M.com part 1 economics for business decisions Most Important Questions pdf download



M.com part 1 economics for business decisions Most Important Questions pdf download

Q.1. Explain the meaning and scope of Business economics.


Business or managerial economics involves application of economic principles to the problems of the firm or business enterprise which are productive economic units operating in an economy. Business economics assumes micro-economic character. As a specialized branch of economics, it adopts and adapts economic models in the problem solving and decision-making process of a firm. It studies the problems and principles of individual firms or an industry and helps the business firm in forecasting and evaluating market trends. It is normative in nature and therefore it is prescriptive in character i.e., it is concerned with what firm should do under the given conditions in which it operates. It determines the objectives of the enterprise and then develops the means to achieve the laid down objectives. It deals with future planning, policy making and decision making.


The scope of business economics includes the following:

1. Demand Analysis and Forecasting

2. Cost Analysis

3. Market Structure

4. Price determination in different markets

5. Profit analysis

6. Capital budgeting


Demand is defined as “Desire backed by willingness and ability to pay.” The oncept of demand has three aspects, namely; (i) the desire to buy, (ii) the willingness to pay and (iii) the ability to pay. These three aspects combined constitute demand. The absence of any one of these three aspects will nullify demand. For instance, the consumer may have the desire to buy but is not willing to pay or the consumer has both the desire and willingness to pay but do not have the ability to pay or the consumer has the ability to pay but not the willingness and desire to buy. All these situations or instances do not constitute demand. India is believed to be self-sufficient in her food requirements. The go-downs of Food Corporation of India are overflowing. However food self-sufficiency in India is true only from the economic or the demand point of view as percent of India’s population is living below the poverty line according to World Bank figures for the year 2011. If demand for food is generated by 100 percent of the population, India would become a food deficit country and may have to depend upon food imports to satisfy domestic food demand. Mere desire to buy and the willingness to pay without the ability to pay cannot and does not constitute demand.



The concept of cost is central to business decision-making. Cost consciousness contributes to cost minimization or cost optimization which leads to cost effectiveness and business expansion. A firm which produces its goods and services at a comparatively lower cost with a qualitative edge over its competitors will not only survive but also prosper. The micro-economic effect of cost consciousness will be the prosperity of individual firms. When cost effective firms in different industries and sectors of the economy produces its goods and services by minimizing cost and maximizing quality, the macro-economic effect would be increase in economic welfare of the largest possible number of people.



A Market may be defined as any place or process that brings buyers and sellers together with an objective to enter into a transaction at an agreed price. The functions of a market economy are carried out through the market mechanism. Markets are therefore the very basis of an economy. Markets may be found in different forms such as the organized markets for commodities like oil, sugar, wheat, rice, gold, copper, iron, rubber and what have you, financial markets for stocks, shares, currencies of the world and financial instruments of various types, goods markets consisting of various goods and services which are traded through the market mechanism, factor markets through which factor inputs like land, labour, capital and enterprise are traded.



The firms that produce a given product and its close substitutes put together are known as an industry. The industry demand curve is the market demand curve for any firm in the industry. When firms decide their output, they must know as to what quantity of output will be sold at various prices. Hence, the firms are interested to know their individual demand curve. The structure of the market in which a firm operates determines the relationship between the market demand curve for the product and the individual demand curve of the firm in a given industry. Once the individual demand curve is known to the firm, it can easily determine its price and output policy. The ability of the firm to decide its price and output policy depends upon the nature of the market structure in which the firm is situated. Thus a competitive firm with zero market power can in no way influence the market price of the product that it produces. A competitive firm is a price taker and not a price maker. It simply has to accept the market price and once the market price is known, a competitive firm can only decide its equilibrium output.


The equilibrium condition of any firm under any market is (MC = MR). It is also the profit maximizing condition. However, the actual profit made by the firm depends upon, amongst other things, the position of the cost and revenue curves. Greater the difference between these curves, greater will be the profit and vice versa. The profits made by a firm also depend upon the nature of the market. In a competitive market, the firm will make only normal profits in the long run. At the extreme other you have oligopoly wherein the profits made by a firm will depend upon the nature of oligopoly. In collusive oligopoly, there is market sharing and the price is determined by the market leader. The firms can make super normal profits. However, under non-collusive oligopoly, the firms will make only normal profits due to competition and price war. A monopoly firm will always make super normal profits. Firms under monopolistic competition may make super normal profits in the short run.



Investment decision making is known as capital budgeting. Amongst alternative investment avenues, the firm has to decide on the most profitable investment opportunity. The study of capital budgeting involves stages such as the search for investment opportunities, forecasting cash flows expected to flow from each investment opportunity, computing the cost of capital and identifying the most profitable investment opportunity. Firms may use various methods to evaluate investment decisions such as the payback period method, the net present value method or the internal rate of return method.


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