B.Com 1st Year Introduction Business Economics Short Notes
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LONG ANSWER QUESTIONS
Discuss about the importance of economics to management.
Or What are the uses of business economics?
Ans. Importance of Business Economics: Main aim of all the business and industrial enterprises is to earn maximum profit. To achieve this object, Business executives have to take many decisions. Decision-making is the process of selecting a particular course of action from among alternatives. A sound decision can be taken only when the decision maker has fairly good knowledge of the aspects of economic theory and the tools of economic analysis which are directly the process of decision-making Business economics is concerned with such aspects and to business economics plays an important role in the decision-making process of a firm.
1. Reconciling Traditional Theoretical Concepts of the Actual Business Behavior and Conditions: Business economics attempts to reconcile the tools, techniques, models and thrones traditional economics with actual business practices and with the environment in which a firm has to operate. Edwin Mansfield said in this regard, ‘Business economics attempts to bridge the gap between purely analytical problems that intrigue many economics theories and the problems of policies that management must have to face.’
2. Predicting Relevant Economic Quantities: Sound business plans and policies for future can be formulated on the basis of economic quantities.
Business economics helps the management in predeciding various economic quantities such as, cost profit, demand, capital, production, price, etc. Since, a business manager has to work in an environment of uncertainty, future should be well predicted in the light of these quantities.
3. Understanding Significant External Forces: The management has to identify all the important factors that influence firm. These factors can broadly be divided into two parts such as internal and external factors. External factors are the factors over which a firm cannot have any control. Therefore, the plans, policies and programmes of the firm should be adjusted in the light of these factors. Important external factors affecting decision-making process of a firm are economic system of the country, business cycles, fluctuations in national income and national production, industrial policy of the government trade and fiscal policy of the government, taxation policy, licensing policy, trends in foreign trade of the country, general industrial relation in the country, etc.
4 Estimating Economic Relationships: Business economics plays an important role in business planning and decision-making by estimating economic relationships between different business factors such as income, elasticity of demand, cost volume and profit analysis, etc.
5 Basis of Business Policies: Business economics is the foundation of all business policies. All the business policies are prepared on the basis of studies and findings of business economics. It warns the management against all the turning points in national as well as international economy.
Thus, it may be concluded that business economics is very helpful in taking sound decision in a firm. It provides the base that can be used by management in its decision-making process.
What are the responsibilities of business economist?
Ans. Responsibilities of Business Economist: Business economist has a great responsibility in a big business and industrial enterprise. He can serve the management of his firm in the best possible manner only if he keeps in mind, the main objects of his firm and his responsibilities to achieve these objects. Responsibilities of business economists can be explained under following heads:
- To Make Successful Forecasting: Success of every business firm is largely determined by the degree of accuracy and correctness of the forecasts made by him. A business economist is responsible for making successful forecasting by analysing all the internal and external factors and by predicting
- their impact on profitability and working of the firm. He must make his best efforts to minimise the uncertainties of future. If he finds an error in his forecasts, he should alert the management at the earliest so that necessary changes may be made in plans, policies and programmes.
- 2. To Establish Contact with the Sources of Economic Information and Experts: A business economist is responsible for providing all the relevant economic information to the management so that the plans and programmes of the firm Business Sx may be checked out after taking into consideration these factors. Therefore, the business economist should establish and maintain contacts with all the possible sources from where he can collect the information relevant for his firm. He should take the help of expert also in analysing such information so that the information for the purpose of decision may be more accurate and useful.
- 3. To Search the Measure for the Increase in the Earning Capacity of Firm: Every business firm has an object of earning maximum profit. A business economist has a great responsibility in this regard. He has to play an important role in the achievement of this object. If he does not undertake his responsibility properly, capacity of the firm cannot be utilised fully and the firm cannot achieve its objects. Therefore, the business economist should continue his efforts in increasing the earning capacity of his firm.
- 4. To Keep the Business Informed of all the Possible Economic Trends: A business economist should keep himself in touch with the latest development of national economy and business environment so that he can get the management familiar with these developments and expected trends of the economy.
5. To Make his Status Respectable in the Firms: Business economist should earn respectful status in the firm. He can get it only when he performs his duties and responsibilities sincerely and seriously. He should be helpful to the management in successful decision-making. He should be ready and offer himself to take up special assignment assigned to him by the management. He should work in the manner that top management may realise his need in the firm and respect his ideas. He should explain his findings to the management in a simple and easy language.
How is business economics related to psychology and politics? Or Illustrate the relationship of business economics with other relevant academic disciplines.
Or Explain how the business economics is related to economics, statistics, mathematics, accountancy and operation research.
Or Explain and illustrate the relationship of business economics with statistics, mathematics, accountancy and economics.
Ans. Growth and development of business economics has been possible over a long period of time and with the cooperation of many other branches of knowledge like macroeconomics, statistics, mathematics, accounts, etc. This relationship can be explained as under:
1. Macroeconomics: The principle provides a base for the solution of business problems of an Business economics is also known as the use of methods and techniques of economics in the field management. It is a special branch of economics which bridges the gap between economics theory a business practice.
2. Statistics: Statistics provides the basis for empirical testing of theory. The results of a theo cannot be accepted in a firm unless and until they are verified. Statistics provides the measures appropriate functional relationship involved in decision-making. Techniques of linear programming also important for business economist because it helps him in finding the best solution of a probi or the best alternative.
3. Mathematics: A knowledge of geometry, trigonometry and algebra is essential for estimating various economic relationships, predicting required economic quantities and decision-making. In addition to this, certain mathematical tools and concepts are also useful in business economics.
4. Operation Research: It is concerned with model building, minimisation, maximisation and optimisation. Construction of theoretical models is helpful in decision-making and maximisation of profits or minimisation of costs. Operation research is helpful in business firm in studying the interrelationship and relative efficiencies of the various aspects of business, such as sales, production of financing. It may encompasses the complete cycle of the flow of goods and services from suppliers to company and from company to consumers.
5. Accountancy: It is concerned with recording and analysing the financial activities of a business firm. Accounting information provides the data required by a business economist for the purpose of decision-making. The main task of management accounting is now seen as being to provide the sort of data which managers need, if they are to apply the idea of business economics to solve business problems correctly, the accounting data are also to be provided in a form so as to fit easily into the concepts and analysis of business economics.
6. Psychology: It is concerned with analysing the problems related to psychology of the business managers and other employees. Business economics aims at finding out the optimal solutions to the business problems of firms.
7. Politics: Business economics is a practical subject that also deals with the political values of a business firm or an individual unit that may be either a person or a firm or group of persons or firms.
Discuss about the role of business economist in a business firm.
Ans. Decision-making is one of the most important function of management of a business and industrial firm. A business economist can play a key role in the process of the firm by assisting management in using the specialised and complicated techniques and methods which are required to make the process of decision-making and planning easy. That is why, in developed countries all the large business and industrial enterprises employ one or more business economists who are being growingly recognised and all leage R. the big business and industrial houses are employing business economist. Business economist studies and analyses all the
internal and external factors that may influence the activities of a firm’s firm so that the uncertainties may be predicted and business risks may be minimised. These factors may be divided into two parts: Internal and external factors.
1. Internal Factors: Internal factors affecting business decisions are the factors over which the management has control. These factors lie within the scope and operation of a firm. Such as, determination of price policy, decision of contraction or expansion of business activities, determination of the level of efficiency and operation, determination of wage policy, etc. Business economist can assist management on the following questions related with internal factors:
(a) What should be the sales budget for the next year?
(b) What should be the policy regarding inventory for next year?
(c) What should be the production schedule for next year?
(d) What changes should be introduced in pricing policy of the enterprise during the next year?
(e) What should be the wage policy for next year?
(f) What type of changes are required in the credit policy of the enterprise?
(g) What should be the policy regarding cash for next year?
(h) What should be the profit budget for next year?
Though all the decisions discussed above are taken independently by the managers of every enterprise the atmosphere of business uncertainties create complications in the process of decisionmaking. Various economics principle help in minimising these uncertainties. Business economists can help by analysing these economic principles.
2. External Factors: External factors are the factors over which the management has no control. These factors relate to business environment in which a firm has to operate, such as business Policy of the government, situation of money, inflation or money deflation, labour laws. Government controls are competitions, economic policy of the government, cyclical fluctuations of the industries, etc. These factors are of great importance for a firm. Business economist has to keep himself in constant touch with the management for the following problems related with external factors:
(a) What changes have taken place in economic policies of government and what more changes are expected in near future in this field?
(b) What type of cyclical fluctuations are expected in national economy in future?
(C) What are the expectations of demand of goods being produced by the enterprise
(d) What policies are expected to be adopted by competitors during coming period?
(e) What changes are expected to take place in the prices of raw materials in the coming period?
(f) What changes are expected to take place in the cost of production?
(g) What is the outlook of national economy for coming year? What are the important economic
trends of national economy that may affect the activities of the firm?
(h) What is the outlook of taxation policy, foreign trade policy, industrial policy of the government?
(i) What is the outlook of market and customer outlook during coming period?
What should be the objectives of a business firm? Explain.
Ans. Every business firm has some objectives which always endeavours to attain in the best possible manner. Following are the important objectives of a business firm:
1. To Maximise Total Sales Revenue: This is the most important objective of a business firm to obtain maximum sales revenue. The attainment of this object does not mean to have the maximum sale in terms of physical quantity but it means to obtain the maximum amount of revenue through sales. A firm can obtain maximum sales revenue at the point when its marginal revenue is zero. No firm will like to increase its sales beyond this point because beyond this point the firm will be suffering a loss.
2.To Maximise Total Profits: Main objective of every business firm is to earn maximum profit.
All the efforts of a firm are directed towards the achievement of this object. A firm can earn maximum profits at the point where Marginal Cost (MC) and Marginal Revenue (MR) are equal. Marginal cost means the cost incurred on the production of an additional unit of a commodity. Marginal revenue is the revenue received from the sale of such additional unit.
3. To provide Maximum Welfare and Satisfaction to Employees: Some business firms aim al providing maximum facilities to their employees so that they may get maximum job satisfaction and their efficiency and ability may be increased. Such firm spend huge amount on the welfare of the employees. The facilities of proper working conditions, canteen, education, training, incentives, was system, bonus, etc. are provided to the employees. This is an important object and very helpful achievement of pre-determined objectives of the firm because if the employees of a firm are satis they will contribute their best efforts so as to achieve the objectives of firm.
4. To Achieve Financial Soundness: No business firm can continue for a long time. If it is financially sound, banks and financial institutions stress upon finances of the firm to grant them sort of financial assistance. Therefore, every business firm takes due care and precautions in the u funds of the firm.
5. To Minimise Cost: Another important objective of a business firm is to minimise the cost of production for producing goods and services so that these goods and services may be provided to the consumers at minimum possible price. To attain this objective, the business firm makes continuous use of various techniques of cost control..
6. To Establish Business Empire: Some business firms have an object of dominating the whole market. Such firms provide goods and services to consumers at the lowest possible price. They provide best after sale service to the consumers. Such firms also aim at selling product to the maximum number of customers so that they can capture the market and establish their business empre.
What are the fundamental concepts of business economics? Describe any three of them with suitable examples.
Or Write a note on fundamental principles of business economics.
ANS. Fundamental Concepts of Business Economics: Future is always uncertain. With this realisation, the management takes numerous decisions and formulates plans for future. Some fundamental concepts and techniques help the management to take correct decisions. These concepts are as follows:
1. Principle of Incremental Cost: Incremental cost is the different cost that must be incurred if a business is taken and that need not be incurred if the business is not taken. According to Haynes, Mote and Paul, ‘It involves estimating the impact of decision on alternatives of costs and revenues, stressing the changes in total cost and total revenue that results from changes in prices, products, producers, investments or whatever may be at stake in the decision.’ Thus, it may be said that incremental cost is a change in total cost due to a change in the level of the activity.
There are two fundamental concepts involved in this analysis, the concept of incremental cost and the concept of incremental revenue. Incremental cost means the change in total cost and incremental revenue means the change in total revenue resulting from a decision. W.W. Haynes stated that a decision is profitable, if:
(a) It increases some revenues more than it decreases others.
(b) It reduces costs more than revenue.
(C) It increases revenue more than costs.
(d) It decreases some costs more than it increases others.
For example: Suppose that a firm gets a proposal to supply certain goods for a consideration of 5 lakhs. The costing department submitted the following estimates of cost:
(allocated at 100% of labour 1,80,000
Selling and administrative expenses
(allocated at 25% of the total cost of materials and labour) 95,000
Total cost 6,55,000
Above estimates furnished by costing department, give an impression that the offer is unprofitable. But if we go into deep, we find that the enterprise is not making full utilisation of its production capacity and the offer can be fitted into existence of incurring any additional overhead. So far as the selling and administrative expenses are concerned, it can be said that there will be no additional selling and administrative expenses if the offer is accepted. Thus, the cost of producing the goods of offer will be as follows:
Total cost 3,80,000
Thus, if the offer is accepted, the incremental cost will be 3,80,000 and incremental revenue will
1,20,000. Therefore, it is advisable be 5,00,000. Thus, the profit of the enterprise will increase by that the offer should be accepted.
2. Principle of Opportunity Cost: Opportunity cost means the cost of foregone opportunities. Opportunity of a product or a service means the revenue expected to be earned by that product or service if it is put to an alternative use.
‘Opportunity cost of a decision means the sacrifice of alternatives required by that decision.
Haynes Haynes has clarified the meaning of the concept of opportunity cost with the help of following examples:
(a) The opportunity cost of using a machine that is useless for any other purpose is nil, since its use requires no sacrifice of other opportunities.
(b) The opportunity cost of using a machine to produce one product is the sacrifice of earnings that would be possible from other products.
(C) The opportunity cost of the time one puts into his own business is the salary he could earn in other occupations (with a correction for the relative ‘psychic income’ in the two occupations). (d) The opportunity cost of the funds ties up in one’s own business is the interest (or profits
corrected for differences in risk) that could be earned on those funds in other ventures. These examples make it clear that opportunity cost requires the measurement of sacrifices. If there is no sacrifice involved by a decision, there will be no opportunity cost. It is also important to note in this regard that the opportunity cost is not recorded in the books of accounts, but it is an important consideration in business decisions. •
3. Principle of Time Perspective: All the decisions of a business firm should be taken only after considering the short-run and long-run effects of decisions on costs and revenues. Short-run refers to a period of time which is short enough to allow the variable factors of production to be used in different amounts. Long-run refers to a period of time, which is long enough to bring about all the possible changes in all inputs. Proper balance should be maintained between short-run and long-run effects.
Therefore, it is important to give due consideration to the time factor. A decision should be taken only after considering the short-run and long-run effects on the costs and revenues.
4. Principle of Discounting: A fundamental principle of economics which is used by almost all the persons in their daily life is that the worth of a rupee of tomorrow is lesser than that of a rupee of today. This principle is based on a well known proverb, ‘A bird in hand is better than two in the bush. It means that a difference should be made between cash received at different times. Money received today could be invested to earn additional money immediately. On the other hand, an amount to be received after certain period of time could not be invested until it is received, therefore, it is less valuable than a rupee received today. Therefore, the time of receipt of amount should be duly taken into consideration in the solution of a particular problem.
For example: Suppose you get an offer to make a choice between a gift of 1,000 today or * 1,050 next year. Naturally, you will prefer to get 1,000 today for two reasons: (i) Future is always uncertain So, there may be uncertainty in getting * 1,050, if the present opportunity is not availed of, (ii) amount of 1,000 received today will earn interest for one year and thus, it will be more than 1,05 Therefore, the principle of discounting is very important particularly in investment decisions.
5. Equi-marginal Principle: This principle deals with the allocation of the available resources among the alternative activities. According to this principle, an input should be so allocated that the value added by the last unit is the same in all cases. This principle states ‘If a person has the thing which he can 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 example: Suppose a firm is involved in three activities, i.e. a, b and c. All these activities require services of labour. The firm should allocate the avail labour in these activities in such a manner that the value of marginal product of labour is equal in all the three activities.
VMP LA = VMP. = VMPLC where,
VMP = Value of Marginal Product, L = labour, a, b, c = Activities
i.e. value of the marginal product of labour employed in ‘d’ is equal to the value of marginal product of labour employed in’b’ and so on.
State the scope of business economics.
Or Discuss about the scope of business economics in detail.
Ans. Scope of Business Economics: Business economics is the process of application of economic principles, techniques and concepts, etc. to solve business problems of a business enterprise of an industry. Business economics helps the management in making efficient and economical use of scarce resources of the firm or industry. The scope of business economics is narrower than that of pure economic theory because economic theory includes both the microeconomics and macroeconomics but the business economics includes microeconomics only. Though no uniform pattern has been followed in respect of the scope of business economics, however, it can be said that the scope of business economics includes following subjects:
1. Theory of Production: Production and cost analysis is also important for the smooth functioning of production process and for project planning. To earn certain level of profit, certain amount of goods has to be produced and to obtain such production, some costs have to be incurred. The problem before management in this regard is to determine the level of production at which average cost of production may be minimum.
2. Theory of Profit: Main objective of every business and industrial enterprise is to earn maximum’ profit. Profit is the difference between total revenue and total cost. An important point of consideration in this regard is the element of leage R. uncertainty about profit. Profit is always uncertain because of the following factors: (a) Demand of the product, (b) Prices of the factors of production, (C) Nature and degree of competition in the market, (d) Price behaviour under changing conditions. Therefore, profit planning and profit management are necessary of for improving profit earning efficiency of the firm. For profit management, it is necessary that most efficient technique should be used for predicting future. The possibility of risks should be minimised as far as possible.
3. Theory of Demand: According to Spencer and Siegelman, ‘A business firm is an economic organisation which transforms productivity sources into goods that are to be sold in a market. Thus, demand forecasting is an important part of business decision-making because an estimate of future sales is essential before preparing production schedule and employing productive resources. Demand analysis helps management in identifying various factors that influence the demand for the products of a firm. Therefore, demand analysis and forecasting is essential for business planning.
4. Theory of Exchange or Price Theory: Pricing is an important area of business economics. The fact is that the success of a business and industrial firm largely depends upon the accuracy and correctness of price decisions that are taken by it. Price policy affects the demand of products to a great extent. It includes the determination of price under different market conditions, pricing methods, pricing policies, differential pricing, product line pricing and price forecasting.
5. Theory of Capital and Investment: Another important area of business economics is the management of capital and investment. Capital is the foundation of a business. Like other factors of production, capital is also a scarce and expensive factor of production. It should be allocated in most efficient manner. Theory of capital and investment explains the following important issues: (a) Selection of most suitable investment project, (b) Most efficient allocation of capital, (C) Assessing the efficiency of capital, (d) Minimising the possibility of under-capitalisation or over-capitalisation.
6. Environmental Issues: There are certain issues of macroeconomics also that form a part of business economics. These issues relate to general business, social and political environment in which a business and industrial firm has to operate. Some of the important factors are: (a) The type of economic system of the country, (b) Business cycles, (c) Industrial policy of the country, (d) Trade and fiscal policy of the country, (e) Taxation policy of the country (f) Price and labour policy, (g) General trends in economy with regard to the production, employment, income, price, saving and investment, etc. (h) General trends in the work of financial institutions in the country, (1) Social factors like value system of the society, (i) General trends in foreign trade of the country.
Discuss the central problems of economics.
Or What are the basic problems of an economic?
Ans. The economic problems emerging out of scarcity of resources have many forms and formats. The various forms of the same economic problem are known as central or basic problems of an economy. The basic problems can be summarised as below:
Fig. 1. Problems of Allocation of Resources
Our economy has to allocate its scarce resources in such a way that serves the best needs of the society. It includes the following three problems:
(a) What to Produce: A major problem before the country is to decide what commodities should be produced and in what quantities with limited resources in end.
For example: A country has to decide how much food grains (wheat, rice, etc.), or how many cars, motorcycles and other goods it wants to produce.
Choice has to be made among different types of goods for instance:
(i) Choice between consumption goods (food, clothes, sugar, etc.) and capital goods (machine,
(ii) Choice between mass goods (bread, clothes, etc.) and luxury goods (cars, refrigerators, A.CS,etc.)
(iii) Choice between private goods and public goods.
(b) How to Produce: The next problem is to decide the manner in which goods and services shou be produced. In other words, the problem is to decide between labour, intensive technique and capiu This problem is concerned with the choice of technique of production.
Under capitalist economics, solution to this problem is based on the availability of resources and their relative prices.
(C) Whom to Produce: The third important problem before an economy is to decide for whom is to be produced and who would consume how much. It is essentially related to who is earning and how much.
In short, the problem regarding for whom to produce is concerned with distribution of the production of the economy among household sector, business sector and government sector.
2. Problems of Efficiency and Full Utilisation of Resources
It includes the following two problems:
(a) Problem of Efficiency: This is the problem concerning how an economy can utilise its resources efficiently. The problem of efficiency has two variants:
(i) Problem of efficiency in production.
(ii) Problem of efficiency in distribution. –
(b) Problem of Full Utilisation of Resources: ff utilisation of resources is waste, then the problem is how can an economy give fuller employment to its unutilised and underutilised existing resources.
3. Problem of Growth
The growth of resources in a country is essential to provide high standard of living for its increasing population. It is all more needed for developing country like India.
Reasons for Origin of Economic Problems
1. Limited resources.
2. Alternative use of resources.
3. Unlimited human wants.
4. Adjustment between resources and wants.
Scarcity is the main reason behind all the economic problems from the analysis of economic world. We come to know that:
1. Human wants are unlimited and recurring end of different priorities.
2. Means are limited in supply and can be put in alternative uses.
Scarcity of means in relation to want is the main reason behind the origin of economic problem.
At the point where the marginal utility is zero, total utility is maximum’. Elaborate it. Explain the above statement with reference of law of diminishing marginal utility.
Ans. point at which the marginal utility is zero and total utility is maximum is known as the ‘point of satiety’ or ‘point of maximum satisfaction! So, when marginal utility is zero, total utility is maximum.
According to the law of diminishing marginal utility (As a consumer increases the consumption of any one commodity, keeping constant the consumption of all other commodities, the marginal utility of variable commodity must eventually decline. This can be understood by the following example:
Units of bread Marginal Utility
5 0(Points of satiety)