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MN 3040 – Business Economics and Financial
Accounting
Objectives of the Lecture
• To explain the syllabus and main text books,
assessment, etc.
• To give basic introduction to business
economics and its various methods of
analysis and tools.
• To explain the nature of market mechanism
in terms of demand, supply and elasticity
concepts.
• To explain the importance of business
economics for practicing engineers.
Learning Objectives
To provide students with
knowledge and understanding of
basic micro and macro economic
principles and tools of analysis.
To provide conceptual and
regulatory framework of financial
and cost accounting for
operational level practicing
engineers.
Learning Outcomes
Understanding the basic micro and
macro economic concepts and
appreciation of links between
economy and technology.
Understanding in financial, cost and
management accounting basic
concepts and application of these
into modern business and
interpretation of main accounting
statements.
Syllabus
Business Economics (Economics and
the economy, Elementary theory of
Economics, Tools of economic analysis,
Demand supply and the market, Theory of
the firm, Different types of firms,
Motivation of firms, Theory of supply,
Costs and production, Introduction to
macro economics and national income
accounting.)
Syllabus
Financial and Cost Accounting (Basic
accounting concepts, Trial balance, Profits
and loss account, Balance sheet, Cash
flow statement, Interpretation of accounts,
Cost concepts and terminology, Analysis
and interpretation of costs, Allocation of
overheads, Marginal costing, CPV
analysis, Standard costs and Stock
control, etc.
Text Books
Begg.S et.al (2004), Economics, 4th ed.,
McGraw-Hill.
Worthington.I (2004), Economics for
Business: Blending Theory and Practice,
Financial Times/Prentice
Mclanely.E (1999), Accounting, An
introduction, Prentice Hall.
Glautier. E et.al (1997) Accounting Theory
and Practice, 6th Ed.
Assessment
40% Continuous Assessment.
60% Final written examination.
What is Economics
Generally economics teach basic rules and
principles of business: core of the business.
Economics is an approach to decision making
and it helps to draw correct conclusions.
All the business subjects origin from
Economics and therefore oldest business
subject is the Economics.
In some markets, highly paid professionals are
the Economists (Ex. USA). Three types of
Economists: Business Economists, Public
Economists and Academic Economists.
Historical Development of Economics
Ancient and medieval
economic thinking
Mercantalism
Physiocrats
Classical
Neo-classical
Marxian
Austrian
(general
equilibrium).
(revamping
of Keynesian
Walrasian
(Mainly religious economicand
ideas:
classical
privateeconomics to
property, price of a good,
(importance
suit
price
withofthe
of
thenoncontemporary
German and US based
capital).
economic
economic
factors).
scenes.) New
evolutionary
Keynesian: market never
(Traders: importance of trade and industry
clear fully of
andinstitutions,
try to explains
(importance
for theInstitutional
development).
why market
property
rightsfails.
and capacity
(Importance of agriculture to
the economic
building).
New in
classical
(problems
American
development).
American institutional
economics
economy).
(importance
(free market,
price theory and
freedom). of fiscal policy).
Keynesian
New Keynesian
economics
(importance
of monetary
Monetary
(development of micro economics
policy).through
(revamping Keynesian
marginal revolution).
(rational
economics
behaviour
by giving
and
Rational
and adaptive
(labour
exploitation,
capital accumulation,
accumulated
micro background.)
knowledge).
falling expectation
of profits ratio, reserve labour army,
end of capitalism and socialist and
(methodology
and
financial economics).
(structural features in the
communist
Kallskian
society).
and
economy).
structural economics
Definition for Economics
Wealth related definitions
Welfare related definitions
Scarcity and wants related
definitions
Modern definitions
Wealth related definitions
Adam Smith – An inquiry into nature and causes of the
wealth of nations.
David Ricardo – To determine the laws which regulates
distribution of the wealth generated.
J.B. Say – Economics is a science which treats of
wealth.
F.A. Walker – Economics is the name of that part of the
knowledge which relates to wealth.
In overall these classical economists consider the
problems of production, distribution and exchange
of wealth as the main issue in economics.
Welfare related definitions
A. Marshall – Economics is the study of
mankind in the ordinary business of life
and it examines that how he acquires and
spends wealth for material welfare of
whole nation.
E. Cannon – Economics is an explanation of
the general causes on which material
welfare of human beings depends.
Scarcity and wants related definitions
L. Robbinson – Economics study problems arise due to
scarcity of resources.
Scarcity emerge due to limited resources and unlimited
wants. Therefore, economics is the study of how people
choose to allocate limited resources to satisfy their
unlimited wants.
Wicksteed – Economics is about study of without wastage
how resources should be utilized by community through
proper regulation and administration.
Stiglar.J - Economics study principles of governance of
allocation of scare resources among the competing
ends.
Scitovosky – Economics is a social science which consider
administration of scare resources.
Enrich Roll – Main issue in economics is choice related
ones and it occurs due to limited resources and their
alternative uses.
Modern definitions
H. Smith – Economics is the study of how in
a civilized society obtains the share of what
other people have produced (distribution)
and how the total product of society changes
(growth) and determined (factors behind
determination of growth).
Jacob Viner – Economics is all about what
economists do.
Main Types of Economics
Positive Economics (Explain what is actually
happening in a economy)
Normative Economics (Explain what should happen
in a economy based on value judgments)
Micro Economics (Study of small economic units
such as individuals, house holds, firms and
industry)
Macro Economics (Study of board aggregates of the
overall economy)
Sub disciplines and branches (development,
history, managerial, business, agricultural, health,
financial, transport, technology, education,
information….etc)
Methodology in Economics
Deductive method
Identify the problem
Define technical terms and relevant variables
Making assumptions
Process of logical deduction to derive
implications
Formulation of hypothesis
Making predictions and testing them
Check predictions are in agreements/conflict
with facts
Modify assumptions and again follow the
procedure or theory is discarded in favor of
superior alternative
Inductive method
Identify the problem
Data collection and some preliminary thinking
Data processing to find out how they are related
Develop a theory and refine it through statistical
methods
Make predictions and test them
Check predictions are in agreements/conflict
with facts
Collect more data and again follow the
procedure or theory is discarded in favor of
superior alternative
Types of Economic Analysis
Partial Economic Analysis (keeping all
other factors constant except one factor).
General Economic Analysis (all the factors
are changing together).
Static analysis (analysis based on one
point in time).
Dynamic analysis (analysis based on
different point in time in continuous
manner).
Comparative static analysis (analysis
based on comparing various static points).
The Rational Decision-Making Process in
Economics
1. Recognize a decision problem.
2. Define the goals or objectives.
3. Collect all the relevant information.
4. Identify a set of feasible decision
alternatives.
5. Select the decision criterion to use.
6. Select the best alternative.
Basic Economic Concepts
Scarcity
o The limitation of resources (relatively fixed in supply, alternative
uses, technology, development stage, etc) and unlimitation of
wants (human behaviour, age, culture, socio-economic situation,
advertisement, openness of the economy, etc) are the main reasons
for this scarcity. Scarcity leads to choice and systems of allocation
(market, government and mixed).
o Scarcity exists when people wants more of an items than is
available. If there is enough of a good available at a zero price to
satisfy wants, the good is said to be a free good. If there is not
enough of a good available at a non-zero price to satisfy wants, the
good is said to be a economic good.
Basic Economic Problems
Limited
Resources
Unlimited Wants
1) What to produce: what goods and services and what quantity are to
be produced. 2) How to produced: Selection of production
technique – capital or labour intensive. 3) For whom to produced:
distribution among the different income groups, regions and social
groups. Other economics problems (sustainable development,
environmental protection, economic growth and development,
corruption and clean government, democracy .. etc).
Economic Systems
Economic systems differs according the ways in which
they answered for these basic economic problems.
1) Free market or capitalist economy (price mechanism).
2) Socialist economy (government and central board).
3) Mixed economy (both government and price
mechanism).
4) Command economy (Military or feudal mechanism).
Factors of Production (productive resources)
Primary factors (not the result of the economic process)
1) Land (free gifts of nature including space and
natural resources. Rents are the earnings. Features:
fixed in supply, no cost in production for society,
earn different rents for different lands).
2) Labour (physical labour and intellectual services,
earn wages/salary).
Secondary factors (results of economic efforts)
3) Capital (stock of physical wealth of nation, fixed or
variable, earn interests).
4) Entrepreneurship (organize factors of production to
produce final products and risk bearer of business,
and earn profits).
5) Knowledge and technology.
Attitude, political, social and environmental
systems.
Opportunity Cost
Opportunity cost occurs due to: limited resources and unlimited
wants. This create scarcity which leads to choice. We can not
have everything what we want. Therefore, if we want to have one
more we have to sacrifice something.
A sacrificed best opportunity is called an opportunity cost.
A opportunity cost of a good is the quantity of other goods
sacrificed to obtain another unit of that good.
A opportunity cost of particular action or activity is the loss of the
opportunity to pursue the most attractive alternative given the
same time and resources
A opportunity cost for free good is zero.
A opportunity cost for economic good is positive.
Production Possibility Frontier Curve (Graphical representation
of opportunity cost)
This country can
X
Produce by using
all the resources X 15 15
Or Y 15.
13
X = 13, Y = 8, (sacrifice
8
Y 7 to get X 13)
X = 8, Y = 12
(sacrifice X 7
to get Y 12)
 Unattainable
 Full employment point

Inefficient
0
8
12
15
This shows maximum combinations of output Y
that the economy can
produce using all the available resources. This shows trade-offs:
more of one commodity less of other. Points above the frontier are
unattainable, below in-efficient and on maximum or full employment
This curve can use to show in technology progress (with various
trends) and economic growth.
Opportunity cost can be explained by using different shape of curves such
as increasing, decreasing and constant.
Marginal Principle
This explains additional benefits derived
from a particular decision and compares
with them additional cost incurred.
Widely used in production, revenue, profits
maximization, investment decisions and so
on.
MPl = d(TP)/d(L), MPk = d(TP)/d(K)
MR = d(TR)/d(q), MC = d (TC)/d(q)
Functions of Economists
Analysis on production, exchange/distribution,
consumption and investment.
Supply, demand and elasticity estimation and
forecast.
Preparation of business plans and conduct and
analysis of market surveys.
Analysis of issues related to production, cost,
revenues and profits.
Analysis of competition and market structure
analysis.
Analysis of issues related to firm and industry.
Investment appraisal and feasibility studies.
Advising on pricing, marketing and distribution.
Economic research and modeling.
Briefing domestic and global economic issues.
Economic Policy advising…etc.
Tools Used in Economics
Variables and Attributes: Variable is a quantity or
numerical characteristic of data which can be a
discrete or continuous. Attributes are the qualitative
characteristics of data.
Exogenous and endogenous variables: Exogenous
(autonomous) variables are taken from the outside
the system and Indogenous variables are emerged
within the system.
• Functions: Economic variables are interrelated and
interdependent therefore we are using various
functional forms: relationship between independent
and dependent variable is a function.
Models (statistical, mathematical, descriptive and
econometrics, etc). These models are based on
assumptions: Ceteris Paribus – other things being
equal, Rational behavior – specific and well defined
motivation, Structural and Institutional
assumptions…etc.
Tools Used in Economics
• Nominal (market price) and Real (deflated) prices.
Data (time series: a sequence of measurement of a
variable at different point of time, cross section: a
measurement of a variable at one point of time,
panel: a measurement of same group in different
point of time, pooled data: mixture).
Statistics - Data collection, presentation, analysis
and interpretation (descriptive - central tendency or
disperse and inference – generalization of sample
results to population).
What is Business/Managerial Economics
“Purpose of studying economics by engineers and managers is
to learn how not to be deceived by economists”.
Two Definitions on Managerial Economics: Narrow (Micro) and
board (Micro, macro, international and other related subjects).
Generally, managerial economics applies economic theory and
methodology to business and administrative decision making.
It provides a systematic and logical way of analyzing business
decisions that focuses on the economic forces that shape both
day to day decisions and long-term planning decisions.
Especially, it helps managers to understand real-world business
problems by using simplifying assumptions to abstract complex
reality into manageable simplicity.
Text Books Definitions
“Managerial Economics is the use of economic modes of
thought to analyze business situation”
“Managerial Economics is concerned with the application of
economic principles and methodologies to the decision
making process within the firm or organization under the
conditions of uncertainty”
“Managerial Economics is the integration of economic
theory with business practice for the purpose of facilitating
decision making and forward planning by management”
Managerial Economics is the application of economic
theory and analysis to practices of business firms and other
institutions”
The Nature of Managerial/Business Economics
Economics
 Micro Economics
 Meso Economics
 Macro Economics
 International
Economics
Business Management Decisions
 Product, price and output
 Make, buy, sell and investment
 Production technique
 Inventory level/technology
 Advertising and financing
 Labour decisions/State
regulations
Managerial Economics
Use of economics, business
management and decision
sciences to solve managerial
problems
Solutions to the managerial problems
Decision Sciences
 Econometrics
 Statistics
 Mathematics
 Game theory
 Forecasting
 Programming
Managerial Economics
Decision Science
Economics
Managerial/Business Economics
Business Management
Case Study Method in Managerial Economics
Lecture and discussion oriented classes are
provided students with information about
concepts, practices and theories. It is a listening
and absorbing information.
Cases oriented classes give students an
opportunity to use concepts, practices and
theories learnt in class. It is a participative and
Learning by doing method.
Your responsibility: Active participation,
interaction, critical evaluation and effective
communication.
What is the Case
A case is a factual description of a situation involving a
managerial problem or issue that requires a solution. It
describes various conditions and circumstances facing an
organization at a particular time.
Case in students Perspective – A short or long story or
narrative and some information about an enterprise, the
external environment in which it conducts its business, and
perhaps some details about its internal operations or some
practical economic problem.
Case analysis is a test of analysis rather test of
comprehension. Therefore, students need a good
training on how to construct good cases, how to
analyze them and how to use them in study, research
and learning process.
A case study is an empirical enquiry that investigates a
contemporary phenomenon within its real life context,
especially when the boundaries between phenomena
and context are not clearly evident. Managerial
economics uses and build many cases as a learning
and research tools.
Importance of Cases
• Helps to improve ability of assessing the situations.
• Improve the ability of organizing and sorting out key
information.
• Improve the ability of forming right questions.
• Improve the capability of defining opportunities and
problems.
• Helps to improve identification and evaluation of
alternative courses of actions.
• Improve ability of interpretation of data.
• Improve evaluation ability of results of past strategies.
• Improve ability of developing and defending new
strategies.
• Interaction, training to deals with uncertainty, ability to
respond to criticism and to evaluate others works.
Case is the best method to study the complex
economics problems in natural setting and has very
long history with academia.
Different subjects adopted in different times.
University education adopted this methods as
teaching, research and learning model in late 19th
century. First used in Harvard Law school, and later
Harvard Business School. Today, it is the main
research teaching and learning model in many
business schools.
Key Steps to Effective Case Analysis (No universal method)
•
Familiarization (grasp of the study)
• Situation Study (Understanding the operational
circumstances of business and its environment)
•
Arriving at Core Problem (identification of main
problem)
•
Analysis and Inferences (Synthesis and interpretation)
• List of Recommendation (theoretically sound and
justifiable policies)
•
Presentation of Case Report (Report should be in
professional setting)
Criticisms about Economics
Economists do not agree each other on
any single economic issue.
Modeling/abstraction, assumptions and
theory building are useless.
Business or economy never behave
according to economics explanations.
Hard to apply micro economics
concepts for business, etc
Questions for Discussion
Define economics according to your own
understanding.
Explain micro economics methodology.
Explain an importance of scarcity concept in
economics.
Distinguish between opportunity cost and
marginal principle.
Why the land and labor are considered as
primary factors of production.
Explain the main features of a mixed economy.
Extra Readings
First and Second Chapters
McGuigan.R, Moyer.C and Harris.B (2002), Managerial Economics, Applications,
Strategy and Tactics.
First and Second Chapters
Worthington.I, Britton.C and Reese. A (2001), Economics for Business:Blending
Theory and Practice, ISBN: 0273632450, Publisher: Financial Times/Prentice Hall
First and Second Chapters
Begg. D, Fischer.A and Dornbush.R (1994), Economics,
McGraw-Hill
First Chapter
Nellis.G and Parker.D (1997), The Essence of Business Economics,
Prentice Hall
First and Second Chapters
Ferguson.R, Ferguson.J and Rothchild.R (1993), Business
Economics, Macmillan