SBA1103 – BUSINESS ECONOMICS

I BBA (2020 – 2023)

https://www.economicsdiscussion.net/utility/
utility-meaning-characteristics-and-types-
economics/13594 1
 L T P Credits Total Marks
SBAA1103 BUSINESS ECONOMICS
4 0 0 4 100

COURSE OBJECTIVES
 To understand the Principles of Economics in Business.
 To gain knowledge of Micro and Macro Economic environment.
 To analyze the different market structures.

UNIT 1 INTRODUCTION 9 Hrs.

Definition, Nature, Scope ,Limitations of Economics –Economics an art or Science - Relevance of Economics in Business
Management - Utility analysis, Marginal Theory of utilities and Equi-Marginal theory of utility.

UNIT 2 DEMAND AND SUPPLY FUNCTIONS 9 Hrs.

Meaning of demand - Demand theory and objectives- Demand analysis - Demand schedule - Demand Curve - Laws of
Demand - Elasticity of Demand -Types and Measurement - Indifference curves analysis - Laws of Supply - Elasticity of
Supply - Consumer Equilibrium - Consumer Surplus

UNIT 3 PRODUCTION 9 Hrs.

Meaning - Analysis of Production function - Laws of production, Laws of increasing returns and Laws of constant returns -
Laws of Returns to Scale - Equal product curves and Producers equilibrium

UNIT 4 MARKET ANALYSIS 9 Hrs.

Market analysis - Nature of market - Types of markets and their characteristics - Pricing under different market structures –
Perfect Competition - Monopoly - Oligopoly and Monopolistic competition - Price discrimination under monopoly competition.

UNIT 5 THEORIES OF FACTOR PAYMENT 9 Hrs.

Theories of factor pricing - factor pricing vs. product pricing - Theories of rent, Theories of interest, Theories of wages,
Theories of profit - Concept of profit maximization.

Max. 45 Hrs.
COURSE OUTCOMES
On completion of the course, student will be able to
CO1 - Describe the Economic Principles.
CO2 - Interpret Demand and Supply.
CO3 - Determine Production and Cost Estimates.
CO4 - Explain Market Structure and Pricing Practices.
CO5 - Evaluate Economic Policies.
CO6 - Formulate profit maximization.
2
 SBAA1103 – Business Economics

UNIT 1 INTRODUCTION 9 Hrs.

Definition, Nature, Scope ,Limitations of Economics –

Economics an art or Science - Relevance of Economics in
Business Management - Utility analysis, Marginal Theory of
utilities and Equi-Marginal theory of utility.

DR. J. RANI
3
What is Economics?

• Economics is the science that deals with production, exchange and

consumption of various commodities in economic systems.
• It shows how scarce resources can be used to increase wealth and
human welfare.
• The central focus of economics is on scarcity of resources and choices
among their alternative uses.
• The resources or inputs available to produce goods are limited or
scarce.
• This scarcity induces people to make choices among alternatives, and
the knowledge of economics is used to compare the alternatives for
choosing the best among them.

4
 INTRODUCTION
Human wants
Social science and their
satisfaction

Eco

Economics
nomics

Employ its For present

scarce and future
resources consumption
• Political Economy is another name of Economics.

• “Polis “ in Greek means a state

• The term Political economy means the

management of the wealth of the state.

• The state is expected to get maximum benefit for

the society
They are: i) the existence of unlimited human wants and ii) the scarcity of
available resources. The numerous human wants are to be satisfied through the
scarce resources available in nature. Economics deals with how the numerous
HUMAN
human WANT
wants are to be satisfied with limited ECONOMIC
Beginning ACTIVITY
resources. Thus, the science of
economics centres on want - e ffort - satisfaction.

WANT

SATISFACTION EFFORT

Economics not only covers the decision making behaviour of individuals

but also the macro variables of economies like national income, public finance,
internatio na l trade• and
Economics
so on. is science of wants

• Economics is science of scarcity

• Economics is science of choice

• The situation that prevails in real world

• The means which satisfy our wants are limited

• Time and money are limited

• Land ,labour and capital used for production are

limited

• Science has increased our resources but our want

also has increased
• Two major factors are responsible for the emergence of economic

problems. They are :

I. The existence of unlimited human wants and

II. The scarcity of available resources

• The numerous human wants are to be satisfied through the scarce

resources available in nature.

• Economics deals with how the numerous human wants are to be satisfied

with limited resources.

• Thus, the science of economics centers on want-effort-satisfaction.

• Economics not only covers the decision making behavior of individuals but

also the macro variables of economics like national income, public finance,

international trade and so on.

NATURE OF ECONOMICS

Under this, we generally discuss whether Economics is science or art or both and if it is a
science whether it is a positive science or a normative science or both.

Economics - As a science and as an art:

There are following characteristics of any science subject, such as;

• It is based on systematic study of knowledge or facts;

• It develops correlation-ship between cause and effect;
• All the laws are universally accepted
• All the laws are tested and based on experiments;
• It can make future predictions;
• It has a scale of measurement.
On the basis of all these characteristics, Prof. Robbins, Prof Jordon, Prof. Robertson etc.
claimed economics as one of the subject of science like physics, chemistry etc. According
to all these economists, ‘economics’ has also several characteristics similar to other
science subjects.

• Economics is also a systematic study of knowledge and facts. All the theories and facts
related with both micro and macro economics are systematically collected, classified
and analysed.

• Economics deals with the correlation-ship between cause and effect. For example,
supply is a positive function of price, i.e., change in price is cause but change in
supply is effect.

• All the laws in economics are also universally accepted, like, law of demand, law of
supply, law of diminishing marginal utility etc.

• Theories and laws of economics are based on experiments, like, mixed economy to is
an experimental outcome between capitalist and socialist economies.

• Economics has a scale of measurement. According to Prof. Marshall, ‘money’ is used

as the measuring rod in economics. However, according to Prof. A.K. Sen, Human
Development Index (HDI) is used to measure economic development of a country.
Economics is an art:

• Art is nothing but practice of knowledge.

• Whereas science teaches us to know art teaches us to do.
• Unlike science which is theoretical, art is practical.

If we analyse Economics, we find that it has the features of an art also.

Its various branches, consumption, production, public finance, etc. provide

practicality solutions to various economic problems. It helps in solving various
economic problems which we face in our day-to-day life.

Thus, Economics is both a science and an art.

It is science in its methodology and art in its application.

Study of unemployment problem is science but framing suitable policies for

reducing the extent of unemployment is an art.
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. The life
expectancy of birth in India is gradually rising. All these above statements are known as
positive statements. These statements are all concerned with real facts and information.

On the contrary, normative science deals with what ought to be? What ought to
have happened? Normative science offers suggestions to the problems.

The statements dealing with these suggestions are coming under normative statements.
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. The
backwardness of Indian economy is due to ‘population explosion’.
The following statements can ensure economics as a positive science, such as;

• Logically based: The ideas of economics are based on absolute logical clarifications
and moreover, it develops relationship between cause and effect.

• Labour Specialisation: Labour law is an important topic of economics. It is based on

the law of specialisation of labour Economists must concern with the causes and
effects of labour-division.

• Not Neutral: Economics is not a neutral between positive and normative sciences.
According to most economists, economics is merely positive science rather than
normative science.
Economics and Normative Science:
The following statements can ensure economics as a normative science, such as,

• Emotional View: A rational human being has not only logical view but also has
sentimental attachments and emotional views regarding any activity. These
emotional attachments are all coming under normative statements. Hence,
economics is a normative science.

• Welfare Activity: Economics is a science of human welfare, All the economic

forwarded their theories for the development of human standard of living Hence, all
the economic statements have their respective normative views.

• Economic Planning: Economic planning is one of the main instruments of

economic development. Several economists have given their personal views for the
successful implementation of economic plan. Hence, economics is coming under
normative science.

All these lead us to the conclusion that ‘Economics’ is both positive and normative
science. It does not only tell us why certain things happen however, it also gives idea
whether it is right thing to happen.
scope of economics

Microeconomics: The part of economics whose subject matter of study is individual

units, i.e. a consumer, a household, a firm, an industry, etc. It analyses the way in which
the decisions are taken by the economic agents, concerning the allocation of the
resources that are limited in nature.
It studies consumer behaviour, product pricing, firm’s behaviour. Factor pricing, etc.

Macro Economics: It is that branch of economics which studies the entire

economy, instead of individual units, i.e. level of output, total investment, total
savings, total consumption, etc. Basically, it is the study of aggregates and
averages. It analyses the economic environment as a whole, wherein the firms,
consumers, households, and governments make decisions.
It covers areas like national income, general price level, the balance of trade and
balance of payment, level of employment, level of savings and investment.
Economics is derived from the Greek word ‘ Oikonomia’ meaning ‘Household
Management’.

Limited resources and Unlimited wants – includes economic theory And principles in
allocation of resources in an effective manner.

Economics is a study of how society uses its limited resources.

What is Business Economics?

Integrating of economic theory and principles in to the business.

Business utilizes these theories in various decision making in business like:

1. Production Decisions
2. Financial Decisions
3. Human Resource Decisions
4. Distribution Decisions

Objectives of Business Economics:

1. Effective allocation of resources.

2. Integrating Economic Theories and Principles.
3. Profit or Wealth Maximization.
Characteristic features of Business Economics:

1. Applied Economics – Business economics is a branch of economics Which uses

economic theories and principles and applies into the business Therefore it is called
applied economics.

2. Micro in Nature : It looks only into the firms perspective.

3. It is normative in approach : It gives certain standards and certain laws ,but Business
will use these standards as how relevant it is to their particular business Callig it as
‘Pragmatic in Approach’(Using right for your business)

Eg: Law of demand is common for all business but business are different in various
perspective like – different kind of product, nature of product, target market, Consumer base
etc.,

4.Macro Analysis : Though it is micro in nature it analyses the external environment

( PESTEL) – Political, Economic, Legal, Social ,Ecological factors in order to take decisions
for micro perspective

5.Study of Allocation of resources and study of decision making in a business

Micro and Macro Economics terms were given by ‘ Ragnar Frisch’ in 1933

Micro means Individualistic and Macro means Aggregate Approach

Micro economics is a branch of economics which deals with individual units Like : producer,
consumer, particular product, price of the product..

Business economics will use more of micro aspects like demand ,supply etc.,
It also helps in answering economic problems like What to produce? How to produce? For
whom to produce etc.,

Macro economics is another branch of economics which deals the aggregate of these
individuals like – Aggregate demand, Aggregate supply, National Income, GDP, Inflation,
Deflation.. Macro economics studies the Economy as a whole..

Difference between Economics and Business Economics:

Business Economics is limited in its scope, Economics has much wider scope.
Business Economics integrates the economic theory, economics gives the particular theory..
Business economics is micro in nature and Economics is macro in nature..
Business Economics deals with theories like profit but Economics deals with theories like
Profit, Wages, interest etc.,
Meaning of Utility:
The simple meaning of ‘utility’ is ‘usefulness’. In economics utility is the capacity of a
commodity to satisfy human wants.
Utility is the quality in goods to satisfy human wants. Thus, it is said that “Wants
satisfying capacity of goods or services is called Utility.”
Kinds of Utility: Utility are of three kinds:

• Marginal Utility,
• Total Utility,
• Average Utility

(i) Marginal Utility:

Definition:
Marginal utility is the utility derived from the last or marginal unit of consumption. It refers
to the additional utility derived from an extra unit of the given commodity purchased,
acquired or consumed by the consumer.

It is the net addition to total utility made by the utility of the additional or extra units of the
commodity in its total stock. It has been said—as the last unit in the given total stock of a
commodity.

According to Prof. Boulding—”The marginal utility of any quantity of a commodity is the

increase in total utility which results from a unit increase in its consumption.”
For example:
Suppose Mr. Shanker is consuming bread and he takes five breads. By taking first unit he
derives utility up to 20; second unit 16; third unit 12; fourth unit 8 and from fifth 2. In this
example the marginal unit is fifth bread and the marginal utility derived is 2. If we will
consume only four bread then the marginal unit will be fourth bread and utility will be 8.
(ii) Total Utility:
Total Utility is the utility from all units of consumption. According to Mayers—”Total Utility
is the sum of the marginal utilities associated with the consumption of the successive units.”
For example:
Suppose, a man consumes five breads at a time. He derives from first bread 20 units of
satisfaction from 16, from third 12, from fourth 8 and from fifth 4 i.e., total 60 units.

(iii) Average Utility:

Average Utility is that utility in which the total unit of consumption of goods is divided by
number of Total Units. The Quotient is known as Average Utility. For example—If the Total
Utility of 4 bread is 40, then the average utility of 3 bread will be 12 if the Total Utility of 3
bread is 36 i.e., (36 ÷ 3 = 12).

The following table will explain the point clearly:

It is clear from the above table that by the increasing use of any article Marginal and Average
Utility reduces gradually and Total Utility increases only up to that point where the Marginal
Utility comes to zero.
What Is Marginal Utility?

Marginal utility is the added satisfaction that a consumer gets from having one
more unit of a good or service. The concept of marginal utility is used by
economists to determine how much of an item consumers are willing to
purchase. Positive marginal utility occurs when the consumption of an additional
item increases the total utility. On the other hand, negative marginal utility
occurs when the consumption of one more unit decreases the overall utility.

KEY TAKEAWAYS:

• Marginal utility is the added satisfaction a consumer gets from having one
more unit of a good or service.
• The concept of marginal utility is used by economists to determine how much
of an item consumers are willing to purchase.
• The law of diminishing marginal utility is often used to justify progressive
taxes.
• Marginal utility can be positive, zero, or negative.
Types of Marginal Utility
There are multiple kinds of marginal utility. Three of the most common ones are as
follows:

Positive Marginal Utility:

Positive marginal utility occurs when having more of an item brings additional
happiness. Suppose you like eating a slice of cake, but a second slice would bring
you some extra joy. Then, your marginal utility from consuming cake is positive.

Zero Marginal Utility:

Zero marginal utility is what happens when consuming more of an item brings no
extra measure of satisfaction. For example, you might feel fairly full after two slices
of cake and wouldn't really feel any better after having a third slice. In this case, your
marginal utility from eating cake is zero.

Negative Marginal Utility:

Negative marginal utility is where you have too much of an item, so consuming more
is actually harmful. For instance, a fourth slice of cake might even make you sick
after eating three pieces of cake.
Customers are the ultimate user for any goods or services, and the producers only aim is to
satisfy their needs and desires. However, the level of satisfaction differs from an individual
to individual and their mental position. The measurement of this utility and satisfaction has
always been a topic of discussion.
There are many theories that describe the level of satisfaction; however, cardinal utility and
ordinal utility are the two predominant theories of utility. Cardinal utility believes in
measuring the satisfaction level in utils, and Ordinal utility believes that the satisfaction
level cannot be evaluated; however, it can be levelled.
The Law of equimarginal Utility is another fundamental principle of Econo­mics.

This law is also known as the Law of substitution or the Law of Maxi­mum Satisfaction.

We know that human wants are unlimited whereas the means to satisfy these wants are
strictly limited. It, therefore’ becomes necessary to pick up the most urgent wants that
can be satisfied with the money that a consumer has. Of the things that he decides to buy
he must buy just the right quantity. Every prudent consumer will try to make the best use
of the money at his disposal and derive the maximum satisfaction.

Explanation of the Law:

In order to get maximum satisfaction out of the funds we have, we carefully weigh the
satisfaction obtained from each rupee ‘had we spend If we find that a rupee spent in one
direction has greater utility than in another, we shall go on spending money on the former
commodity, till the satisfaction derived from the last rupee spent in the two cases is equal.
It other words, we substitute some units of the commodity of greater utility tor some
units of the commodity of less utility. The result of this substitution will be that the
marginal utility of the former will fall and that of the latter will rise, till the two marginal
utilities are equalized. That is why the law is also called the Law of Substitution or the Law
of equimarginal Utility.
Suppose apples and oranges are the two commodities to be purchased. Suppose further
that we have got seven rupees to spend. Let us spend three rupees on oranges and four
rupees on apples. What is the result? The utility of the 3rd unit of oranges is 6 and that of
the 4th unit of apples is 2. As the marginal utility of oranges is higher, we should buy more
of oranges and less of apples. Let us substitute one orange for one apple so that we buy
four oranges and three apples.

Now the marginal utility of both oranges and apples is the same, i.e., 4. This arrangement
yields maximum satisfaction. The total utility of 4 oranges would be 10 + 8 + 6 + 4 = 28 and
of three apples 8 + 6 + 4= 18 which gives us a total utility of 46. The satisfaction given by 4
oranges and 3 apples at one rupee each is greater than could be obtained by any other
combination of apples and oranges. In no other case does this utility amount to 46. We
may take some other combinations and see.

We thus come to the conclusion that we obtain maximum satisfaction when we

equalize marginal utilities by substituting some units of the more useful for the
less useful commodity. We can illustrate this principle with the help of a diagram.
Practical Importance of the Law of Substitution:
The law of substitution is of great practical importance. Everybody has got limited
income. Naturally he must try to make the best use of it.

Consumption: A wise consumer consciously acts on this law while arranging his
expenditure. His expenditure is so distributed that the same price measures equal utilities
at the margin of different purchases. Every person must try to spend his income in a
manner which yields him the greatest satisfaction. This he will be able to do only if he
spends his money in such a manner as to ob­tain equal satisfaction from the marginal
units of money spent on the various commodities he purchases.

Production: The law is also of great importance in production. The producer has to use
several factors of production. He wants maximum net profit. For this purpose, he must
substitute one factor for another so as to have the most economical combination, for
example, he will substitute labour for machinery and vice versa, So that the marginal
utility or marginal productivity of the two is equalized in this manner, he will get most
economical combination of the ‘actors of production at his disposal to make maximum
profit.

Exchange: The law also applies in exchange because exchange is nothing else but
substitution of one thing for another. When we sell a commodity, say, sugar, we get
money. With this money, we buy another commodity, say, wheal. We have, therefore,
really substituted sugar for wheat.
Distribution:
It is on the principle of marginal productivity that the share of each factor of production
(viz., land, labor, capital, organization) is determined. The use of each factor is pushed up
to a point where its marginal product is equal to the marginal product of every other
factor, of course after allowing for the differences in their respective remunerations. This
necessitates substituting one factor for another.

Public Finance:
The Government, too, is guided by this law in public expenditure. The public revenues
are so spent as to secure maximum welfare for me community. The Government must
cut down all wasteful expenditure while the return is not proportionate and instead
concentrate its resources on more productive or more beneficial expenditure.

Influences Prices:
The law of substitution influences prices. When a commodity becomes scarce and its
price soars high, we substitute for it things which are less scarce. Its price, therefore,
comes down.