BACHELOR OF COMMERCE DEGREE PROGRAMME

DEPARTMENT OF COMMERCE
FACULTY OF MANAGEMENT STUDIES AND COMMERCE
UNIVERSITY OF JAFFNA

Subject
ECONOMIC FOR ENTERPRISE
Status
CORE
Course Code
COM 11032
Year & Semester
FIRST YEAR/ SEMESTER I
 ECONOMICS

Economics is a social science which deals with

human wants and their satisfaction.

Economics Defined - Economics is the study of the

ALLOCATION of SCARCE resources to meet
UNLIMITED human wants.

The study of how individuals and societies choose to

use the scare resources
Main Divisions of Economics

1. Production
2. Consumption
3. Exchange
4. Distribution
Consumption
Consumption deals with the satisfaction of human wants.

When a want is satisfied, the process is known as

consumption.

Production
Production refers to the creation of wealth.

it refers to the creation of utilities.

utility refers to the ability of a good to satisfy a want.

Exchange
In modern times, no one person or country can be self-
sufficient. This gives rise to exchange.

Goods may be exchanged for goods or for money.

If goods are exchanged for goods, we call it barter.

As goods are exchanged for money, we study in economics

about the functions of money, the role of banks and we also
study how prices are determined.

We also discuss various aspects of international trade.

Distribution

Wealth is produced by the combination of land, labor,

capital and organization.

it is distributed in the form rent, wages, interest and profits.

In economics, we are not much interested in personal

distribution.
Microeconomics
Microeconomics - is concerned with decision-making by
individual economic agents such as firms and consumers.

Macroeconomics
Macroeconomics - is concerned with the aggregate
performance of the entire economic system.

That is, examines the economic behavior of aggregates-

income, employment, output, and so on on a national scale
Methods of Economics

1.Positive economics
2.Normative economics
3.Descriptive economics
4.Empirical economics
Positive Economics

Positive economics is the study of the causal relationships that exist

in the economy.

It just states what the relationship is. There are no value judgments
involved.

It just states what the situation is.

The statement if taxes on tobacco is doubled, there will be substantial

reduction in tobacco consumption is a positive economic statement.

If government subsidy to basic education is reduced, there will be

higher drop-outs among children of poor families, is another positive
economic statement.
 Positive economic theory would describe how money
supply growth impacts inflation,

but it does not provide any guidance on what policy should be

followed.

The unemployment rate in France is higher than that in the

United States is a positive economic statement.

It gives an overview of an economic situation without

providing any guidance for necessary actions to address the
issue.
Normative Economics
Normative economics is a branch of economics that
expresses value or normative judgments about economic
fairness.

It focuses on what the outcome of the economy or goals of

public policy should be.
Value judgments play an integral part in the ranking of
possible objectives and the choices to be made among them.

Taking the tobacco example, a normative statement would be

Taxes on tobacco should be raised by 100% to substantially
reduce tobacco consumption. Notice the term should in the
statement.

In the education example, a normative economic statement

would likely be, The government should continue to
subsidize basic education to minimize drop outs.
 Descriptive Economics

Descriptive economics involves the collection of a

country's economic data and compilation by
economists.

The aim of the process is to try and identify

repetitive patterns in the economy and to try and
explain them.
 Empirical Economics

An approach to economics that involves the observation and

measurement of behavior

Empirical evidence is a source of knowledge acquired by

means of observation or Experimentation

Whereas theoretical refers to abstract representations,

empirical is actual real world observations.
 Field of Economics

Comparative Economic System

Urban and Regional Economics
Econometrics
Development Economic
Labor Economics
International Trade
International Monetary Economics
Public Economics
Economic History
 Comparative Economic System

Comparative economic systems is the subfield of economics

dealing with the comparative study of different systems of
economic organization

such as capitalism, socialism, feudalism and the mixed

economy.

Examines the ways alternative economic systems function

 Urban and Regional Economics

Urban economics is broadly the economic study of urban

areas;

it involves using the tools of economics to analyze urban

issues

such as crime, education, public transit, housing, and local

government finance.
Urban and Regional Economics

The economic study of regions based on the consideration of

space, transportation cost, and location in production and
consumption decisions.

Regional economics studies a wide variety of topics, including

the migration of labor, the macroeconomic activity in cities
and states, and the location choices of firms.
 Econometrics

Econometrics is the application of mathematics, statistical

methods to economic data OR

The application of statistical and mathematical theories to

economics for the purpose of testing hypotheses and
forecasting future trends.

aim to give empirical content to economic relations.

 Development Economic

Development economics is a branch of economics which

deals with economic aspects of the development process in
low-income countries.

Development economics involves the creation of theories

and methods that aid in the determination of policies and
practices
Development Economic..

Its focus is not only on methods of promoting economic

development, economic growth and structural change but also
on improving the potential for the mass of the population
 LABOUR ECONOMICS
Labour economics seeks to understand the functioning and
dynamics of the markets for wage labour.

Labour markets function through the interaction of workers

and employers.

attempts to understand the resulting pattern of wages,

employment, and income.

Deals with the factors that determine wage rates,

employment, and unemployment
 International Trade

International trade is the exchange of capital, goods, and

services across international borders or territories.
 International Monetary Economics

Same as international finance, but with more emphasis on the

role of money and less on other financial assets.

Study trade flows among countries and international financial

institutions
 PUBLIC ECONOMICS

focused on studying the public sector and examining the ways

it interacts with the private sector.

A variety of topics are covered, including taxation, welfare,

and the impact of social policy on economic health
 ECONOMIC HISTORY

Economic history is the study of economies or economic

phenomena in the past.

Analysis in economic history is undertaken using a

combination of historical methods, statistical methods,
and by applying economic theory to historical
situations and institutions.
 TERMS
Economic Theory
A statement or set of related statements about causes
and effect, action and reaction, in economic life.

For example, an economic theory would be "if the price of

something goes up, people will buy less of it." We could test
that theory by observing whether or not cigarette sales
decline after a price increase.
 MODEL

A model is a more formal statement of a theory.

It often takes the form of stating the presumed relationship between

two or more factors in a precise way.

The factors included in a model are called variables because they

are things that can change over time.

In our earlier example, the price of cigarettes is a variable, and the

quantity of cigarettes purchased is another variable. A theory links
these two variables together in such a way that explains the causal
relationship between them in a testable way

Usually a mathematical statement of a relationship between

two or more variables
 VARIABLE
A measure that can change from time to time or from
observation to observation

A characteristic, number, or quantity that increases or

decreases over time, or takes different values in different
situations.

Two basic types are:

(1) Independent variable: that can take different values and
can cause corresponding changes in other variables

(2) Dependent variable: that can take different values only in

response to an independent variable.
 ECONOMETRIC MODEL
Econometric models are statistical models used
in econometrics.

An econometric model specifies

the statistical relationship

A simple example assumes that monthly spending by

consumers is linearly dependent on consumers' income
in the previous month.

Then the model will consist of the equation

 Ct = a + bY[t-1]+ et
where Ct is consumer spending in month t, Yt-1 is
income during the previous month, and et is an error
term measuring the extent to which the model cannot
fully explain consumption.

Then one objective of the econometrician is to obtain

estimates of the parameters a and b;

these estimated parameter values, enable predictions

for future values of consumption to be made based on
the prior month's income.
 Ceteris paribus

Literally, all else equal. Used to analyze the relationship

between two variables while the values of other variables are
held unchanged

such as, "If we reduce our prices by X percent, ceteris

paribus, our sales revenue should go up by Y percent."

Latin for, all other things being equal.

 STOCKS AND FLOWS

Stocks and flows are basic concepts in economics

Stocks can be measured at a given point of time

A flow is a quantity that can be measured only in

terms of a specified period of time. In other words,
it has a time dimension

For example, wealth is a stock and income is a flow.

 Occams Razor

It's often important to dispense with less relevant aspects of an

issue so that we can focus on specific issues. We do this all the
time. For example, when trying to determine the cause of an upset
stomach, we focus on things like what we ate earlier, the presence
of a fever, and so on. We don't usually include factors such as the
strength of sunspots or the weather in Brazil. Similarly, when
economists try to explain social phenomena, they key in on the
factors that seem most relevant. This practice comes from the
principle known as Occam's razor, which instructs us to strip away
extraneous detail in order to expose the important aspects of a
question.
 Economic resources
land
natural resources, the free gifts of nature
labor
the contribution of human beings
capital
plant and equipment
this differs from financial capital
entrepreneurial ability
 Resource payments

Economic Resource Resource payment

land rent
labor wages
capital interest
entrepreneurial ability profit
 OPPORTUNITY COST

The opportunity cost of any alternative is defined as the cost

of not selecting the "next-best" alternative.
 Marginal analysis

Marginal benefit = additional benefit

resulting from a one-unit increase in the
level of an activity

Marginal cost = additional cost associated

with one-unit increase in the level of an
activity
 Net benefit
Individuals are not expected to maximize
benefit; nor are they expected to minimize
costs.

Individuals are assumed to attempt to

maximize the level of net benefit (total benefit
minus total cost) from any activity in which
they are engaged.
 Marginal analysis
MB > MC expand the activity

MB < MC contract the activity

optimal level of activity: MB = MC (Net

benefit is maximized at this point)
 Marginal benefit
MB generally declines as the level of an
activity rises, ceteris paribus.
Consider the MB of time spent studying:
 Marginal cost
For most activities, marginal cost rises as
the level of the activity increases.
 Optimal study time
The optimal amount of study time occurs at
the point at which MB = MC
 Firms Objective: Profit Maximization
The standard assumption in microeconomic theory of the firm
is that: The firms goal is to maximise its economic profit

A firm has to decide:

What to produce
How to produce the output
How much to sell and at what price
How to promote the product.
 ECONOMIC PROFIT

Economic Profit = Total Revenue - Total Economic Cost

Total revenue is the sum of the payments the firm receives

from the sale of its output.

Distinctions between the economists and the accountants

concept of cost must be borne in mind when calculating a
firms economic cost:
 Economic costs are opportunity costs - i.e. the value of
inputs in their best alternative use.

Economic cost is generally not equal to accounting cost

Economic cost may be greater or less than accounting cost.

The economic cost includes the accounting cost, or actual

funds spent carrying out the action, and the opportunity
cost