. You receive two
more job offers:
To work as an executive at Rs 30000 a month
To work as a journalist at Rs 35000 per month
The OC of working in a bank is Rs, 35000.