Business Economics

Introduction to Business Economics

Faculty:
Prof. Sunitha Raju
Session Date: 03.08.2018
 EPGDIB/IM (2018-20)

Principles of Economics
Business Economics

 Economic system operates under certain guiding

principles

 Scarcity & trade-offs (choice)

 Rationality and the Decision making at the Margin
 Rule based (incentives)
 Markets and Organisation of Economic Activity
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Business Decision Making – Why?

Business Economics

 Allocation Issues for a firm

 Optimise resource use
 Maximise profits/ value
 Decisions on Pricing & Output
 EPGDIB/IM (2018-20)
Business Decision Making –
Applications
Business Economics

1. A Global Carmaker produces and sells in different geographic

regions.
 Produces in home country and in foreign subsidiary
 Sells in domestic market and foreign market
 Needs to determine prices and production
2. An IT company proposes to enter a new market, Europe
 Identifying country location, cost of establishing office, wage cost, quality of
customer service, likely demand
 Needs to carry out economic forecasting
3. Pharmaceutical Company decision of investing in R & D
 Assess the riskiness of the investment – commercial success
 Assess the production costs
 Assess the potential competition
4. Conforming to government regulation- environmental, Pricing
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Business Firm’s Decisions

Business Economics

 Objective of Profit Maximisation

 Total Revenue and Total Cost
 What to supply, How much to supply and Where to supply

 Pricing Decision issues

 Product demand and Supply curves
 Efficient price and Output
 Markets and Price level

 A Systematic Approach to Pricing

 Price Environment
 Price Determination
 Price Strategy
 EPGDIB/IM (2018-20)
Market Framework for Firm’s
Pricing
Business Economics

(i) Demand and Supply factors determine market

price

(ii) Price always tends toward equilibrium

 EPGDIB/IM (2018-20)
Supply and Demand Shifts and
Effect on Prices
Business Economics

No change An increase in A decrease in

in supply supply supply

No change P same P down P up

in Demand Q same Q up Q down

An increase P up P ambiguous P up
in Demand Q up Q up Q ambiguous

A decrease P down P down P ambiguous

in Demand Q down Q ambiguous Q down
 EPGDIB/IM (2018-20)

Price: Economic Properties

Business Economics

 Measure of scarcity

 Signals to both consumers and producers for efficient

decision making

 Determined in markets where demand and supply forces

interact

 Price Controls lead to Market distortions

 EPGDIB/IM (2018-20)

Categories of Goods & Services

Business Economics

Rival Consumption
Yes No
Private Goods Collective Goods
Yes

(Car or Coke) (Theater)

Exclusion

Commons Public Goods

No

(Ocean Fishery (National Defense)

 EPGDIB/IM (2018-20)

Steps in Business Decision Making

Business Economics

1. Define the Problem

 Identifying the context or setting
 Context has a bearing on Objective and Course of Action
2. Determine the Objective
 Objective of profit or Other?
 Barometer of Performance
 Benefit-Cost analysis
3. Explore the Alternatives
4. Predict the Consequences
 Economic modelling
5. Choice based on Sensitivity Analysis
 EPGDIB/IM (2018-20)

Structure of Car Sector

Business Economics

YEAR/ HML PAL MARUTI

COMPANY
MS PAT MS PAT MS PAT
(RS. LAKHS) (RS. LAKHS) (RS. LAKHS)

1983-84 52.9 NA 46.2 610 - -

1985-86 23.4 NA 29.1 1146 47.0 300

1989-90 15.9 272.5 23.6 1717 60.4 4194

1991-92 12.6 (1820.4) 18.77** (169.7) 68.8 3539*

1992-93 15.7 (3049.5) 11.3 NA 69.5 3661

1993-94 12.4 1756 11.9 (2241) 72.4 13600*

1994-95 9.8 NA 10.5 NA 75 NA

HML : HINDUSTAN MOTORS LIMITED

PAL : PREMIER AUTOMOBILE LIMITED
MS : MARKET SHARE
PAT : PROFIT AFTER TAX
• : PROFIT BEFORE TAX (PBT)
** : FOR 9 MONTHS
 EPGDIB/IM (2018-20)

Decision Making Framework of

a Firm
Business Economics
Business and Social Environment

Technology
 Production Capacity
 Worker Knowledge
 Communications
 Capability
 Research and
Development
Market Environment
Legal Environment
 Customer Demand
 Tax Burden
 Level of Competition
 Regulatory Policy
 Supplier Capability
 Trade Policy
Competitive Strategy
 Product Choice
 Pricing Strategy
 Promotion Strategy

Organisation Design
 Assignment of Decision Rights
 Match Worker Incentives with
Managerial Motive
 Decision Management and Control

Pay for Performance

 Worker Pay for Performance
 Divisional Pay for Performance
 Management Pay for Performance

Shareholder Value Maximization

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Firm and Goals (1)

Business Economics

 Basis of Corporate Strategy

 what products/services will firm offer for sale?
 who will be the firm’s customers?
 what should the firm continue to do or plan to abandon?
 how does the firm’s strategy align with the market and
competitive realities?
 how should a firm compete against its market rivals?
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Firm and Goals (2)

Business Economics

 Trade-offs among Alternate goals

 To pursue short run profits or long run profits
 To improve profit margins or increase market share
 To increase penetration of existing markets or enter new markets
 To diversify into related products or into unrelated products
 To seek faster growth or stability
 EPGDIB/IM (2018-20)

Firm and Goals (3)

Business Economics

 Firm’s Strategic Alternatives

 Concentration on a single business
 Vertical integration
 Horizontal integration
 Diversification
 Joint ventures
 Innovation

 Profit Maximisation
 Compensatory and functional theories of profit
 Frictional and Monopoly theories of profit
 Technology and Innovation theories of profit