Course – Business Economics

Faculty – Dr K.Venkateswarlu
 Meaning of Business Economics
 Scope of Business Economics
 Objectives of Business Firms
 Economics is a broad discipline.
 It’s the study of scarcity, the study of how people use

resources and respond to incentives, or the study of

decision-making. It often involves topics like wealth and
finance, but it’s not all about money.
 Economics ranges from the very small to the very large.
 The Analysis of individual behaviour with reference to

decision making falls under microeconomics.

 The Analysis of behaviour in general say with reference to

the industry, sector, economy, regions of the world and the

world as a whole is called macroeconomics.
 Business economics is a discipline which makes use of
economic theory and quantitative methods to analyse
business firms and the factors contributing to the
diversity of organizational structures and the
relationships of firms with labour, capital and product
markets.
 Business economics is a field of applied economics

that studies the financial, organizational, market-

related, and environmental issues faced by business
firms or companies.
 Business economics is an integral part of traditional economics
and is an extension of economic concepts to the real business
situations. It is a tool of managerial decision-making and
forward planning by management.
 Business economics is based on microeconomics in two
categories: positive and normative. Business Economics is
concerned with the application of economic theory to business
management.
 Business Economics is the study of all the factors which affect
the working, management and prosperity of a business or firm.
In short Business Economics is applied Economics
 Managerial economics is one important offshoot of business
economics.
 The scope of Business Economics is large as it deals with both
internal factors within the business as well as factors that are
beyond the business owner's control.
 The field of business economics addresses economic
principles, strategies, standard business practices, the
acquisition of necessary capital, profit generation, the
efficiency of production, and overall management strategy. 
 Business economics also includes the study of external
economic factors and their influence on business
decisions such as a change in industry regulation or a sudden
price shift in raw materials.
 Business economics encompasses subjects such as the concept
of scarcity, product factors, distribution, and consumption.
 Business economics focuses on the economic issues and
problems related to business organization, management, and
strategy.
 Business economic seeks to establish laws which help
business firms to attain their goals. This requires the study of
positive and descriptive theory.
 In order that firms establish valid decision rules,
understanding of economic environment is necessary.
 In general Business Economics studies - Demand Analysis
and Forecasting, Production and Cost Analysis, Pricing
Decisions, Policies and Practices , Profit Management and
Capital Management.
 The usefulness of business economics lies in borrowing
and adopting the toolkit from economic theory,
incorporating relevant ideas from other disciplines to
take better business decisions, serving as a catalytic
agent in the process of decision making by different
functional departments at the firm’s level, and finally
accomplishing a social purpose by orienting business
decisions towards social obligations
 Firms undertake business activity with a view to
achieve certain objectives
 The objectives of business firms discussed in business

economics are –
1. Economic Theory of Firm
2. Behavioural Theories of Firm
3. Managerial Theories of Firm
 The firm is the microlevel decision making unit existing within an industry
and a market environment. The decision making process of firm is very
complex:it depends on the nature and efficiency of the firm itself. It is
very difficult to generalize on the economic behaviour of the firms.
 Economists have put forward profit maximization hypothesesholds good
irrespective of the nature of market and its perfection, irrespective of the
time perspective, short run or long run, irrespective of the firms and the
industry which they belong.
 There may be questions on the realistic nature of the underlying nature of
economists’ theory but its explanatory and predictive value is immense
 Quite a few alternative hypotheses, alternative to profit maximization have
been suggested, but some how they still remain hooked to the concept of
profit
 Infact Behavioural and Managerial Theories of seem to supplement rather
than substitute altogether the economic theory of the firm
A firm can maximize its profits when it satisfies two
conditions:
1. MC = MR
2.MC must rise after cutting the MR curve or MC cuts the
MR from below
Profit Maximisation Condition
Maximise π (q), Where π (q) = TR(p,q) – TC(q)
π (q) = profit , TR(p,q) = total revenue , TC(q) = total

cost
 Maximum profits are determined as the pure profits
which are gained above the average costs. This
includes the amount left behind with the owner after
paying all the expenses. As a result, it depicts the extra
income with the entrepreneur beyond his normal
profits.
 The above-mentioned conditions for marginal revenues

and profit maximisation (relating to Baumol’s sales

maximisation model) apply to both perfect competition
and imperfect competition( For example, oligopoly
market. Monopoly market etc)
 Under Perfect Competition
 Imperfect Competition
 The Profit Maximisation Rule is –
MC = MR and
MC cuts MR from below
 Traditional Views - Adam Smith, Ricardo, Marx, Walker and Marshall
 Modern Views – JB Clark, Schumpeter, Hawley, F. Knight, and Kiersteed
 Recent Views – kalecki, Kaldor and Passinetti
 Most discussed in are – Schumpeter’s innovations theory and Frank
Knight’s theory of Risk and Uncertainty
 The Behavioural Theory considers a large firm producing
multi-product, having multiple goals, operating under
uncertainty in an imperfect market.
 Thus there are considerable differences between the economic
and the Behavioural Theory
 The Behavioural firm satisfies in view of market uncertainties
relating to rival’s reaction.
 The behavioural theory supplements profit goal with
production inventory, sale and market share
 The theory is associated with H A Simon, K J Cohen and R M
Cyert , Cyert and J G March
 The basic characteristic of managerial business is the divorce
of ownership from management. The Management pursue
goals which maximise their own utility subject to a minimum
profit constraint
 Three models of Managerialism are popular –
 Baumol’s model of Sales Revenue Maximisation:
 It states that the goal of the firm is maximization of sales
revenue subject to a minimum profit constraint. The minimum
profit constraint is determined by the expectations of the share
holders. 
 Here, revenue maximises when the 6th quantity gets sold after which the
increase in qty sold will not maximize the revenue and make marginal
revenue negative. At this point, the total revenue is maximum while the
marginal revenue is zero.
 According to Robin Marris, managers maximize firm’s growth
rate subject to managerial and financial constraints. Marris
defines firms balanced growth rate (G) as follows:
• Manager’s utility function and Owner’s utility function
 The manager’s utility function (Um) and owner’s utility function
(Uo) may be specified as follows:
•  Um = f (salary, power, job security, prestige, status) and
• Uo = f (output, capital, market-share, profit, public esteem).
 Owner’s utility function (Uo) implies growth of demand for firms’
products and supply of capital. Therefore, maximization of
Uo mans maximization of demand for a firm’s products or growth
of supply of capital.
 Oliver E. Williamson hypothesised (1964) that profit
maximization would not be the objective of the
managers of a joint stock organisation. This theory,
like other managerial theories of the firm, assumes
that utility maximization is a manager's sole
objective.
 He argues that managers have discretion in pursuing

policies which maximise their own utility rather than

attempting the maximisation of profits which
maximises the utility of owner-shareholders.