HS 200 – BUSINESS ECONOMICS

Module -1
• What is economics?
• What is Managerial Economics?
• Economics and managerial decision making?
• Review of economic terms
• What is economics?
– Derived from Greek word “okios” which means
household.
– Human wants are unlimited.
– Resources available to satisfy these wants are
scarce/limited.
– People always want to maximize their gains.
• Economic problems
– Economic agents, either in individual level, group
or country level have some economic problems
because of scarcity of resources
– They need to choose scarce resources among
other alternatives based on choice and valuation
of alternatives
– There is a gap between the want and the
resources available that leads to the fact that
there are economic problems
10 “wants” 4 Resources

Priorities

4
“wants”
• What is Economics?
– From here the definition or the meaning of
economics comes that economics is the study of
how economic agents or society choose to use
scarce productive re sources that have alternative
uses to satisfy wants (needs) which are unlimited
and of varying degree of importance
– we can simply say that economics is the study of
scarcity and choice
• Micro economics
– The micro economics essentially deals with the fact
that how individual firm individual producer,
individual organizer; they should take their decision
they should make their economic decision taking
whatever the constant into account
• Managerial economics
– the study of how to direct scarce resource in the way,
that the most efficiently achieve a managerial goal
 Marginal analysis
• Marginal analysis examines the effects of additions to
or subtraction from a current situation.
• Marginal analysis is concerned with finding out the
change in the total arising because of one additional
unit.
• Concept of marginal analysis deals with a unit increase
in cost/ revenue/utility.
• The change in the total revenue due to one additional
unit sold is known as Marginal Revenue.
• The change in total cost on account of one additional
unit produced is known as Marginal Cost.
• The change in total utility on account of one additional
unit utilized is known as Marginal Utility.
The change in the total revenue due to one additional unit
sold is known as Marginal Revenue.
Marginal Revenue = 𝑇𝑅– 𝑇𝑅𝑛−1
Where, 𝑇𝑅 is the total Revenue of n products
𝑇𝑅𝑛−1 is the total revenue of 𝑛 − 1 products.

The change in total cost on account of one additional unit

produced is known as Marginal Cost.
Marginal Cost = 𝑇𝐶 – 𝑇𝐶𝑛−1
Where, 𝑇𝐶 is the total cost of n products
𝑇𝐶𝑛−1 is the total cost of 𝑛 − 1 products.

The change in total utility on account of one additional unit

utilized is known as Marginal Utility.
Marginal Utility = 𝑇𝑈 – 𝑇𝑈𝑛−1
Where, 𝑇𝑈 is the total cost of n products
𝑇𝑈𝑛−1 is the total cost of 𝑛 − 1 products.
 Utility
• People demand goods and services in an
economy to satisfy their wants.
• All goods and services have wants satisfying
capacity which is known as Utility.
• Utility ( level of satisfaction) is different from
person to person.
• In economic theory utility can be measured in
two ways
 Cardinal utility analysis
 Ordinal utility analysis
Cardinal Utility analysis
• Cardinal utility analysis is based on the cardinal
measurement of utility which assumes that utility is
measurable or quantifiable ,
• i.e it can be measured in some units. According to this
approach how much utility a consumer obtains from
goods can be expressed in cardinal numbers such as
1,2,3, 4 and so forth.
We thus have
Total utility and Marginal Utility.
Total Utility (MU) which is a measure of the overall
satisfaction.
The additional satisfaction a consumer gains from
consuming one more unit of good or service is Marginal
Utility (MU).
Slices of bread Total Utility Marginal utility
1st 40 40

2nd 78 38

3rd 113 35

4th 144 31

5th 170 26

6th 190 20

7th 203 13

8th 208 5

9th 204 -4
Thus we have,

Total utility
 Marginal Utility

Total Utility (MU) which is a measure of

the overall satisfaction.

The additional satisfaction a consumer

gains from consuming one more unit of good or
service is Marginal Utility (MU).
Ordinal Utility analysis

• Ordinal utility approach is purely subjective and is

immeasurable.
• Ordinal measurement of utility is the one in
which utility cannot be expressed in absolute
units.
• Preferences among goods can be ranked using
ordinal numbers such as fist, second, third etc.
• Utility from one source may be ‘equal to’, ‘more
than’ or ‘less than’ utility from another source.
• But it is not possible to state the difference in
absolute or numerical units.
Law of diminishing marginal utility
• The law of Diminishing Marginal Utility was perfected
and popularized by Alfred Marshall.
• The law states that as the stock of a commodity
increases with the consumer, its Marginal Utility to the
consumer decreases.
• It can eventually fall to zero and become even
negative.
• If utility of a product is measured in terms of money
that one is willing to sacrifice to consume a certain
amount of that product, the law of diminishing
marginal utility can be restated.
• The more the consumption of a product, the less is the
worth of extra units of consumption during a specified
period.
Marginal Utility

O Q
Diminishing marginal utility
 Production Possibility Frontier
• Production possibility schedule is that
schedule which shows alternative production
possibilities of two sets of goods with the
given resources and technique of production.
• Production possibility curve is a graphic
presentation of two sets of goods with the
given resources and technique of production.
 Production Possibility Curve
Goods A B C D E
Wheat ( lakh tones) 100 90 70 40 0
Cloth ( 1000 tones) 0 1 2 3 4

A
90 B
C
70
Wheat
D
40

E
1 2 3

Cloth