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Summary Business Economics IBM1
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BUSINESS ECONOMICS: MICRO PERSPECTIVE - BUSINESS LEVEL1. Meaning of economics
Paul A. Samuelson defines economics as “the study of how men and society choose, or
without the use of money, to employ scarce productive resources which could have
alternative uses, to produce various commodities over time and distribute them for
consumption now and in the future among various people and groups of society.
2. Understand economics and scarcity
Scarcity means that there are never enough resources to satisfy all human wants. Every
society, at every level, must make choices about how to use its resources.
Economics is the study of the trade-offs and choices that we make given the fact of scarcity.
Opportunity cost is what we give up when we choose one thing over another.
3. Meaning and subject-matter of microeconomics
Microeconomics deals with small segments of society
- It is defined as the study of behavior of individual decision-making units, such as
consumers, resource owners and firms.
- It is also known as Price Theory since its major subject matter deals with the
determination of the price of commodities and factors
- Microeconomics has both theoretical and practical importance
→ it solves the three central problems of an economy: what, how and for whom to
produce
4. Importance of microeconomics
Microeconomics has both theoretical and practical importance
- It helps in formulating economic policies that enhance productive efficiency and result
in greater social welfare
- It explains the working of a capitalist economy where individual units are free to make
their own decisions (producers and consumers)
- It describes how, in a free enterprise economy, individual units attain an equilibrium
position
- It helps the government in formulating correct price policies
- It helps in efficient employment of resources by the entrepreneurs
- It helps business economists to make conditional predictions and business forecasts
- It is used to explain gains from trade, equilibrium in the balance of payment position
and determination of international exchange rate
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, 5. Meaning of economic problems
The economic problem is the problem of choice
- The problem of choice has to be faced by every economy of the world
- Human beings have wants which are unlimited
- When these wants get satisfied, new wants crop up
- Human wants multiply at a fast rate
- The economic resources to satisfy these unlimited wants are limited
6. Causes of economic problems
The desire to consume more of better goods and services has always been increasing. They
keep on increasing with the rise in people’s ability to satisfy them. They attribute to:
- People’s desire to raise their standard of living
- Human tendency to accumulate things beyond their present need
- Multiplicative nature of some wants like buying a car creates want for many other
things (petrol, parking space, safety locks, …)
- Basic needs for food, water and clothing
- The influence of advertisement in modern times create new kinds of wants and
demonstration effect
→ due to these reasons, human wants continue to increase endlessly
Resources are limited. The scarcity of resources is the root cause of all economic problems.
All resources that are available to people at any point of time for satisfying their wants are
scarce and limited.
- Resource scarcity is a relative term
- It implies that resources are scarce in relation to the damned for resources
- The scarcity of resources is the mother of all economic problems
- It forces people to make choices
Resources are not only scarce in supply, but they have alternative uses. The same
resources cannot be used for more than one purpose at a time.
- People have to make a choice between alternating uses of the resources
- If the area of land is put to a particular use, the landlord has to forgo the return
expected from its other alternative uses.
- This is termed as opportunity cost
7. Economic problems of an economy
(A) what goods to produce and how much to produce?
(B) How to produce?
(C) For whom to produce?
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, 8. Goods and resources
Economic goods
- Goods or services a consumer must pay to obtain, also called scarce goods
Free goods
- Goods or services that a consumer can obtain for free because they are abundant
relative to the demand
Productive resources
- The inputs used in the production of goods and services to make a profit: land,
economic capital, labor and entrepreneurship (factors of production)
9. Understanding microeconomics
Questions to ask in microeconomics
- What determines how households and individuals spend their budgets?
- What combination of goods and services will best fit their needs and wants, given the
budget they have to spend?
- How do people decide whether to work and if so, whether to work full-time or
part-time?
- How do people decide how much to save for the future, or whether they should
borrow to spend beyond their current means?
- What determines the products and how many of each a firm will produce and sell?
- What determines what prices a firm will charge?
- What determines how a firm will produce its products?
- What determines how many workers it will hire?
- How will a firm finance its business?
- When will a firm decide to expand, downsize or even close?
10. Opportunity cost
Opportunity cost is defined as the cost of an alternative opportunity given up or surrendered.
- Ex: one piece of land, both wheat and potato can be grown with the same resources.
If wheat is grown then the opportunity cost of producing wheat is the quantity of
sugarcane given up.
It is clear that the question of opportunity cost arises whenever resources have alternative
uses. These resources are not always physical resources, they may be monetary resources
or time.
11. Production possibility curve
The production possibility curve of frontier (PPF) shows the various alternative combinations
of goods and services that an economy can produce when the resources are all fully and
efficiently employed. PPC shows the obtainable options.
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