Business Economics (ECO 341) Fall Semester, 2012

1. Business Economics (ECO 341)Fall Semester, 2012 • Khurrum S. Mughal

2. Course Material • Required Texts & Readings: • Economics, 19th Edition by Paul A. Samuelson & William D. Nordhaus • Recommended Readings: Articles from • Economics, 4th Edition by David H. Hyman • Economist Weekly, Business Section.

3. Grading Criteria • Class Participation 5 • Quizzes 10 • Assignments 10 • Presentation 10 • Two Mid Term Examinations 25 • Final Exam 40 100

5. Economics

6. Economics • Definition: • How societies use scarce resources to produce valuable goods and services and distribute them among different individuals. (Economics, 19th Edition by Paul A. Samuelson & William D. Nordhaus)

7. Economics • Scarcity • Production is never high enough to meet everyone’s demand • Wants are unlimited • Efficiency • An economy is producing efficiently unless no individual’s economic welfare can be improved unless someone else is made worse off

8. Basics of Economics • Microeconomics • Study of economics at smaller scale • Adam Smith: Markets, Firms, & Households • Wealth of Nations (1776): Determination of prices of land, labour, & capital; and strength and weaknesses of market mechanism • Macroeconomics • Study of overall performance of the economy • General Theory of Employment, Interest & Money, John M Keynes (1936) • What causes business cycles, with alternating spells of high unemployment and high inflation • Fallacies Encountered in Economic Reasoning: • The post hoc fallacy - causality • Failure to hold other things constant • The fallacy of composition

9. Basics of Economics • Positive Economics • Based on facts of an economy • Normative Economics • Involves ethical precepts and norms of fairness

10. Basics of Economics • Types of Economies • Market Economies: Individual and private firms make the major decisions regarding production and consumption (laissez-faire economy) • Command Economies: Government makes all important decisions about production and distribution • Mixed Economies

11. Basics of Economics • Limited Resources: • Land • Labour • Energy • Factories and tools • Technical knowledge etc. • Allocation among innumerable possibilities • Choice of input and output allocation • Factors of Production: land, labour and capital

12. Basics of Economics

13. Basics of Economics • Opportunity Cost: The cost of giving up any activity when one makes a choice to choose the best possible alternative • Example: Choosing between production of computers and printers by a firm on PPF

14. Basics of Economics • Marginal Analysis: How much you get from using one more unit • Marginal Utility • Marginal Product • Marginal Revenue • Marginal Cost

15. Basics of Economics • Time Dimension: • Short Run • Operating period in which at least one factor of production is in fixed supply • Long Run • Operating period in which all factors of production are in variable supply • Short Run Profits Vs Long Run Success of Business

16. Basics of Economics • Limited Resources: • Land • Labour • Energy • Factories and tools • Technical knowledge etc. • Allocation among innumerable possibilities • Choice of input and output allocation • Factors of Production: land, labour and capital

17. Society’s Technological Possibilities • Inputs and Outputs • The Production Possibility Frontier • Application of PPFs • Poor Vs High Income Nations • Choice among Public and Private Goods • Economic Growth • Current Vs Future Consumption • Unattainable Vs Inefficient Points on PPF

18. Business Economics Application of theory and tools of analysis of decision science to examine how an organization can achieve its aims and objectives most efficiently

19. Managerial Economics • Management Decision Problems • Economic Theory: • Micro & Macroeconomics • Decision Science: • Mathematical Economics and Econometrics • Managerial Economics: • Application of economic theory and decision tools to solve managerial decision problems

20. Relationship to Economic Theory • Relationship to economic theory: • Linked to individual firms investment decision, production and preferences of consumers. • Macroeconomic conditions in which a firm is functioning. • Economic theories aim to predict economic behaviour • Theory of the firm is of utmost importance for Managerial Economics

21. Relationship to Decision Sciences • Mathematical Economics is used to formalize the economic models of economic theory in the form of an equation • Econometric tools are used to statistically analysis the models using real world data • The tools are used for forecasting as well. • For Example: Demand of Education

22. Relationship with Business Administration • Integration of Economic Theory, Decision Science Tools, and Business Areas of Study • Managerial Decision Process: • Establishing the objective of the firm • Problems and Obstacles towards achieving the objective • Identifying the range of possible solutions • Selecting the optimal solution • Implementation of the solution

23. Relationship with Business Administration • Types of Business Decisions • Price and Output Decisions • Demand Estimation • Choice of technique of production • Advertising Decisions • Long-run Production Decisions • Investment Decisions

24. Functional Relationships in Economics • y=f(x) or y=g(x,z) or y=h(x1, x2,…..xn) • Total, Average and Marginal Products • Example: Labor to be employed in Construction • Economic Models: Experiments similar to Natural science experiments by holding everything else constant

25. Economic Models • Example of Demand and Supply • Demand Function Qd=a-bP where b<0 • Supply Function Qs=c+dP where d>0 • Equilibrium Qd=Qs