CDZ1A/CDW1A/CDC1A Business Economics. Unit : I - V

Transcription

1 CDZ1A/CDW1A/CDC1A Business Economics Unit : I - V

2 Unit I: Syllabus Wealth, Welfare & Scarcity Definitions Positive and Normative Economics Scope and importance of Business Economics Production Possibility curve/frontiers Accounting profit & Economic profit 2

3 Adam Smith ( ) Father of political economy As who is the first person to give definition to economics and he separate economics from other sciences Name of his definition is Wealth definition An inquiry into the nature and causes of wealth of nations

4 Adam Smith ( ) content: font size 20 4

5 Adam Smith Definition in short In short economics lays down the principles to make the people and the Sovereign rich. The science provides ways and means of getting plentiful revenue to the State and more property to the people 5

6 Appraisal & Criticism Appraisal 1. Separate economics from other subject 2. Economics studies the causes of wealth changes 3. Economics is a body of knowledge which deals with consumption, production, exchange and distribution Criticism 1.Too much emphasis on wealth and restricted meaning on health. 2.Concept of Economic man 3. No mention of Man s welfare 4. Economic problem 6

7 ALFRED MARSHALL ( ) 7

8 Definition A study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of material requisites of wellbeing 8

9 Appraisal & Criticism Appraisal Has given due importance for man and wealth. He has made welfare of mankind as the ultimate goal of this science. Thus he has made economics normative Criticism Marshall gave importance for material requisites and hence non-material things would be outside the scope of economics according to him. Objection to welfare production of intoxicants (wine and opium ) it is an economic activity but not good for health. 9

10 Lionel Robbin s 10

11 Scarcity Definition Science which studies human behaviour as a relationship between ends and scarce means which have alternative uses Highlights of Definition Wants are unlimited (economic problems are dealt) Means are scarce (focuses on a particular aspect of behaviour) Means are capable of alternative uses. 11

12 POSITIVE ECONOMICS & NORMATIVE ECONOMICS POSITIVE ECONOMICS DESCRIBE THINGS WHAT IT IS NORMATIVE ECONOMICS PRESCRIBE THINGS WHAT IT OUGHT TO BE 12

13 Micro & Macro Economics Micro Economics Micro economics is the study of the economics actions of individuals, small group of individuals. Macro Economics Macro economics is concerned with the determination of the broad aggregates in the economy such as national product, employment, the price level and balance of payment 13

14 Scope of Business Economics I. Whether Business Economics is normative or positive economics II. Area of study III. Profits _ The Central Concept in Business Economics IV. Optimisation V. Relationship of Business Economics with other Disciplines 14

15 Production Possibility Curve or Transformation Curve Production possibility curve shows the menu of choice along which a society can choose to substitute one good for another assuming a given state of technology and given total resources. 15

16 Accounting and Economic Profit Accounting Profit=TR (W+R+I+M) Where W = Wages and salaries R=Rent; I=Interest; M=Cost of materials Economic profit=total Revenue (Explicit costs + Implicit costs) 16

17 Unit II: Syllabus Meaning of Demand Determinants of demand Law of Demand Elasticity of Demand Demand Forecasting Supply 17

18 DEMAND Demand is not merely a wish or desire, but an effective demand that is desire backed by purchasing power and willingness to buy. Demand=Wants + Purchasing power. 18

19 Law of Demand Law of Demand, other things being equal, if the price of commodity falls, the quantity demanded of it will rise, and if the price of the commodity rises, it quantity demanded will decline 19

20 Other things being equal No change in the consumer s income, taste and preferences No change in the prices of substitute and complements No new substitutes for the goods have been discovered. People do not feel that the present fall in price is a prelude to a further decline in price. The commodity in question is not one which has a prestige value. 20

21 Demand Schedule and Demand Curve A 21

22 Why does demand curve slopes downwards? 1. Law of Diminishing Marginal utility 2. Substitution Effect 3. Income Effect 4. Less Urgent uses CDZ1A/CDW1A- 22

23 Exception to demand curve 1. Giffen Paradox 2. Veblen Goods 3. Other Exceptions CDZ1A/CDW1A- 23

24 Factors determining the demand 1. Changes in tastes and fashions 2. Changes in Weather 3. Changes in Income and Distribution of Income 4. Changes in Expectation 5. Changes is Savings 6. Consumer Credit Policy 7. Advertisement 8. Demonstration Effect CDZ1A/CDW1A- 24

25 Elasticity of demand Elasticity of demand measures the responsiveness of the quantity demanded to the change in the price Percentage change in the qty demanded Ed = Percentage change in the price 25

26 Kinds of elasticity of demand I. Price elasticity of demand Price elasticity of demand shows the changes relationship between price of product and quantity demanded II. Income elasticity of demand Income elasticity of demand shows the change in relationship between the consumers income and quantity demanded III. Cross elasticity of demand Cross elasticity of demand shows the change in relationship between the two commodities demanded 26

27 Types of price elasticity A. Unitary Elastic Demand Ed = 1 B. Relatively Elastic Demand Ed greater than one C. Relatively Inelastic Demand Ed=less than 1 D. Perfectly Inelastic Demand Ed = 0 E. Perfectly Elastic Demand Ed = infinite 27

28 Types of price elasticity E 28

29 FACTORS DETERMINING ELASTICITY OF DEMAND 1. Availability of substitutes 2. Number of variety of uses 3. The importance of the commodity in the Buyer s Budget 4. Nature of the commodity 5. Range of Prices 6. Time factor in elasticity 7. Habitual Necessaries 29

30 Methods of demand forecasting Forecasting Methods Survey method Statistical method Opinion Survey Consumer s interview Trend Projection Complete Enumeration Correlation and Regression Sample survey Barometric Method End use method 30

31 Supply Means the quantities of a commodity or services which a seller is willing and able to offer for sale at various prices during a given period of time. 31

32 Supply Schedule and Supply Curve E 32

33 Unit III: Syllabus Law of Diminishing Marginal Utility Law of Equi Marginal Utility Indifference curve Definition, Properties and equilibrium 33

34 UTILITY Utility is a power of a commodity or services to satisfy a human want. Utility is said mean the satisfaction, Utility of a commodity refers to the expected satisfaction which consumer hopes to get from it. 34

35 CARDINAL UTILITY AND ORDINAL UTILITY The term cardinal and ordinal utility are borrowed from mathematics. The number 1,2,3,4 etc., are cardinal numbers. According to the concept of ordinal utility the utility cannot be measured. The numbers 1st,2nd,3rd,4th are ordinal numbers. The numbers are ordered or ranked 35

36 TOTAL UTILITY AND MARGINAL UTILITY Total utility is the amount of satisfaction derived from the consumption of or possession of good. Marginal utility is the utility or satisfaction derived one more unit of the commodity. TUn-TUn-1=MU 36

37 Law of Diminishing Marginal Utility The law states that as a person consumes more of any good the total utility he derives increases but the increase in total utility is not proportionate to the increase in his consumption 37

38 Law of Diminishing Marginal Utility A D 38

39 Law of Equi-marginal utility Marshall If a person has a thing which can be put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all. For if it had a greater marginal utility in one use than another he would gain by taking away some of it from the second use and applying it to the first. 39

40 Equilibrium or Maximum satisfaction for two commodities The law of equi-marginal utility states that the consumer will distribute his money income between the two good A&B in such a way that the utility derived from the last rupee spent on each commodity is equal. Mua Mub MUm = = Pa Pb 40

41 Law of equi-marginal utility 41

42 Indifference curve An indifference curve refers to the same level of satisfaction of the consumer derived from a combination of two goods. A scale of preference of consists of a number of alternatives combination of two goods which give the consumer same level of satisfaction. 42

43 PROPERITIES OF INDIFFERENCE CURVE 1. It is convex to the origin. 2.Indifference curve slope downwards to the right. 3. Every indifference curve to the right represents higher level of satisfaction. 4. Indifference curve cannot intersect to the origin. 5. Indifference curve will not touch the axis. 43

44 INDIFFERENCE MAP A collection of indifference curves corresponding to different levels of satisfaction. 44

45 Budget line Consumer budget states the real income or purchasing power of the consumer from which he can purchase certain quantitative bundles of two goods at given prices. 45

46 Consumer Equilibrium with indifference curve A consumer is said to be in equilibrium at a point price line is touching the highest attainable indifference curve from below 46

47 Unit IV: Syllabus Production Function Law of Variable Proportion Law of Return to Scale Economics of Scale Cost classification Break Even Analysis 47

48 Production Function According to the Stigler The production function is the given to the relationship between rates of input of productive services and the rate of output of product. Y=f(L,K,R,S,V,r) Where Y =output L=Labour unit K=Capital input R=Raw material S=Land input V=Returns to scale r= Efficiency parameter 48

49 The law of variable proportion If one input is variable and all other inputs are fixed the firms production function exhibits the law of variable proportions. The law states that as the quantity of a variable input is increased by equal doses keeping the quantities of other inputs constant total product will increase but after a point at a diminishing rate. 49

50 Stage I Total product first increase at increasing rate then the rate increase changes from increasing to diminish Marginal product increases at a maximum and begins to diminish. Average product increases continues to increase. Stage II Law of variable proportion Total product continues to increasing at a diminishing rate reaches a maximum and then tarts diminishing. M.P continues to diminish become zero. A.P reaches a maximum where it equals MP and then starts diminishing. of 50

51 Law of variable proportion Stage III Total product diminishes. M.P is negative. A.P continues to diminish Law of variable proportion 1PxWbAYrek4 51

52 Internal / External economies Internal economies of production which accrue to the firm when it expands the output, so that the cost of production would come considerably and place the firm is better position to compete in market effectively. External economies are the benefits accruing to each member firm of the industry as a result of the expansion of the industry. 52

53 Types of internal economies Labour economies Technical economies Marketing economies Managerial economies Financial economies Economies of survival 53

54 EXTERNAL ECONOMIES Economies of concentration Economies of information Economies of welfare Economies of specialization CDZ1A/CDW1A- 54

55 MONEY COST & REAL COST, OPPORTUNITY COST Money Cost According to accountants the money cost of producing an article includes only those costs which are directly paid out or accounted for by the producers, i.e., wages, interest, rent depreciation charges on fixed capital,taxes and sundry expenses. Real Cost All efforts and sacrifice made by the society. Opportunity Cost It means next best alternative use of the resources. 55

56 PAST COST AND FUTURE COST It means costs which have actually incurred in the past and find entry on the books of account. Future cost are those costs which are likely to be incurred in future periods or to be very precise, the costs that are contemplated to be incurred in future periods. But the management can have control over future costs. Future costs are generally projected on the basis of past costs. 56

57 OUT OF POCKET COST AND BOOK - COST Out of pocket cost denotes immediate current payment. Hence it is called cash cost or explicit cost. Book cost denotes which need not be immediate current payment. Hence it is called implicit cost. 57

58 INCREMENTAL COST AND SUNK COST Incremental cost refers to the additional cost incurred due to change in the level of business activity. Sunk cost are those costs which remain unaltered even after change in level of business activity. 58

59 SHORT RUN COST & LONG RUN COST Short run cost In the short period only certain factors input could be made variable and some other factors could not be changed or adaptable. In the short run there is no scope to vary plant and machinery, cost varies with the level of output. Long run Cost In the long run all input factors are made variable and adaptable to the changes in the rate of output. 59

60 FIXED COST AND VARIABLE COST Some inputs can be fixed over the period of time for producing more than one batch of goods. The fixed capital of the firm,e.g., equipment, machinery, land, and buildings. Variable costs are those costs which are exhausted by a single use, e.g.,raw material and fuel etc,. 60

61 Break Even Point The break-even point (BEP) in economics, business and specifically cost accounting is the point at which total cost and total revenue are equal. There is no net loss or gain. 61

62 Cost Control Cost control involves discovering better and economical way of doing each operation. It aims at keeping the costs down thereby increasing the profitability and competence of the firm and making best use of every rupee spent in producing a commodity. Internal Economies Break Even Point 62

63 Unit V:Syllabus Price and Output Determination under perfect competition Monopoly Monopolistic competition Oligopoly Pricing objectives and methods 63

64 Objectives Of Pricing Policy 1. Prices should aim at maximising profit for the entire product line. 2. Prices should be set to promote the long-range welfare of the firm. 3. Prices should be adapted and individualized to fit the diverse competitive situations encountered by different products, 4. Pricing policies should be flexible enough to meet changes in economic conditions of the various customer industries 64

65 Pricing Methods 1. Cost-Plus or full-cost Pricing Method 2. Target Pricing Or Pricing For A Rate Of Return 3. Marginal Cost Pricing 4. Going-Rate Pricing 5. Customary Pricing 6. Differential Pricing 7. Administered Pricing 65

66 Perfect Competition According to Prof.Frank Knight the term perfect competition is defined as a condition of market in which there will be fluidity & mobility of factors of production so that the number of firms and the size of firms can freely increase or decrease 66

67 Short run equilibrium under Perfect Competition In the short-run, it is possible for an individual firm to make a profit. This situation is shown in this diagram, as the price or average revenue, denoted by P, is above the average cost denoted by C. 67

68 Long run equilibrium under Perfect Competition However, in the long period, positive profit cannot be sustained. The arrival of new firms or expansion of existing firms (if returns to scale are constant) in the market causes the (horizontal) demand curve of each individual firm to shift downward, bringing down at the same time the price, the average revenue and marginal revenue curve. The final outcome is that, in the long run, the firm will make only normal profit (zero economic profit). Its horizontal demand curve will touch its average total cost curve at its lowest point. 68

69 Monopoly the control over the market. Monopoly means absence of competition. Its an extreme situation in imperfect competition. It denotes a single seller or producer having 69

70 Monopolistic competition Monopolistic competition is a common market structure where many competing producers sell products that are differentiated from one another (ie. the products are substitutes, but are not exactly alike). 70

71 Oligopoly Classification of Oligopoly Oligopoly means few seller in the market. 1. Pure or perfect Oligopoly & Differentiated or Imperfect Oligopoly 2. Open & Closed Oligopoly 3. Collusive & Competitive Oligopoly 4. Partial & full Oligopoly 5. Syndicated & Organized Oligopoly 71

72 Oligopoly Kinked Demand curve According to Prof. Leftwhich An Oligopolistic industry is one in which the number of sellers is small enough for the activities of single seller to affect other firms and for the activities of other firms to affect him 72