INTRODUCTION TO ECONOMY, ECONOMICS AND

BUSINESS ECONOMICS

• SBI targets existing customers for second home loans • What's a citizen's life worth?• Are cricket matches justified even at the cost of

productivity loss?• Toyota’s Liva to take on Swift, Polo, Micra.• Turbulent flight: Can Air India Survive? • Ambanis, Birlas, actors earn in multi crores: is it justifiable?• Markets can digest only one more rate hike by RBI.• Fuel price hike to push inflation into double digit.• China’s products to be expansive due to wage rise.

Economics

Defined “as a social science which covers the actions of individuals and groups of individuals in the process of producing, exchanging and consuming of goods and services to achieve optimization of resource use”

What decisions?

1. Production Decisions2. Exchange Decisions3. Consumption Decisions

Problems in the economy?

The problem of scarcity excess of human wants over what can actually

be produced.

Production possibility curve (PPC) a curve showing all the possible

combinations of two goods that a country can produce within a specified time period with all its resources fully and efficiently employed.

PPCGives choice - rational choice that involves

weighing up the benefits of any activity against its opportunity cost.

Shows scarcity.Opportunity cost - is the cost of any activity

measured in terms of the best alternative/s forgone. Increasing opportunity cost of production – when additional production of one good involves ever increasing sacrifices of another.

Growth in potential output.

Problems of an economy

• What to produce• How to produce• How to distribute• How to grow

Solve the problems

Other questions to discuss

Q.1. Could output and consumption take place without money?

Q.2. If we would all like money, why does the govt. not print a lot more? could it not solve the problem of scarcity ‘at a stroke’?

Q.3. If there are several other things, you could have, is the opportunity cost the sum of all of them?

The Materials Balance Model :the interdependence of economic activity and the

nature- closed system and open system

Nature

Output market

Factor market

Households Firms

Natural

resource

s draw

n from natu

re

Residuals

from co

nsumption

Residuals from productionSupply of goods and services

Reuse-

-recy

cling--r

ecovery

Demand for resourcesSupply of resources

Demand for goods and services

Recovery --- recycling -- reuse

Energy, Air, Water, Amenities

Air pollution, solid waste, waste heat, waste pollution

Dividing up the subject

Macro – aggregate demand, aggregate supply and determination of national output, problems of recession, unemployment, inflation, balance of payment, cyclical instability and policies adopted by govt. to deal with these problem.

Micro – production, consumption, exchange and govt. regulation what, how much, how, for whom

Case - Disney Corporation

- Pinocchio priced at $79.95 – sold 100,000 copies

- priced at $29.95 and sold over 300,000 copies

- uses sophisticated pricing strategies such as:

- bundling - bundle of Disney cruise with a stay at their Disney world theme park in Florida, a McDonalds kid’s meal and action figures from their movies and several of their cable channels to cable customers

- price discrimination

Case - The Boeing CompanyIn 1970s managers set out two-prong approach- low

cost and technological leader1980s- 81% of market share- seven fold increase with

high profitsIn 1991 $45 million profit on every 747 sold for $ 150

millionAirbus- the principal rival , a joint venture British,

French, German and Spanish aerospace firms in 1974 – by 1997 captured 33% of market with technological advances and low cost leadership

Boeing to drop prices>earnings fell to 31% relative to 1991

Link between economic theory and the decision sciences

problems facedby

decision makersin management

economic theory

managerial economics, which applies and extends economics

and the decision sciences tosolve management problems

decisionsciences

solution todecisions problemsfaced by managers

Basic process of decision making

Business economics

Deals with the decision making and forward planning in uncertainty and integrates economic theory with business practice for the purpose of facilitating decision-making and forward planning by management.

Aspects of application

- Use of optimization techniques to improve organizational decisions

- Consideration of individual consumer choice to understand individual and market demand decisions and to forecast demand

- Analyze cost and supply structure to understand supply decisions

- Understanding markets- Understanding external factors like

unemployment, inflation