Business Economics Notes For SYBBA(CA)

 Business Economics

 

MEANING AND SCOPE OF MICROECONOMICS

Microeconomics, the study of individual economic units, focuses on consumer and firm behaviour, market interactions, and resource allocation, covering topics like demand, supply, pricing, and production. 

 

Nature of Microeconomics

 

• Focus on Individual Units:

Microeconomics studies the behaviour of individual consumers, firms, and industries, rather than the economy as a whole. 

 

• Emphasis on Specific Markets:

It analyses the functioning of specific markets for goods, services, and factors of production. 

 

• Analytical Approach:

Microeconomics uses models, graphs, and assumptions to explain economic phenomena and predict outcomes. 

 

• Optimization:

Microeconomic theory assumes that individuals and firms make decisions to maximise their utility or profits, respectively. 

 

Scope of Microeconomics

 

• Consumer Behaviour:

Microeconomics examines how consumers make choices about what goods and services to purchase and how their preferences and incomes affect their demand.

 

• Firm Behaviour:

It studies how firms decide what to produce, how to produce it, and how much to produce, as well as their costs and profits.

 

• Market Structures:

Microeconomics analyses different market structures, such as perfect competition, monopoly, oligopoly, and monopolistic competition.

 

 

 

• Pricing Theory:

It explores how prices are determined in different markets, including the role of supply, demand, and market forces.

 

• Factor Markets:

Microeconomics examines the markets for factors of production, such as labour, capital, and land, and how their prices are determined.

 

DIFFERENCE BETWEENMICROECONOMICSS AND MACROECONOMICS

 

MEANING OF DEMAND

What is demand?

Demand simply means a consumer’s desire to buy goods and services without any hesitation and pay the price for it. In simple words, demand is the number of goods that the customers are ready and willing to buy at several prices during a given time frame. Preferences and choices are the basics of demand, and can be described in terms of the cost, benefits, profit, and other variables.

 

Determinants of Demand

There are many determinants of demand, but the top five determinants of demand are as follows: 

Product cost: Demand of the product changes as per the change in the price of the commodity. People deciding to buy a product remain constant only if all the factors related to it remain unchanged.

The income of the consumers: When the income increases, the number of goods demanded also increases. Likewise, if the income decreases, the demand also decreases.

Costs of related goods and services: For a complimentary product, an increase in the cost of one commodity will decrease the demand for a complimentary product. Example: An increase in the rate of bread will decrease the demand for butter. Similarly, an increase in the rate of one commodity will generate the demand for a substitute product to increase. Example: Increase in the cost of tea will raise the demand for coffee and therefore, decrease the demand for tea.

Consumer expectation: High expectation of income or expectation in the increase in price of a good also leads to an increase in demand. Similarly, low expectation of income or low pricing of goods will decrease the demand.

Buyers in the market: If the number of buyers for a commodity are more or less, then there will be a shift in demand.

 

The Law of Demand

The law of demand is interpreted as ‘the quantity demanded of a product comes down if the price of the product goes up, keeping other factors constant.’ In other words, if the cost of the product increases, then the aggregate quantity demanded decreases. This is because the opportunity cost of the customers increases that leads the customers to go for any other substitute or they may not purchase it. The law of demand and its exceptions are really inquisitive concepts.

 

MEANING OF DEMAND

Meaning of Supply:

The Law of supply expresses that when the cost of a product expands or increases, its supply also increases. Likewise, when the cost of a product diminishes, its supply additionally diminishes. Henceforth, there is an immediate connection between the cost or price and the inventory of a product. Be that as it may, here we will concentrate on the Supply Function exhaustively.

 

Determinants of Supply:

The factors on which the supply of a product or a service are:

• Firm goals.
• Cost of inputs or factors.
• Technology.
• Government policy.
• Expectations.
• Costs of other commodities.
• The number of firms.
• Natural factors.
• Price of the commodities.

·        Firm Goals:

The supply of merchandise or products additionally relies upon the objectives of an association or an organisation. An association might have different objectives, for example, sales maximisation, employment maximisation, profit maximisation, and so on.

·        Cost of Inputs or Factors:

The cost of factors of production and inputs like land, work, capital, and business venture likewise decide the supply of the products. At the point when the cost of resources is low, the expense of production is likewise low.

·        Technology:

When a firm uses new innovation, it saves resources and furthermore decreases the expense of creation or production or manufacturing. Accordingly, firms produce more and supply a greater quantity of goods.

·      Government Policy:

The taxation rebates, subsidies, and policies given by the public authority likewise sway the supply of goods.

 

 

The law of supply is a fundamental principle of economic theory which states that, keeping other factors constant, an increase in sales price results in an increase in quantity supplied.[1] In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes. This means that producers and manufacturers are willing to offer more of a product for sale on the market at higher prices, as increasing production is a way of increasing profits.[2]

 

In short, the law of supply is a positive relationship between quantity supplied and price, and is the reason for the upward slope of the supply curve.

 

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What is macroeconomics?

Macroeconomics is a branch of economics that depicts a substantial picture. It scrutinises itself with the economy at a massive scale and several issues of an economy are considered.

 

Macroeconomics examines the economy as a whole, focusing on broad factors like GDP, inflation, and unemployment. For instance, macroeconomic policies such as increasing government spending or lowering interest rates can stimulate economic activity if a country faces high unemployment. These measures aim to boost job creation, increase consumer spending, and drive economic growth.

 

The importance of macro economics is as follows

 

(i)              The study of macro economics is indispensable for understanding the functioning of an economy.

(ii)            Macro economics is of great help in the formulation of economic policies.

(iii)          It is helpful in the computation of national income and in the analysis of problems related to national income.

(iv)           It helps the policy makers to control trade cycles.

(v)             It is helpful in the study of growth and development of the countries.

(vi)           It is helpful in the study of the general level of taxation and expenditure.

(vii)         It enables us to study the nature and size of the material welfare of the nations.

Macroeconomic variables

• GDP growth.
• Money supply.
• Unemployment rate.
• Inflation rate.
• Government debt.

GDP growth

Gross domestic product describes the overall economic value of the goods and services produced by a country. GDP is also a measure of spending by a government and its citizens along with the financial impact of trade and investments within a nation. GDP is usually calculated annually.

 

Inflation rate

Inflation describes an increase in the average cost of goods or services over a period of time. Inflation that occurs rapidly is a measure of economic instability or downturn while steady inflation is usually predicted as a normal economic factor.

 

Fiscal policy

Monetary policy is shaped by large financial institutions in both the public and private sectors. Large banks and government agencies make decisions that impact interest rates, inflation and federal budgets. This guides the flow of money in circulation within an economy.

 

National income

National income is the combined amount of money a country generates within its economy. This figure helps economists measure economic growth along with standards of living for citizens including income distribution.

 

Employment

The unemployment rate of a country offers an indication of the economic health of a nation. A higher employment rate versus those unemployed indicates a stronger economy. When a majority of citizens are employed, their spending increases the amount of money in circulation and boosts the economy.

 

Economic growth rate

This factor describes the change in the percent of the cost of producing goods or services in a country during a certain period of time in relation to a previous growth period.

 

 

 

National income

 

National income refers to the total value of goods and services produced within a country, including net income from abroad, during a specific period. It is often measured using indicators like GDP (Gross Domestic Product), GNP (Gross National Product), or NNP (Net National Product) at factor cost.

 

Gross Domestic Product (GDP)

GDP measures the total value of goods and services produced within a country’s borders. It is an important economic indicator that reflects the growth of a nation's economy. GDP can be calculated using the GDP Formula:

 

GDP = Consumption + Investment + Government Spending + Exports - Imports

 

Gross National Product (GNP)

 

GNP refers to the value of all goods and services produced by the residents of a country, both domestically and abroad. Unlike GDP, GNP includes net income from abroad. It is calculated as:

 

GNP = GDP + Net Income from Abroad - Net Payments to Foreign Assets

 

Importance of National Income

National Income serves various important purposes, including:

 

1. Setting Economic Policies: National Income data helps in formulating economic policies to foster economic growth.
2. Tracking Inflation and Deflation: National Income statistics are used to monitor inflation and deflation and create timely anti-inflationary measures.
3. Budget Planning: Government budget preparation relies heavily on national income figures. Policies are shaped to align with the available economic resources.
4. Standard of Living Comparison: National Income is used to compare the standard of living across countries and over time within the same country.
5. Defence and Development: National Income estimates help allocate funds for both defence and development projects.

 

Methods for Measuring National Income

There are several ways to measure National Income:

 

1. Income Method: This method calculates National Income by adding the net income of all citizens from factors of production like rent, wages, interest, and profits, excluding transfer payments.
2. Expenditure Method: The Expenditure Method of National Income sums up the total spending in an economy, including consumption, investment, government expenditure, and net foreign investment.
3. Product Method: This measures the total value of final goods and services produced in an economy, assessed at market prices.
4. Value-Added Method: This method subtracts the value of intermediate goods used in production to calculate the value-added at each stage.

 

Business or trade cycles

 

Business or trade cycles are the terms used to describe the cyclical expansion and contraction of economic activity. Period of Expansion, Upswing, or Prosperity" refers to the era of high income, high output, and high employment. The era of contraction, recession, downswing, or depression is a time of low income, poor production, and low employment. 

 

Understanding Phases Of The Trade Cycle

Expansion

The first phase of the trade cycle is expansion. In this phase of the trade cycle, there is a rise in positive economic indicators. Indicators like employment, income, output, wages, profits, demand and supply for good services. At this point, debtors are paying their debts on time, money supply velocity is high, and investment is increasing. Plus, this phase is continuous as long as economic conditions are favourable for expansion.

Peak

The economy reaches a saturation point in the second phase of the trade cycle. At this point, growth has reached its maximum. This means there is no further growth in the economic indicators, and they are at their highest point. At the moment, prices are at their peak. During this stage, the trend of economic growth reverses. Also, this is the time when consumers tend to reorganise their budgets.

Recession

Following the peak phase is the recession. During this phase, demand for goods and services declines rapidly and steadily. Moreover, producers fail to notice the decrease in demand immediately and continue producing. Thus, it results in a surplus of products on the market. Furthermore, prices tend to go down. Then all the positive economic indicators, like income, output, wages, etc., start to go down.

Depression

A depression is when the economy's growth falls below the steady growth line. In general, economic activity declines during a depression. Several factors decline, including production, employment, and income. Also, there is a decline in purchasing power responsible for the decline in prices. 

 

 

Inflation

Inflation is an increase in the prices of goods and services. The most well-known indicator of inflation is the Consumer Price Index (CPI), which measures the percentage change in the price of a basket of goods and services consumed by households.

 

Causes of inflation The main causes of inflation can be grouped into two broad categories: 1. demand-pull, 2. cost-push

 

Demand-pull inflation

Demand-pull inflation arises when the total demand for goods and services (i.e. ‘aggregate demand’) increases to exceed the supply of goods and services (i.e. ‘aggregate supply’) that can be sustainably produced.

 

Cost-push inflation

Cost-push inflation occurs when the total supply of goods and services in the economy which can be produced (aggregate supply) falls. A fall in aggregate supply is often caused by an increase in the cost of production.