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Semester 1: ELECTIVE I: BUSINESS ECONOMICS
Introduction to Economics: Wealth, Welfare and Scarcity, Views on Economics, Positive and Normative Economics, Definition, Scope and Importance of Business Economics, Concepts: Production Possibility frontiers, Opportunity Cost, Accounting Profit and Economic Profit, Incremental and Marginal Concepts, Time and Discounting Principles, Concept of Efficiency, Business Cycle: Inflation, Depression, Recession, Recovery, Reflation and Deflation
Introduction to Economics
Wealth and Welfare
Economics studies the distribution and production of wealth, focusing on how societies manage limited resources to create welfare. Wealth refers to the abundance of valuable resources, while welfare pertains to the overall well-being and quality of life of individuals.
Scarcity
Scarcity is a fundamental concept in economics, highlighting the limited nature of resources compared to human wants. This necessitates making choices, leading to trade-offs and prioritization in economic decision-making.
Views on Economics
Different schools of thought exist within economics, including classical, neoclassical, Keynesian, and behavioral economics. Each offers distinct perspectives on economic phenomena and policy recommendations.
Positive and Normative Economics
Positive economics deals with objective analysis and factual statements about economic behavior, while normative economics involves value judgments and prescriptive statements about what ought to be.
Definition, Scope, and Importance of Business Economics
Business economics, or managerial economics, applies economic theory and methodologies to business decision-making. Its scope includes demand analysis, production and cost functions, pricing decisions, and market structure analysis. It is essential for efficient resource allocation and strategic planning.
Production Possibility Frontiers
The production possibility frontier (PPF) illustrates the maximum feasible output combinations of two goods using available resources. It demonstrates opportunity costs, trade-offs, and economic efficiency.
Opportunity Cost
Opportunity cost refers to the potential benefits lost when one alternative is chosen over another. It emphasizes the cost of foregone opportunities in resource allocation.
Accounting Profit and Economic Profit
Accounting profit is the difference between total revenue and explicit costs, while economic profit includes both explicit and implicit costs. Economic profit provides a broader view of profitability and resource allocation.
Incremental and Marginal Concepts
Incremental analysis assesses the additional benefits and costs associated with a decision, while marginal analysis examines the change in total cost or benefit from producing one more unit. Both concepts are crucial for optimizing decision-making.
Time and Discounting Principles
Time value of money is a key principle in business economics, recognizing that money available now is worth more than in the future due to its potential earning capacity. Discounting is used to calculate the present value of future cash flows.
Concept of Efficiency
Efficiency in economics refers to the optimal use of resources to achieve maximum output. It includes allocative and productive efficiency, where resources are allocated where they are most valued, and produced at the lowest cost.
Business Cycle
The business cycle consists of various phases: inflation refers to rising prices, depression denotes a prolonged economic downturn, recession is characterized by negative economic growth, recovery indicates a resurgence in economic activity, reflation refers to stimulating the economy after a downturn, and deflation involves falling prices.
B.Com (Professional Accounting)
Business Economics
FIRST YEAR – SEMESTER – I
Periyar University
Business Economics
Demand and Supply Functions: Meaning of Demand, Demand Analysis, Demand Determinants, Law of Demand and its Exceptions, Elasticity of Demand: Definition, Types, Measurement and Significance, Demand Forecasting: Factors Governing Demand Forecasting, Methods of Demand Forecasting, Law of Supply and Determinants
Demand and Supply Functions
Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a given period.
Understanding demand helps businesses forecast sales and adjust strategies accordingly.
Demand analysis examines consumer behavior and factors influencing demand, including consumer preferences and market trends.
Market surveys, consumer feedback, and statistical analysis are used to gather insights.
Consumer income
Price of related goods
Consumer tastes and preferences
Expectations about future prices
Number of buyers
Changes in these determinants can shift the demand curve.
The law of demand states that, all else being equal, as the price of a good decreases, the quantity demanded increases, and vice versa.
Giffen goods
Veblen goods
Expectations of future price increases
Elasticity of demand measures how much the quantity demanded of a good changes in response to a change in price.
Price elasticity of demand
Income elasticity of demand
Cross elasticity of demand
Calculated as the percentage change in quantity demanded divided by the percentage change in price.
Helps businesses set prices and understand consumer responsiveness.
Demand forecasting predicts future consumer demand using historical data, market trends, and economic indicators.
Historical sales data
Economic conditions
Market trends
Qualitative methods (e.g., expert opinions)
Quantitative methods (e.g., time series analysis)
Causal models
The law of supply states that, all else being equal, an increase in price results in an increase in quantity supplied.
Production costs
Technology changes
Number of suppliers
Expectations for future prices
These determinants influence the supply curve and its position.
Consumer Behaviour: Meaning, Concepts and Features, Law of Diminishing Marginal Utility, Equi-Marginal Utility, Indifference Curve: Meaning, Definition, Assumptions, Significance and Properties, Consumer's Equilibrium, Price, Income and Substitution Effects, Types of Goods: Normal, Inferior and Giffen Goods, Derivation of Individual Demand Curve and Market Demand Curve with the help of Indifference Curve
Consumer Behaviour
Consumer behaviour refers to the study of how individuals make decisions to spend their available resources on consumption-related items. It encompasses the processes of decision-making, purchasing, and post-purchase evaluation.
Key concepts in consumer behaviour include needs, wants, motivation, perception, learning, and attitudes. Each of these plays a role in influencing how consumers behave.
Consumer behaviour features include the psychological processes involved in decision-making, the influence of social factors, the role of marketing strategies, and the impact of cultural factors.
This law states that as a consumer consumes more units of a good, the additional satisfaction (or utility) gained from each additional unit decreases. This concept helps explain consumer choices and demand.
The principle of equi-marginal utility states that consumers allocate their income in such a way that the last unit of currency spent on each good or service provides the same level of marginal utility. This leads to maximum satisfaction.
An indifference curve represents a set of combinations of goods that provide the consumer with the same level of satisfaction.
Indifference curves illustrate consumer preferences, showing how a change in quantity of one good can be compensated by a change in quantity of another good without altering overall satisfaction.
Consumers have well-defined preferences.
Indifference curves do not intersect.
Higher curves represent higher utility levels.
Consumers can trade off between goods.
Indifference curves help in understanding consumer preferences and choices, allowing for the analysis of consumer equilibrium.
Downward sloping.
Convex to the origin.
Do not intersect.
Consumer equilibrium occurs when a consumer has fully utilized their income in such a way that no further reallocation of spending can increase overall satisfaction.
This effect describes how a change in the price of a good influences consumer purchasing behavior.
The income effect refers to how changes in consumer income affect demand for goods.
The substitution effect occurs when consumers change their preference for one good over another due to a change in relative prices.
Goods for which demand increases as consumer income rises.
Goods for which demand decreases as consumer income rises.
A special case of inferior goods where demand increases as price increases, defying the law of demand.
The individual demand curve can be derived using the indifference curve approach, showing the relationship between the price of a good and the quantity demanded while keeping utility levels constant.
The market demand curve is derived by horizontally summing individual demand curves, reflecting the total quantity demanded by all consumers at varying prices.
Theory of Production: Concept of Production, Production Functions: Linear and Non-Linear Homogeneous Production Functions, Law of Variable Proportion, Laws of Returns to Scale, Difference between Laws of variable proportion and returns to scale, Economies of Scale, Internal and External Economies, Internal and External Diseconomies, Producer's equilibrium
Theory of Production
Concept of Production
Production refers to the process of transforming inputs into goods and services. It involves combining various resources such as labor, capital, and raw materials to create a finished product that meets consumer needs.
Production Functions
A production function describes the relationship between inputs used in production and the resulting output. It can be categorized into linear and non-linear functions.
Linear and Non-Linear Homogeneous Production Functions
Linear production functions imply constant returns to scale, where doubling inputs leads to a doubling of output. Non-linear homogeneous production functions may exhibit increasing or decreasing returns to scale, affecting efficiency as input levels change.
Law of Variable Proportion
This law states that when one input is varied while others are held constant, the marginal product of the variable input will eventually decrease after reaching a certain level of usage, leading to diminishing returns.
Laws of Returns to Scale
These laws analyze how output changes as all inputs change proportionately. Increasing returns to scale occur when output rises more than inputs, constant returns when output rises in proportion, and decreasing returns when output rises less than the increase in inputs.
Difference between Laws of Variable Proportion and Returns to Scale
The law of variable proportion applies to the short run when one input changes, while returns to scale apply to the long run when all inputs can be varied.
Economies of Scale
Economies of scale are cost advantages gained as production scales up. They reduce average costs per unit as output increases due to operational efficiencies.
Internal and External Economies
Internal economies are cost reductions within a firm due to scale, while external economies involve industry-wide benefits, often from infrastructure improvements or ancillary services.
Internal and External Diseconomies
Internal diseconomies arise when a firm grows too large, leading to inefficiencies. External diseconomies occur when industry growth leads to rising costs due to factors like congestion or resource depletion.
Producer's Equilibrium
Producer's equilibrium is achieved when a firm maximizes its output or minimizes its costs for a given level of output. This point is determined by balancing marginal costs and marginal revenues.
Product Pricing: Price and Output Determination under Perfect Competition, Short Period and Long Period Price Determination, Objectives of Pricing Policy, Its importance, Pricing Methods and Objectives, Price Determination under Monopoly, kinds of Monopoly, Price Discrimination, Determination of Price in Monopoly, Monopolistic Competition, Price Discrimination, Equilibrium of Firm in Monopolistic Competition, Oligopoly, Meaning, features, Kinked Demand Curve
Product Pricing: Price and Output Determination under Perfect Competition
Price and Output Determination under Perfect Competition
In perfect competition, many firms sell identical products. The price is determined by the intersection of supply and demand. Firms are price takers, meaning they cannot influence market prices.
Short Period Price Determination
In the short run, firms can cover variable costs but may not cover total costs. Price equals marginal cost at the equilibrium output level, where firms maximize profit.
Long Period Price Determination
In the long run, firms can enter or exit the market, leading to normal profits where price equals average total cost. This ensures no economic profit remains in the long term.
Objectives of Pricing Policy
Key objectives include profit maximization, market penetration, survival during tough conditions, and maintaining market share.
Importance of Pricing Policy
A well-defined pricing policy can influence demand, sales volume, and the firm's overall competitive position in the market.
Pricing Methods and Objectives
Various pricing methods include cost-plus pricing, value-based pricing, and competitive-based pricing. Each has distinct objectives like covering costs, maximizing perceived value, or matching competitors.
Price Determination under Monopoly
Monopoly exists when a single firm dominates the market. The monopolist sets the price higher than marginal cost, leading to higher profits and potentially fewer outputs.
Kinds of Monopoly
Monopolies can be classified as natural monopolies, government-granted monopolies, or pure monopolies, each with its characteristics and regulatory implications.
Price Discrimination
Price discrimination occurs when a monopolist charges different prices for the same product based on criteria like buyer type or purchase quantity, maximizing profits.
Determination of Price in Monopoly
Price is determined where marginal cost equals marginal revenue. This intersection helps to set the profit-maximizing output and corresponding price.
Monopolistic Competition
In monopolistic competition, many firms offer differentiated products. Each firm has some control over its prices due to product differentiation.
Equilibrium of Firm in Monopolistic Competition
Firms will produce where marginal cost equals marginal revenue. In the long run, this leads to normal profits as new firms enter the market.
Oligopoly
An oligopoly consists of a few firms that control the majority of the market. Decisions made by one firm significantly impact others.
Kinked Demand Curve
The kinked demand curve model illustrates pricing behavior in an oligopoly. Firms may not change prices due to the perception that competitors will not follow, leading to price rigidity.
