MN 3040 – Business Economics and Financial Accounting

1. 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.

2. 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.

3. 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.

4. 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.)

5. 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.

6. 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.

7. Assessment 40% Continuous Assessment. 60% Final written examination.

8. 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.

9. (revamping Keynesian economics by giving micro background.) Historical Development of Economics • (general equilibrium). (revamping of Keynesian and classical economics to suit with the contemporary economic scenes.) New Keynesian: market never clear fully and try to explains why market fails. Walrasian • (Mainly religious economic ideas: private property, price of a good, price of the capital). Ancient and medieval economic thinking (importance of non- economic factors). German and US based evolutionary • (Traders: importance of trade and industry for the development). Mercantalism (importance of institutions, property rights and capacity building). Institutional • (Importance of agriculture to the economic development). New classical economics Physiocrats (problems in American economy). American institutional (importance of fiscal policy). • (free market, price theory and freedom). Classical Keynesian New Keynesian economics (importance of monetary policy). Monetary • (development of micro economics through marginal revolution). Neo-classical (rational behaviour and accumulated knowledge). Rational and adaptive expectation • (labour exploitation, capital accumulation, falling of profits ratio, reserve labour army, end of capitalism and socialist and communist society). Marxian (methodology and financial economics). Austrian Kallskian and structural economics (structural features in the economy).

10. Definition for Economics • Wealth related definitions • Welfare related definitions • Scarcity and wants related definitions • Modern definitions

11. 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.

12. 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.

13. 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.

14. 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.

15. 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)

16. 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

17. 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

18. 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).

19. 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.

20. Basic Economic Concepts • Scarcity • 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). • 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.

21. Basic Economic Problems Unlimited Wants Limited Resources 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).

22. 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).

23. Factors of Production (productive resources) • Primary factors (not the result of the economic process) • 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).

24. Secondary factors (results of economic efforts) • 3)Capital (stock of physical wealth of nation, fixed or variable, earn interests). • Entrepreneurship (organize factors of production to produce final products and risk bearer of business, and earn profits). • Knowledge and technology. • Attitude, political, social and environmental • systems.

25. 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.

26. Production Possibility Frontier Curve (Graphical representation of opportunity cost) • 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 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. • This country can • Produce by using • all the resources X 15 • Or Y 15. • X = 13, Y = 8, (sacrifice Y 7 to get X 13) • X = 8, Y = 12 (sacrifice X 7 to get Y 12) X 15 · Unattainable 13 · 8 Full employment point Inefficient · 0 8 12 15 Y

27. 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)

28. 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.

29. 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.

30. Tools Used in Economics • Nominal (market price) andReal (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).

31. 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.

32. 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”

33. 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 • Decision Sciences • Econometrics • Statistics • Mathematics • Game theory • Forecasting • Programming • Economics • Micro Economics • Meso Economics • Macro Economics • International Economics Managerial Economics Use of economics, business management and decision sciences to solve managerial problems Solutions to the managerial problems

34. Decision Science Managerial/Business Economics Economics Business Management Managerial Economics

35. 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.

36. 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 – Ashort 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.

37. 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.

38. 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.

39. 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.

40. 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)

41. 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

42. 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.

43. 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 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