Economics

What is Economics?
 Discusses how a society tries to solve the
human problems of unlimited wants and
scarce resources.

 Scientific study of the choices made by

individuals and societies with regard to the
alternative uses of scarce resources
employed to satisfy wants.
 Theoretical aspect and an applied
science in its practical aspects.

 Not an exact science; An “art” as well.

 A social science.
.
 Business economics can be simply viewed as
the application of economics for the analysis of
business.

 Business, on the other hand, is an economic

activity.
 The indiscriminate application of
economics to business analysis can,
sometimes, create confusing paradoxes.

 These are referred to as Fallacies. The

Business Decisions are taken in the light
of Economic Analysis keeping in view
the Economic Fallacies
 Economic Analysis
 Economic Fallacies
 Business Decision
Forms of Economics
Analysis
 Types of Economic Analysis
 Micro and Macro

 Microeconomics (“micro” meaning small): study

of the behaviour of small economic units

 An individual consumer, a seller/ a producer/ a

firm, or a product.

 Focus on basic theories of supply and demand in

individual markets
 Macroeconomics (“macro” meaning large):
study of aggregates.

 Industry as a unit, and not the firm.

 Focus on aggregate demand and aggregate

supply, national income, employment, inflation,
etc.
Types of Economic Analysis
contd..

 Partial and General Equilibrium

 Partialequilibrium analysis: Related to micro analysis

 Studies the outcome of any action in a single
market or consumer only.

 Equilibrium of one firm or few firms and not

necessarily the industry or economy.
 General equilibrium: explains economic phenomena
in an economy as a whole.

 State in which all the industries in an economy are

in equilibrium.

 State of full employment

 Static and Dynamic Analysis

The stationary state is an economy in which the tastes,

resources and technology do not change through time.”

Static economic analysis is also known as a timeless

economy
 It refers to a state which studies the changes in
successive tastes, techniques etc.

 The concept of dynamics is nearer to reality.

 In dynamic economics we study the economic

variables like consumption function, income and
investment in a dynamic state.
Types of Economic Analysis
contd..

 Positive and Normative

 Positive economics: “what is” in economic matters

 Establishes a cause and effect relationship between

variables.

 Analyzes problems on the basis of facts.

 Normativeeconomics: “what ought to be” in
economic matters.

 Concerned with questions involving value judgments.

 Incorporates value judgments about what the economy

should be like.
Types of Economic Analysis
contd..

 Short Run and Long Run

 Shortrun: Time period not enough for consumers and

producers to adjust completely to any new situation.

 Some inputs are fixed and others are variable

 Long run: Time period long enough for consumers
and producers to adjust to any new situation.

 All inputs are variable

 Decisions to adjust capacity, to introduce a larger

plant or continue with the existing one, to change
product lines.
Business Economics

 Application of economic theory and the tools of

analysis of decision science to examine how an
organisation can achieve its objectives most effectively.

 Study of allocation of the limited resources available

to a firm or other unit of management among the various
possible activities of that unit.
Business Economics

 Applies economic theory and methods to business

and administrative decision-making.

 Application of economic principles and

methodologies to the decision-making process within
the firm or organization.
Business Economics
Contd…

 Micro as well as Macro

 Applied microeconomics: demand analysis, cost and
production analysis, pricing and output decisions.

 Macroeconomics: national income, inflation and stages of

recession and expansion.

 Normative Bias
 Prescriptive: States what firms should do in order to reach
certain objectives.

 Decides on whether or not the probable outcome of a

managerial decision is desirable.
Business Economics

 Decisions Resulting in Partial Equilibrium

 Decisions taken by any firm would relate to the equilibrium of

that particular firm.

 Deals with partial equilibrium analysis.

Doctors, managers (Price discrimination, strategic entry deterrence,

cost minimization, trend forecasting)
Fallacies of Economic
Analysis
 The fallacy of composition is when an individual
infers that something is true of the whole because it
is true of part of the whole.

 Something that is true at micro level need not be

true at macro level.

 In economics, this reasoning often leads to

incorrect conclusions.
The Fallacy of Composition

 To assume what is true for one part will necessarily

be true for the whole is fallacy of composition .

 E.g. saving of all families. One saves it is good, all

save in economy level of consumption expenditure
will decrease.

 E.g. A person standing in crowded hall.

Post hoc, propter hoc
 It is Latin and its meaning is, “After that
therefore, because of that”. What follows is
result of the preceding.

 E.g. Cold and Fever.

 Demand recession and tax concessions.

The Fallacy in Syllogism
 Syllogism is a particular form of reasoning.

 It has major premise, Minor premise, and

Conclusion

 For example: Major premise: Blind

can’t read
 Minor premise: Ali can’t read
 Conclusion: So Mr. Ali is blind
Probabilistic vs. Deterministic
Inferences
 Most generalizations of economic analysis are
subject to fulfillment of certain condition called
assumptions. One such assumption that dominates
economic analysis is “other things remaining the
same.”

 But other things are so diversified that they seldom

remain constant. So the conclusions from economic
analysis are bound to be probabilistic instead of
deterministic
Black, White and Grey

 Fallacy of assuming that there is no middle

ground so result is accepted or rejected.
Wishing it were So
 We believe the things we want to believe
we always accept favorable interpretation
of event or a course of action. This can
ruin the analysis
Business Decision
 Crucial business decisions like what to
produce, for whom to produce, why to
produce are taken after properly analyzing
the economic process behind the business
activity. Due consideration in gain to the
impacts of economic fallacies on the
process. As each and every economic
agent faces scarcity of resources and has
to make choices, so decision making is
truly economic in nature.
Decision vs. Action
 Decision is a prelude to action. Decision is mental
process and does not necessarily result in action.

 Action, on the other hand, is a physical process-

execution, or implementation of decision.

 Decisions are supposed to be followed by actions.

 Actions generate reaction. New decision is taken on

the basis of reaction thus it is an ongoing process
Decision Making vs. Decision
Taking
 A decision is an attempt towards the solution of a
problem.

 Decisions originate at various levels of organization.

At lower level and middle level of management,
decision exists in the form of rules, procedures.

 Policy decisions are taken at the top level

management.
 Decision making is a process in which a decision
maker looks at the problem, (past).

 Then makes an attempt towards an optimistic

decision cum-action (project) and reads the reaction
(future) to repeat or revise a decision.

 Thus decision making is essentially a process of co-

ordination on the time scale and involves risk.

 Decision taking, on the hand, is risk almost free.

 Business managerial decisions are in the
nature of “decision making.”

 Bureaucratic/administrative decisions are

in the nature of decision taking.

 Decision taking at lower level of

management and decision making is at
the top level.
Scientific vs. Intuitive
Decision
 Decision making is scientific and decision taking is
intuitive.

 Intuition involves value judgment based on beliefs

and experience.

 Whereas decision making is scientific on the basis

that it involves analysis of problem through data,
concepts, precepts and techniques.
General vs. Functional
Decision
 Management has become highly specialized.

 The specialization of various functions of

management have resulted in the bifurcation of
decision at two levels.

 Functions required decision making takes place at

general management level, whereas the decision
taking exists and functions at management level
Certain decision vs. Risky
Decision vs. Uncertain Decision

 This evolves from the decision environment following the

following course:

 Changes take place every where.

 These changes may be known or unknown.

Known Changes

 If changes are known its outcome may be definite or

indefinite.

 The definite outcome of changes results in certain

decisions.

 But if the outcome of the changes is indefinite, they

result in risky decisions.
Unknown Changes

 If the changes are unknown, they result in unpredictable

results and hence the decisions will be uncertain.

 The decision taken would like to operate under certainty.

 However, the decision makers will like to operate under

the risky and uncertainty.