Post on 14-Apr-2018
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MN 3042 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.
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Learning Objectives
To provide students withknowledge 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.
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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 theseinto modern business and
interpretation of main accounting
statements.
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Syllabus
Business Economics (Economics andthe 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 incomeaccounting.)
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Syllabus
Financial and Cost Accounting (Basicaccounting 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, CPVanalysis, Standard costs and Stock
control, etc.
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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.
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Assessment
40% Continuous Assessment.
60% Final written examination.
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What is Economics
Generally economics teach basic rules andprinciples of business: core of the business.
Economics is an approach to decision makingand it helps to draw correct conclusions.
All the business subjects origin fromEconomics and therefore oldest businesssubject is the Economics.
In some markets, highly paid professionals arethe Economists (Ex. USA). Three types ofEconomists: Business Economists, Public
Economists and Academic Economists.
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Ancient and medieval
economic thinking
(Mainly religious economic ideas: private
property, price of a good, price of the
capital).
Mercantalism (Traders: importance of trade and industry
for the development).
Physiocrats(Importance of agriculture to the economic
development).
Classical
Neo-classical
Marxian
(free market, price theory and freedom).
(development of micro economics through
marginal revolution).
(labour exploitation, capital accumulation,
falling of profits ratio, reserve labour army,
end of capitalism and socialist and
communist society).Austrian
Walrasian
German and US basedevolutionary
Institutional
American institutional
Keynesian
Monetary
Rational and adaptive
expectation
(general equilibrium).
(importance of non-
economic factors).
(importance of institutions,property rights and capacitybuilding).(problems in American
economy).
(importance of fiscal policy).
(importance of monetary
policy).(rational behaviour and
accumulated knowledge).
New classical
economics
(revamping of Keynesian
and classical economics to
suit with the contemporary
economic scenes.) NewKeynesian: market never
clear fully and try to explains
why market fails.
Kallskian and
structural economics
(structural features in the
economy).
(methodology and financial economics).
Historical Development of Economics
New Keynesian
economics
(revamping Keynesianeconomics by giving
micro background.)
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Definition for Economics
Wealth related definitions
Welfare related definitions
Scarcity and wants related
definitions
Modern definitions
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Wealth related definitions
Adam Smith An inquiry into nature and causes of thewealth of nations.
David Ricardo To determine the laws which regulates
distribution of the wealth generated.
J.B. Say Economics is a science which treats ofwealth.
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.
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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 ofwhole nation.
E. Cannon Economics is an explanation of
the general causes on which materialwelfare of human beings depends.
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Scarcity and wants related definitions
L. Robbinson Economics study problems arise due toscarcity of resources.
Scarcity emerge due to limited resources and unlimitedwants. Therefore, economics is the study of how peoplechoose to allocate limited resources to satisfy theirunlimited wants.
Wicksteed Economics is about study of without wastagehow resources should be utilized by community throughproper regulation and administration.
Stiglar.J - Economics study principles of governance ofallocation 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 theiralternative uses.
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Modern definitions
H. Smith Economics is the study of how ina 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.
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Main Types of EconomicsPositive Economics (Explain what is actually
happening in a economy)Normative Economics (Explain what should happenin a economy based on value judgments)
Micro Economics (Study of small economic unitssuch as individuals, house holds, firms andindustry)
Macro Economics (Study of board aggregates of theoverall economy)
Sub disciplines and branches (development,history, managerial, business, agricultural, health,financial, transport, technology, education,information.etc)
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Methodology in EconomicsDeductive method
Identify the problem
Define technical terms and relevant variables
Making assumptions
Process of logical deduction to deriveimplications
Formulation of hypothesis
Making predictions and testing them
Check predictions are in agreements/conflictwith facts
Modify assumptions and again follow theprocedure or theory is discarded in favor ofsuperior alternative
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Inductive methodIdentify the problem
Data collection and some preliminary thinking
Data processing to find out how they are related
Develop a theory and refine it through statisticalmethods
Make predictions and test them
Check predictions are in agreements/conflictwith facts
Collect more data and again follow theprocedure or theory is discarded in favor ofsuperior alternative
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Types of Economic Analysis
Partial Economic Analysis (keeping allother factors constant except one factor).
General Economic Analysis (all the factorsare changing together).
Static analysis (analysis based on onepoint in time).
Dynamic analysis (analysis based on
different point in time in continuousmanner).
Comparative static analysis (analysis
based on comparing various static points).
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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.
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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 isavailable. 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.
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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 socialgroups. Other economics problems (sustainable development,
environmental protection, economic growth and development,
corruption and clean government, democracy .. etc).
Unlimited Wants
Basic Economic Problems
Limited
Resources
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Economic Systems
Economic systems differs according the ways in whichthey 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 pricemechanism).
4) Command economy (Military or feudal mechanism).
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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).
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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 toproduce final products and risk bearer of business,
and earn profits).
5) Knowledge and technology.
Attitude, political, social and environmental
systems.
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Opportunity Cost
Opportunity cost occurs due to: limited resources and unlimited
wants. This create scarcity which leads to choice. We can nothave 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 particularaction or activity is the loss of the
opportunity to pursue the most attractive alternative given thesame time and resources
A opportunity cost forfree good is zero.
A opportunity cost foreconomic good is positive.
Production Possibility Frontier Curve (G hi l t ti
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15138
0 8 12 15 Y
XUnattainable
Full employment point Inefficient
This shows maximum combinations of output 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 areunattainable, below in-efficient and on maximum orfull 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 suchas increasing, decreasing and constant.
Production Possibility Frontier Curve (Graphical representationof opportunity cost)
This country can
Produce by using
all the resources X 15Or Y 15.
X = 13, Y = 8, (sacrifice
Y 7 to get X 13)
X = 8, Y = 12
(sacrifice X 7
to get Y 12)
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Marginal Principle
This explains additional benefits derivedfrom a particular decision and compareswith them additional cost incurred.
Widely used in production, revenue, profitsmaximization, investment decisions and soon.
MPl = d(TP)/d(L), MPk = d(TP)/d(K)MR = d(TR)/d(q), MC = d (TC)/d(q)
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Functions of EconomistsAnalysis on production, exchange/distribution,consumption and investment.
Supply, demand and elasticity estimation andforecast.
Preparation of business plans and conduct andanalysis of market surveys.
Analysis of issues related to production, cost,revenues and profits.
Analysis of competition and market structureanalysis.
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 advisingetc.
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Tools Used in Economics
Variables and Attributes: Variable is a quantity ornumerical characteristic of data which can be adiscrete or continuous. Attributes are the qualitativecharacteristics of data.
Exogenous and endogenous variables: Exogenous(autonomous) variables are taken from the outsidethe system and Indogenous variables are emergedwithin the system.
Functions: Economic variables are interrelated andinterdependent therefore we are using variousfunctional forms: relationship between independent
and dependent variable is a function.Models (statistical, mathematical, descriptive andeconometrics, etc). These models are based onassumptions: Ceteris Paribus other things beingequal, Rational behavior specific and well defined
motivation, Structural and Institutionalassumptionsetc.
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Tools Used in Economics
Nominal (market price) andReal (deflated) prices.
Data (time series: a sequence of measurement of avariable at different point of time, cross section: ameasurement of a variable at one point of time,
panel: a measurement of same group in differentpoint of time, pooled data: mixture).
Statistics - Data collection, presentation, analysisand interpretation (descriptive - central tendency or
disperse and inference generalization of sampleresults to population).
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What is Business/Managerial Economics
Purpose of studying economics by engineers and managers isto learn how not to be deceived by economists.
Two Definitions on Managerial Economics: Narrow (Micro) andboard (Micro, macro, international and other related subjects).
Generally, managerial economics applies economic theory andmethodology to business and administrative decision making.
It provides a systematic and logical way of analyzing businessdecisions that focuses on the economic forces that shape bothday to day decisions and long-term planning decisions.Especially, it helps managers to understand real-world businessproblems by using simplifying assumptions to abstract complexreality into manageable simplicity.
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Text Books Definitions
Managerial Economics is the use of economic modes of
thought to analyze business situationManagerial Economics is concerned with the application of
econom ic pr inc ip les and methodolog ies to the decis ion
making p rocess w ith in the fi rm o r organizat ion under the
conditions of uncertaintyManagerial Economics is the integration of economic
theory w ith business pract ice for the pu rpose of fac i l i tat ing
decision making and forward planning by management
Managerial Econom ics is the appl icat ion of econom ic
theory and analys is to p ract ices of business f i rms and other
institutions
The Nature of Managerial/Business Economics
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The Nature of Managerial/Business 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
Economics
Micro Economics
Meso Economics
Macro Economics International
Economics
Decision Sciences
Econometrics
Statistics
Mathematics
Game theory
Forecasting Programming
Managerial Economics
Use of economics, business
management and decisionsciences to solve managerial
problems
Solutions to the managerial problems
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Economics
Decision Science
Business Management
Managerial Economics
Managerial/Business Economics
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Case Study Method in Managerial Economics
Lecture and discussion oriented classes are
provided students with information aboutconcepts, 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.
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What is the Case
A case is a factual description of a situation involving amanagerial 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 somepractical economic problem.
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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 acontemporary 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 learningand research tools.
Importance of Cases
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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 ofalternative 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.
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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.
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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 andjustifiable policies)
Presentation of Case Report (Report should be in
professional setting)
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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
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Questions for Discussion
Define economics according to your own
understanding.Explain micro economics methodology.
Explain an importance of scarcity concept ineconomics.
Distinguish between opportunity cost andmarginal principle.
Why the land and labor are considered asprimary factors of production.
Explain the main features of a mixed economy.
Extra Readings
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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 forBusiness:Blending
Theory and Practice,ISBN: 0273632450, Publisher: Financial Times/Prentice Hall
First and Second ChaptersBegg. 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