SUBJECTS

• BUSINESS ECONOMICS – 60 MARKS

• BUSINESS AND COMMERCIAL KNOWLEDGE- 40
MARKS
 CHAPTER MAY NOV MAY NOV
18 18 19 19
NATURE AND SCOPE 10 9 10 10
E C O N O M I C S ( W E I G H TA G E )

DEMAND AND SUPPLY 20 16 16 20

PRODUCTION AND 10 12 9 11
COST
MARKET 12 14 15 12
BUSINESS CYCLE 8 9 10 7
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NOTES MAKING
Scarcity refers to a basic economic problem—the
gap between limited resources and limitless
wants.

This situation requires people to make decisions

about how to allocate resources efficiently, in
order to satisfy basic needs and as many
additional wants as possible.
Choices mean that one alternative is selected over
another.

Selecting among alternatives involves three ideas

central to economics: scarcity, and opportunity cost.
What are Economic Activities
 • The term ‘Economics’ owes its origin to the
Greek word ‘Oikonomia’ which means
‘household’. Till 19th century,
• Economics was known as ‘Political
Economy.’ The book named ‘An Inquiry into
ORIGIN the Nature and Causes of the
• Wealth of Nations’ (1776) usually
abbreviated as ‘The Wealth of Nations’, by
Adam Smith is considered as the first
modern work of Economics.
 Economics is the study of how societies use
scarce resources to produce valuable
commodities and distribute them among
different people.

DEFINITON Economics studies how individuals, firms,

governments, and other organizations within
our society make choices and how these
choices determine a society’s use of its
resources.
 The classical economists like Adam Smith, J.S. Mill,
Ricardo, Senior and others were the first to give a
systematic definition of Economics.

Adam Smith, father of Economics and founder of

WEALTH classical school of economics, in his famous book, “An
Enquiry into the Nature and Causes of Wealth of
DEFINITION Nations,” had defined Economics as “the science of
wealth”.

According to him, “Economics is concerned with an

enquiry into the nature and cause of wealth of nations,
and it related to the laws of production, exchange,
distribution and consumption of wealth”.
WELFARE DEFINITION
• Professor Alfred Marshall had propounded
welfare definition in his book “Principles of
Economics” in 1890.
• According to him, “Economics is 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 well-being.
• Thus, it is one side a study of wealth; on the
other and more important side a part of the
study of man.”
Definition according to era

1.Classical era (18th centaury)- Adam smith and J B Say.

They called economics as science of wealth.

2.Neo classical era (19th centaury)- Alfred Marshall and

A C Pigou They called economics as Science of welfare.

3.Modern era(20th centaury)- In this era economics as a

science of scarcity was given by lionel robbins and growth
and development term was given by Paul a samulson.
Economics as a Science

A subject is considered science if:

It is a study of the relationship between cause and effect.
It is capable of measurable and based on facts.
It has its own methodological apparatus.
It should have the ability to forecast.
After being analyzed, economics has all the features of science.
Like science, it has a cause and effect relationship
between economic phenomena.

For instance, Law of demand explains the cause and effect relationship between
price and quantity demanded a commodity.
Similarly, the outcomes are measurable in terms of money.
It has its own methodology of study.

It forecasts the future market condition with the help of various statistical and non-statistical tools.

Thus, a majority of economic laws are of this type and therefore, economics as a science.
Critics

Economics as a science but not a perfect science like physical science. The fact is that we cannot rely upon
the accuracy of the economic laws.

The predictions made on the basis of economic laws can easily go wrong.

In other words, the subject matter of economics is the economic behaviour of man which is highly
unpredictable.
Economics as an Art

Art is a branch of study that deals with expressing or applying the creative skills and imagination
of humans to perform a certain activity.

Similarly, economics also requires human imagination for the practical application of scientific
laws, principles, and theories to perform a particular activity.

Art is a system of rules for the achievement of a given end. We know that in practice, economics
is used for achieving a variety of goals.

Every individual economic unit has an economic goal to achieve. It decides its course of action by
keeping in mind the end to be achieved and the situation faced by it.

Therefore, economic laws are widely used and relied upon at all levels of our economic
activities. And that makes economics an art.
Art tells us how to do the thing i.e. to achieve an objective. Economics is also
used for achieving a variety of goals.
For e.g. All policies etc made in economics has the ultimate objective of
solving economic problems.

Art is the practical application of theoretical knowledge Like Art, Economics

also practices its theoretical laws.
For e.g. The various policies are made only after having theoretical
knowledge of the society and country as a whole. Hence, economics is
also an art.
CONCLUSION

•Knowledge is science, action is art.’

MICRO ECONOMICS
• Meaning and Subject-matter of Microeconomics
• The word ‘Micro’ is derived from the Greek word mikros meaning small.
Microeconomics deals with small segments of the society.
• Microeconomics is defined as the study of behaviour of individual decision-
making units, such as consumers, resource owners and firms.
• It is also known as Price Theory since its major subject-matter deals with the
determination of price of commodities and factors.

• Microeconomics has both theoretical and practical importance. It solves the

three central problems of an economy, i.e., what, how and for whom to
produce.
MACRO ECONOMICS
• The word ‘Macro’ is derived from the Greek word makros meaning large.

• Macroeconomics deals with aggregative economics.

• Macroeconomics is defined as the study of overall economic phenomena, such as problem

of full employment, GNP, savings, investment, aggregate consumption, aggregate
investment, economic growth, etc.

• It is also known as Theory of Income and Employment since its major subject-matter deals
with the determination of income and employment.

• The study of macroeconomics is used to solve many problems of an economy like, monetary
problems, economic fluctuations, general unemployment, inflation, disequilibrium in the
balance of payment position, etc.
MICRO VS
MACRO
 CONCLUSION
• It is difficult to demarcate or differentiate between micro and macro
economics.

• What is macro from an economy’s point is micro in the context of the

world.
• It is difficult to say which is more important. Both have their own
significance.
• According to Prof. Samuelson, knowledge of both is absolutely vital and there
is no competition between macro and micro economics.
• Both are complementary and should be fully utilized for proper
understanding of an economy.
Economics as a Positive
Science VS Normative
Science
Economics as a Positive Science
• Positive economics deals with what is or how an economics problem facing a
society is actually facing.

• Robbins held that economics was purely a positive science.

• According to him, economics should be neutral or silent between ends, i.e.,

there should be no desire to learn about ethics of economic decisions.

• In other words, in positive economics we study human decisions as facts

which can be verified with actual data.
• Examples of positive economics are:
• (a) India is an overpopulated country.
• (b) A fall in the price of a good leads to a rise in its
quantity demanded.
• (c) Prices have been rising in India.
• (d ) Minimum Wage Law increases unemployment.
• (e) A profit maximizing firm will set its price where
marginal revenue is equal to marginal cost.
• (f ) Air is a mixture of gases.
• (g ) Increase in real per capita income increases the
standard of living of people.
Economics as a Normative Science

• Normative economics deals with what ought to be or how an

economic problem should be solved.

• Alfred Marshall and Pigou have considered the normative aspect of

economics.

• They maintain that economics is a normative science as it

prescribes that course of action which is desirable and necessary to
achieve social goals.
Interdependence of Positive and Normative Science
• In reality, economics has developed along both positive and
normative lines.
• Both these aspects have grown inseparably.
• The role of an economist is not only to explain and explore (i.e.,
positive aspect) but also to admire and condemn (i.e., negative
aspect.)
• This role of an economist is essential for a healthy and rapid growth
of an economy. giving facts and the second part is normative based
on value judgements.
BUSINESS ECONOMICS
Nature of Business Economics

• The economic world is extremely complex as there is a lot of

interdependence among the decisions and activities of
economic entities.
• Economic theories are hypothetical and simplistic in character
as they are based on economic models built on simplifying
assumptions.
• Therefore, usually, there is a gap between the propositions of
economic theory and happenings in the real economic world
in which the managers makedecisions.
Business Economics is a Science:

• Science is a systematized body of knowledge which

establishes cause and effect relationships.
• Business Economics integrates the tools of decision sciences
such as Mathematics, Statistics and Econometrics with
Economic Theory to arrive at appropriate strategies for
achieving the goals of the business enterprises.
• It follows scientific methods and empirically tests the validity
of the results.
 • Business Economics is based largely on Micro-
Economics.
• A business manager is usually concerned about
achievement of the predetermined objectives
Based on of his organization so as to ensure the long-term
Micro survival and profitable functioning of the
organization.
Economics • Since Business Economics is concerned more
with the decision making problems of individual
establishments, it relies heavily on the
techniques of Microeconomics.
Incorporates elements of Macro Analysis

• A business unit does not operate in a vacuum.

• It is affected by the external environment of the economy in
which it operates such as, the general price level, income and
employment levels in the economy and government policies
with respect to taxation, interest rates, exchange rates,
industries, prices, distribution, wages and regulation of
monopolies.
• All these are components of Macroeconomics.
• A business manager must be acquainted with these andother
macroeconomic variables, present as well as future, which
may influence his/ her business environment.
Business Economics is also an Art

it involves practical
application of rules attainment of set
and principles for objectives.
the
Use of Theory of Markets and Private Enterprises

• Business Economics largely uses the theory of

markets and private enterprise. It uses the theory of
the firm and resource allocation in the backdrop of a
private enterprise economy.
 Micro-Economics is abstract and
purely theoretical and analyses
economic phenomena under
Pragmatic unrealistic assumptions.
in
In contrast, Business Economics
Approach is pragmatic in its approach as it
tackles practical problems which
the firms face in the real world.
 • Business Economics is interdisciplinary in
nature as it incorporates tools from other
Interdisciplinary disciplines such as Mathematics, Operations
in Nature Research, Management Theory,
Accounting,marketing, Finance, Statistics
and Econometrics.
 • Economic theory has developed along two
lines – positive and normative. A positive or
pure science analyses cause and effect
Normative in relationship between variables in an
Nature objective and scientific manner, but it does
not involve any value judgement. In other
words, it states ‘what is’ of the state of
affairs and not what ‘ought to be’.
Economic Problems
 ECONOMY

• Economy: Meaning
• An economy is a system in which people earn their
living by performing different economic activities
like production, consumption and investment. In
other words, an economy refers to the whole
collection of production units in an
area(geographical area or political boundary) of a
country by which people get their living.
• An economy is classified into market economy and
planned economy. These economies can be
subdivided into closed economy and open
economy.
 Economic problem is the problem of choice.

Meaning of The problem of choice has to be faced by every

economy of the world, whether developed or
developing.
Economic Human beings have wants which are unlimited.

Problems When these wants get satisfied, new wants crop

up.

Human wants multiply at a fast rate. The economic

resources to satisfy these unlimited wants are
limited.
They are available in limited quantities in relation to the demand.

Resources are not only scarce but they also have alternative uses. All this
necessitates a choice between which goods and services to produce first.

The economy comprising of individuals, business firms, and societies must

make this choice.

According to Prof. Robbins, “the economic problem is the problem of choice

or the problem of economizing, i.e., it is the problem of fuller and efficient
utilization of the limited resources to satisfy maximum number of wants.
Causes of Economic Problems

• 1. Human Wants are Unlimited.

• Human beings have wants which are unlimited.

• Human want to consume more of better goods and services has always
been increasing.
• For example, the housing need has risen from a small house to a luxury
house, the need for means of transportation has gone up from scooters
to cars, etc. Human wants are endless. They keep on increasing with
rise in people's ability to satisfy them.
• 2. Resources are Limited.
• Scarcity of resources is the root cause of all economic problems.

• All resources that are available to the people at any point of time for satisfying their
wants are scarce and limited.

• Conceptually, anything which is available and can be used to satisfy human wants
and desire is a resource.

• In economics, however, resources that are available to individuals, households, firms

and society at any point of time are traditionally natural resources (land).
• Human resources (labor), capital resources (like machine, building, etc.)and
entrepreneurship are scarce.
• 3. Resources have Alternative Uses.

• Resources are not only scarce in supply but they have alternative uses.
Same resources cannot be used for more than one purpose at a time.

• For example, ` 100 can be put in various alternative purposes such as

buying petrol, notebook, ice-cream, burger, cold drink, etc.

• Similarly an area of land can be used for farming or as a playground or

for constructing school, college or hospital building or for constructing
residential building, etc.
 Economic Problems

• Economic problems are reflected in the form of Central or Basic Problems of an

economy.

• Any economy—whether market, centrally planned, or mixed—has to face these

problems.

• According to Samuelson, there are three fundamental and interdependent problems

in an economic organization—what, how and for whom—which are grouped under
allocation of resources.

• Allocation of resources means how much of each resource is devoted to the

production of goods and services.
What/How/ for Whom to Produce
 How to Produce?

• It is the question of choice of technique of production. Since resources

are scarce, an inefficient technique of production, which would lead to
wastage and high cost, cannot be applied.

• A technique of production which would maximize output or minimize

cost should be used.

• We generally consider two types of techniques of production: labor-

intensive and capital-intensive techniques. In labour-intensive
technique, more labour and less capital is used. In capital-intensive
technique, more capital and less labor is used.
 • The problem of ‘for whom to produce’ relates to
how the value of the produced output of an
economy gets distributed amongst different people.
• People do not receive the output they produce as
their compensation.
• The output is sold and the money is earned in the
For Whom to production process.
Produce? • This money is paid as income to people for the work
they have done in the production process.
• This income, in turn, is used by people to satisfy
their wants. Hence, the problem of for whom to
produce tells us how the different factors of
production are compensated for their work.
 State
Economy
• While a socialistic economy emphasized collective ownership
of the means of production (property and assets), it also
ascribed a large role to the state in running the economy,

• while communist economy, on the other hand, advocated

state ownership of all properties including labour with
absolute power to state in running the economy. Though for
Marx, Socialism was a transitional stage to communism, it
never did happen in reality.
SOCIALIST ECONOMY
• 1. Also known as ADMINSTRATIVE,COMMAND,CONTROLLED and PLANNED Economy.

• In the 1840s a new type of economic theory emerged in the literary circles known as “The
Communist Manifesto”. Written by Karl Marx with Fredric Engels it propounded a new and
unique concept of an economy of a country. This came to be known as a socialist economy.

• In such an economy the factors of production are all state-owned. So all the factories,
machinery, plants, capital, etc. is owned by a community in control of the State.
• All citizens get the benefits from the production of goods and services on the basis of equal
rights.
• In a socialist economy, private companies or individuals are not allowed to freely
manufacture the goods and services.

• And the production occurs according to the needs of the society and at the command of the
State or the Planning Authorities. The market and the factors of supply and demand will play
no role here.

• The ultimate aim of a socialist economy is to ensure the maximization of wealth of a whole
community, a whole country. It aims to have an equal distribution of wealth amongst all its
citizens, not just the welfare of its richest companies and individuals.
 • 1] Collective Ownership of Resources
• In a socialist economy, the entire foundation is based on socio-economic
objectives. The welfare of the people takes precedence over the profit motive.
And so all major factors and resources of production are in the ownership of
the state itself. Only small farms and trading firms are kept under private
ownership.

FEATURES • 2] Central Economic Planning

• In a socialist economy, there is always a central planning committee. This is the
OF authority who will decide what is to be produced using the state resources.
They will also decide the quantity and the method of production. The ultimate
aim of such authority is to fulfill the socio-economic aims of the State.
SOCIALIST • 3] No Choice for Consumers
• Every coin has two sides. So in a socialist economy, every citizen is guaranteed
ECONOMY basic goods like food, clothing, shelter, etc. But the consumers do not have
absolute freedom of choice. They cannot demand the products they wish, they
must choose from the products the state manufactures.
• Since there is no free market, there is no concept of preference or demand and
supply. Also while every citizen will get work, he is not able to freely choose his
occupation.
• 4] Equal Distribution of Income
• This is one of the main features of a socialist economy. The setup does not allow
one person to accumulate a lot of wealth. So the gap between the rich and the poor is
much narrower. And all their citizens enjoy equal opportunities and facilities like
education, public healthcare, etc. So there is no discrimination between different
classes of people.

• 5] Absence of Market Forces

• The motive here is the welfare of the people. Since there is no profit motive price
mechanism will not influence any product decisions. The pricing structure in a socialist
economy is ‘administered pricing’ which is set by the planning commission on the basis
of their socio-economic objectives.
 • Capitalism is the most prominent in our current global
economic system. Its main characteristic is that it most
mean of production and property are privately owned by
individuals and companies. The government has a limited
role in such an economy limited to management and
control measures.
• So a capitalist economy is a liberal economy. This means
only the free market will determine the supply, demand,
CAPITALIST and prices of the products. There is no direct government
intervention other than to control monopolistic practices
ECONOMY in the economy.
• As we said earlier a capitalist economy is the most
predominant in the current global economy. USA, UK,
Germany, Japan, Singapore all are classic examples of
capitalist economies.
• Also known as free market economy, Laissez faire style of
economy.
FEATURES OF CAPITALIST ECONOMY

• Right to Private Property: This is the essence of capitalism. This right

means that private property such as property, factories,
machines, plants etc. can be owned under private individuals and
companies. The three things covered under this right are:
Every individual can acquire any amount of property, He can use these
properties as he wishes, He also has the right of inheritance. So he can
inherit the property from his forefathers. And he can also pass it on to his
successors on his death.
• Price Mechanism: Price mechanism is like an invisible hand that controls
the workings of a capitalist economy. The forces of supply and demand will
determine the prices and the level of productions in the economy. The
government will not have any interference in this matter.
• Profit Motive: The driving force behind any
capitalist economy is the profit motive. All
companies wish to produce and sell their products
to maximize their profits. This also induces healthy
competition in the economy.
• Freedom of Enterprise: In capitalism, every
individual is free to make his own economic choices
without any intervention. This includes both
the consumer and the producers.
So a producer is free to produce any goods or
services. And the consumer is free to buy whatever
he desires and from whomever, he wants without
restrictions.
• Nehru, and many other leaders and thinkers of the newly
independent India, sought an alternative to the extreme versions
of capitalism and socialism.
• Sympathizing with the socialist outlook, they found the answer
in an economic system which, in their view, combined the best
features of socialism without its drawbacks. In this view, India
would be a ‘socialist’ society with a strong public sector but also
with private property.
• All economies of the world are in essence mixed economies! Capitalism and socialism are both two ends of
the spectrum. In the real world, we take the middle road. Combining features of both the capitalist economy
and the socialist economy we arrive at a mixed economy.
• It is the golden combination of a command economy and a market economy. So it follows both price
mechanism and central economic planning and oversight.
• The means of production are held by both private companies and public or State ownership. And while
market forces decide the price, demand, supply, etc there is some government oversight to prevent
monopolization and discrimination.
• The idea behind a Mixed Economy is to tackle the demerits of both a capitalist economy and a socialist
economy and come up with a unique system. It appreciates the concept and the freedom of private
ownership of properties and resources.
• But at the same time, it understands the disadvantage of unchecked capitalism. Hence it proposes
government oversight and economic planning so there is no discrimination against the poorest citizens.
FEATURES OF MIXED ECONOMY

• Coexistence of All Sectors: In a mixed economy all three sectors coexist in harmony, i.e.
private sector, public sector, and joint sector. The joint sector is jointly run by the
government and private companies, with at least 51% ownership belonging to the state.
• Cooperative Sector: In a mixed economy another sector exists, the cooperative sector. The
main aim of the formation of this sector is so that the government can provide financial
assistance to cooperative societies involved in warehousing, agricultural, dairy industry,
etc.
• Freedom and Control: Here all individuals have the freedom to produce goods and
products, hold property, choose their occupation and choose or demand products/services
they want. But to keep a check on monopolistic practices and discrimination of the lower
sectors of society the state maintains some control.
• Economic Planning: In a mixed economy we have a central planning authority. All sectors
of the economy follow the economic plan of the state to achieve various targets and goals.
The plan is not rigid but more of a general guideline for economic growth and prosperity of
the nation.
• Social Welfare: One of the main aims of a mixed economy is social welfare. It aims to
reduce the wealth gap in the country and fight the inequalities of our society. The aim is to
reduce poverty and unemployment. And at the same time also improve social security,
public health care, public education system, etc.