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BA 5101 ECONOMIC ANALYSIS FOR BUSINESS
UNIT I
INTRODUCTION
The themes of economics – scarcity and efficiency – three fundamental economic problems – society’s capability – Production possibility frontiers (PPF) – Productive efficiency Vs economic efficiency – economic growth & stability – Micro economies and Macro economies – the role of markets and government – Positive Vs negative externalities. MEANING: The word ‘Economics’ originates from the Greek work ‘ Oikonomikos ’ which can be divided into two parts: ( a ) ‘ Oikos ’, which means ‘Home’, and ( b ) ‘ Nomos’, which means ‘Management’. Thus, Economics means the study of the way in which mankind organizes itself to tackle the basic problems of scarcity. All societies have more wants than resources. Hence, a system must be devised to allocate these resources between competing ends. Economics is a social science. It is called „social‟ because it studies mankind of society. It deals with aspects of human behavior. It is called science since it studies social problems from a scientific point of view. The development of economics as a growing science can be traced back in the writings of Greek philosophers like Plato and Aristotle. Economics was treated as a branch of politics during early days of its development because ancient Greeks applied this term to management of city-state, which they called „Polis‟. Actually economics broadened into a full- fledged social science in the later half of the 18th century Development of Economics/Definition of Economics We have now formed an idea about the meaning of Economics. This at once leads to a general definition of Economics. Economics is the social science that studies economic activities. This definition is, however, too broad. It does not specify the exact manner in which the economic activities are to be studied. Economic activities essentially mean production, exchange and consumption of goods and services. However, with the progress of civilization, the complexity of the production, exchange and consumption processes in society have increased manifold. Economists at different times have emphasized different aspects of economic activities, and have arrived at different definitions of Economics. We shall now discuss some of these definitions in detail. These definitions can be classified into four groups:
**1. Wealth definitions,
- Material welfare definitions,
- Scarcity definitions, and
- Growth-centered definitions**.
ADAM SMITH’S DEFINITION
Adam Smith, considered to be the founding father of modern Economics, defined Economics as the study of the nature and causes of nations’ wealth or simply as the study of wealth. The central point in Smith’s definition is wealth creation. Implicitly, Smith identified wealth with welfare. He assumed that, the wealthier a nation becomes the happier are its citizens. Thus, it is important to find out, how a nation can be wealthy. Economics is the subject that tells us how to make a nation wealthy. Adam Smith’s definition is a wealth-centered definition of Economics. Main Characteristics of Wealth Definitions
- Exaggerated emphasis on wealth: These wealth centered definitions gave too much importance to the creation of wealth in an economy. The classical economists like Adam Smith, J.S. Mill, J.B. Say, and others believed that economic prosperity of any nation depends only on the accumulation of wealth.
- Inquiry into the creation of wealth: These definitions show that Economics also deals with an inquiry into the causes behind the creation of wealth. For example, wealth of a nation may be increased through raising the level of production and export.
- A study on the nature of wealth: These definitions have indicated that wealth of a nation includes only material goods ( e.g. , different manufactured items). Non-material goods were not included. Hence, non-material goods like services of teachers, doctors, engineers, etc., are not considered as ‘wealth’. But this definition was severely criticized by highlighting the points like; Too much emphasis on wealth, Restricted meaning of wealth, No consideration for human feelings, No mention for man‟s welfare Silent about economic problem etc… ALFRED MARSHALL’S DEFINITION Alfred Marshall also stressed the importance of wealth. But he also emphasized the role of the individual in the creation and the use of wealth. He wrote: “ Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man ”. Marshall, therefore, stressed the supreme importance of man in the economic system. Marshall’s definition is considered to be material-welfare centered definition of Economics. Features of Material Welfare Definitions The main features of material welfare-centered definitions are as follows:
The merits of scarcity definition are; this definition is analytical, universal in application, a positive study and considering the concept of opportunity cost. But this also criticized on the grounds that; it is too narrow and too wide, it offers only light but not fruit, confined to micro analysis and ignores Growth economics etc.. MODERN GROWTH-ORIENTED DEFINITION OF SAMUELSON In relatively recent times, more comprehensive definitions of Economics have been offered. Thus, Professor Samuelson writes, “ Economics is the study of how people and society end upchoosing, with or without the use of money, to employ scarce productive resources that could have alternative uses to produce various commodities over time and distributing them for consumption, now or in the future, among various persons or groups in society. It analyses costs and benefits of improving patterns of resource allocation ”. A large number of modern economists subscribe to this broad definition of Economics. Features of the Modern Growth-Oriented Definition
- Growth-orientation: Economic growth is measured by the change in national output over time. The definition says that, Economics is concerned with determining the pattern of employment of scarce resources to produce commodities ‘over time’. Thus, the dynamic problems of production have been brought within the purview of Economics
- Dynamic allocation of consumption: Similarly, under this definition, Economics is concerned with the pattern of consumption, not only now but also in the future. Thus, the problem of dividing the use of income between present consumption and future consumption has been brought within the orbit of Economics.
- Distribution: The modern definition also concerns itself with the distribution of consumption among various persons and groups in a society. Thus, while the problem of distribution is implicit in the earlier definitions, the modern definition makes it explicit.
- Improvement of resource allocation: The definition also says that, Economics analyses the costs and benefits of improving the pattern of resource allocation. Improvement of resource allocation and better distributive justice are synonymous with economic development. Thus, issues of development of a less developed economy have also been made subjects of the study of Economics. To put it summarily, the modern definition of Economics is the most comprehensive ofall the definitions. All the issues that were highlighted in the earlier definitions are included here. In addition, the issues of development of a backward economy, as well as those of growth in a mature capitalist economy, form part of this definition. Economics as it stands today, is built on the basis of this comprehensive definition
THEMES OF ECONOMICS
SCARCITY AND EFFICIENCY - TWIN THEMES OF ECONOMICS
“Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.” Behind this definition are two key ideas in economics: that goods are scarce and that society must use its resources efficiently. Indeed, economics is an important subject because of the fact of scarcity and the desire for efficiency. Consider a world without scarcity. If infinite quantities of every good could be produced or if human desires were fully satisfied, what would be the consequences? People would not worry about stretching out their limited incomes because they could have everything they wanted; businesses would not need to fret over the cost of labor or health care; governments would not need to struggle over taxes or spending or pollution because nobody would care. Moreover, since all of us could have as much as we pleased, no one would be concerned about the distribution of incomes among different people or classes. In such an Eden of affluence, all goods would be free, like sand in the desert or seawater at the beach. All prices would be zero, and markets would be unnecessary. Indeed, economics would no longer be a useful subject. Ours is a world of scarcity, full of economic goods. A situation of scarcity is one in which goods are limited relative to desires. An objective observer would have to agree that, even after two centuries of rapid economic growth, production in the United States is simply not high enough to meet everyone’s desires. If you add up all the wants, you quickly find that there are simply not enough goods and services to satisfy even a small fraction of everyone’s consumption desires. Our national output would have to be many times larger before the average American could live at the level of the average doctor or big-league baseball player. Moreover, outside the United States, particularly in Africa and Asia, hundreds of millions of people suffer from hunger and material deprivation. Given unlimited wants, it is important that an economy make the best use of its limited resources. That brings us to the critical notion of efficiency. Efficiency denotes the most effective use of a society’s resources in satisfying people’s wants and needs. By contrast, consider an economy with unchecked monopolies or unhealthy pollution or unwarranted government interferences. Such an economy may produce less than would be possible without these factors, or it may produce a distorted bundle of goods that leaves consumers worse off than they otherwise could be—either situation is an inefficient allocation of resources. In economics, we say that an economy is producing efficiently when it cannot make anyone economically better off without making someone else worse off. The essence of economics is to acknowledge the reality of scarcity and then figure out how to organize society in a way which produces the most efficient use of resources. That is where economics makes its unique contribution.
Thus, when we are studying how a producer fixes the prices of his products, we are studying Micro- Economics. Similarly, when we are studying why an industry is located at a particular place, we are studying Micro-Economics. The whole content of micro Economics theory is presented in the following chart; The term Macro Economics is derived from the Greek word makros, meaning “large”. In Macro-Economics, we study the economic behaviour of the large aggregates such as the overall conditions of the economy such as total production, total consumption, total saving and total investment in it. It is the study of overall economic phenomena as a whole rather than its individual parts. It includes: (i) National income and output; (ii) General price level; (iii) Balance of trade and payments; (iv) External value of money; (v) Saving and investment; and (vi)Employment and economic growth. Thus, when we study why we continue to have balance of payments deficits, or why the value of rupee vis-à-vis dollar is falling or why saving rates
are high or low in a particular country we are studying Macro-Economics. The various aspects of macro economic theory are shown in the above chart. NATURE OF ECONOMICS Under this, we generally discuss whether Economics is science or art or both and if it is a science whether it is a positive science or a normative science or both.
- Economics – As a science and as an art: Often a question arises – whether Economics is a science or an art or both. a)Economics is a science : A subject is considered science if - it is a systematised body of knowledge which studies the relationship between cause and effect. - it is capable of measurement.- it has its own methodological apparatus. - it should have the ability to forecast. If we analyse Economics, we find that it has all the features of science. Like science it studies cause and effect relationship between economic phenomena. To understand, let us take the law of demand. It explains the cause and effect relationship between price and demand for a commodity. It says, given other things constant, as price rises, the demand for a commodity falls and vice versa. Here the cause is price and the effect is fall in quantity demanded. Similarly like science it is capable of being measured, the measurement is in terms of money. It has its own methodology of study (induction and deduction) and it forecasts the future market condition with the help of various statistical and non-statistical tools. But it is to be noted that Economics is not a perfect science. This is because
- Economists do not have uniform opinion about a particular event.
- The subject matter of Economics is the economic behaviour of man which is highly unpredictable.
- Money which is used to measure outcomes in Economics is itself a dependent variable.
- It is not possible to make correct predictions about the behaviour of economic variables. (b) Economics is an art : Art is nothing but practice of knowledge. Whereas science teaches us to know art teaches us to do. Unlike science which is theoretical, art is practical. If we analyse Economics, we find hat it has the features of an art also. Its various branches, consumption, production and public finance etc. provide practical solutions to various economic problems. It helps in solving various economic problems which we face in our day-to-day life. Thus, Economics is both a science and an art. It is science in its methodology and art in its application. Study of unemployment problem is science but framing suitable policies for reducing the extent of unemployment is an art. 2. Economics as Positive Science and Economics as Normative Science (i) Positive Science : As stated above, Economics is a science. But the question arises whether it is a positive science or a normative science. A positive or pure science analyses cause and effect relationship between variables but it does not pass value judgment. In other words, it states what is and not what ought to be. Professor Robbins emphasised the positive aspects of science but Marshall and Pigou have considered the ethical aspects of science which obviously are normative.
Deductive method : This method is also called abstract, analytical and priori method. Under this method laws are deduced logically. On the basis of certain fundamental assumptions or accepted axioms or truths which have been established and handed down from generation to generation, conclusions and generalisations are drawn. The logic proceeds from general to particular. This method is called abstract or a priori because it is based on abstract reasoning and not on actual facts. However, actual situation may differ from what deductive logic suggests For example, it is assumed that man is rational and on the basis of this it is deduced that he will buy cheap and sell dear. But in actual situation this may not happen, say, because of absence of proper knowledge and market conditions. Inductive Method : Under this method conclusions are drawn on the basis of collection and analysis of facts relevant to the inquiry. The logic in this case proceeds from the particular to the general. The generalisations are based on observation of individual examples. CENTRAL ECONOMIC PROBLEMS As discussed before, human wants are unlimited and productive resources such as land and other natural resources, raw materials, capital equipments etc. with which goods and services are produced to satisfy those wants are scarce. The problem of scarcity of resources is felt not only by individuals but also by the society as a whole. This gives rise to the problem of how to use scarce resources to attain maximum satisfaction. This is generally called ‘the economic problem’. Every economic system, be it capitalist, socialist or mixed, has to deal with this central problem of scarcity of resources relative to wants for them. The central economic problem is further divided into four basic economic problems. These are : (i) What to produce? (ii) How to produce? (iii) For whom to produce? (iv) What provisions (if any) are to be made for economic growth? (i) What to produce? : Every society has to decide which goods are to be produced and in what quantities. Whether more guns should be produced or more butter should be produced; or whether more capital goods like machines, equipments, dams etc., will be produced or more consumer goods such as bread will be produced. Not only the society has to decide about what goods are to be produced it has also to decide in what quantities these goods would be produced. In nutshell, a society must decide how much wheat, how many hospitals, how many schools, how many machines, how many meters of cloths etc. have to be produced. (ii) How to produce? There are various alternative techniques of producing a commodity. For example, cotton cloth can be produced with either handlooms or power looms or automatic looms.
Production with handlooms involves use of more labour and production with automatic loom involves use of more machines and capital. A society has to decide whether it will produce cotton cloth rising labour intensive techniques or capital intensive techniques. Likewise for all goods and services it has to decide whether to use labour intensive techniques or capital intensive techniques. Obviously, the choice would depend on the availability of different factors of production (i.e. labour and capital) and their relative prices. It is in the society’s interest to use those techniques of production that make best use of the available resources. (iii) For whom to produce? Another important decision which a society has to take is for whom to produce. The society can not satisfy all wants of all the people. Therefore, it has to decide who should get how much of the total output of goods and services. In other words, it has to decide about the shares of different people in the national cake of goods and services. (iv) What provision should be made for economic growth? A society would not like to use all its scarce resources for current consumption only. This is because if it uses all the resources for current consumption and no provision is made for future production, the society’s production capacity would not increase. This implies that incomes or standards of living of the people would remain stagnant and in future, the levels of living may decline Therefore, a society has to decide how much saving and investment (i.e. how much sacrifice of current consumption) should be made for future progress. PRODUCTION POSSIBILITIES CURVE The nature of basic problems explained above can be better understood with the help of an important tool of Economics known as Production Possibilities Curve (PPC). Production possibilities curve graphically represents the alternative production possibilities facing an economy. In Economics, a production-possibility curve ( PPC ) or “transformation curve” is a graph that shows the different rates of production of two goods that an individual or group can efficiently produce with limited productive resources. The PPF shows the maximum obtainable amount of one commodity for any given amount of another commodity or composite of all other commodities, given the society’s technology and the amount of factors of production available. In order to understand PPC, Economists criticize the concept of PPC on the different grounds since it is based on the certain assumptions like;
- Human wants are unlimited.
- The resources are limited but which has alternative uses
- It takes into consideration the production of only two goods. However, in reality the economy will produce many goods. The life on the earth is not possible only with two goods.
- It also assumes that the economy has utilized scarce resources efficiently and fully. In other words, the economy is in full employment.
- PPC is drawn provided that the state of technology is given and it remains constant over the
The curve AF is called Production Possibilities Curve (PPC) or Production Possibilities Frontier (PPF). This curve shows the various combinations of two goods which the economy can produce with a given amount of resources. Since the given resources are fully employed and utilized, the combination of two goods produce can lie anywhere on the production possibilities curve AF but not inside or outside it. For example, the combined output of two goods can neither lie at R nor at S (Figure 2). This is because at point R the economy would not be utilising its resources fully and at point S, the economy would not have capability to produce with the given technology Opportunity Cost and Production Possibilities Curve Suppose after completing your chartered accountancy course, you have two options open to you. One, to join a company which gives you Rs. 8 lakh annually and second, to start your practice and earn Rs. 6 lakh. Now, if you join the company, you will earn Rs. 8 lakh annually but you will not get Rs. 6 lakh. This Rs. 6 lakh is your opportunity cost for serving in the company and not starting your practice. Most generally, the opportunity cost of a given activity is defined as the value of the next best activity. In the context of PPC, since there are only two goods, therefore opportunity cost of producing one good is in terms of sacrifice made of the other good. In table 1, we have found opportunity cost of producing additional units of cloth in terms of wheat. Thus, as the economy moves from possibility A to possibility B, it has to give up one thousand quintal of wheat in order to have one thousand meters of cloth. Thus, first thousand meters of cloth have the opportunity cost of one thousand quintals wheat to the economy. But as we step up the production of cloth and move further from B to C, extra two thousand quintals of wheat have to be foregone for producing extra one thousand meters of cloth. In other words, opportunity cost goes on increasing as we have more of cloth and less of wheat. It is this principle of increasing opportunity cost that makes the PPC concave to the origin. If opportunity costs were constant, PPC would be a straight line. But generally, we get increasing opportunity costs. This is because a given resource is suitable more for the production of one good than another. Thus, in our example, land is more suitable for the production of wheat than cloth. As we increase the production of cloth, resources which are less productive in the production of cloth would have to be pushed in it. Thus, more units of that resource would be required to produce cloth. In other words, greater sacrifice would have to be made in terms of production of wheat for every extra production of cloth. This law holds good if we move from A to F or from F to A on the PPC. Economic growth and shift in Production Possibility Curve
All points on PPC curve show that goods and services are produced at least cost and no resource is wasted i.e. an economy is productively efficient. But that does not mean there is no scope of progress. When the economy makes progress in technology, that is, when scientists and engineers discover new and better ways of doing things, the production possibilities curve will shift outward and to the right showing that more of both goods can be produced than before (see Fig. 3) Figure 3 shows that technological progress allows the society to produce more of both goods with a given and fixed amount of resources. Thus, with P’ P’, more amount of wheat and cloth can be produced than before with the given amount of inputs. It is to be noted that if the economy is producing at point R (in Fig. 2), then it is not using its resources fully i.e. its resources are unemployed. A Shift from inside the PPC (Say R) to anywhere on the PPC (Say to B) indicates that the resources which were lying unutilised are now being utilised fully. But a movement from one PPC to another PPC on the right indicates economic growth of the economy. This movement becomes possible because of an improvement in the overall technology, greater capital formation, an increase in the population growth etc. Production possibility curve helps in :
- Allocation of resources: PPF Curve can be efficiently used to explain three central problems: What to Produce? and How to produce? But fails to explain how distribution of national product takes place
- Economic growth : If technology changes in an economy, the production possibilities frontier changes accordingly. In the example above, an advance in wheat technology makes the economy better at producing wheat. This means that, for any given level of cotton production, the economy will be able to produce more wheat than it did before. This is represented by the vertical arrows between the two curves. Thus, the production possibilities frontier shifts out ( First figure) Or vice versa ( second figure).
To help to achieve the other objectives of the firm like industry leadership, expansion implementation of policies etc... Importance of Managerial Economics : Business and industrial enterprises aim at earning maximum proceeds. In order to achieve this objective, a managerial executive has to take recourse in decision-making, which is the process of selecting a specified course of action from a number of alternatives. A sound decision requires fair knowledge of the aspects of economic theory and the tools of economic analysis, which are directly involved in the process of decision-making. Since managerial economics is concerned with such aspects and tools of analysis, it is pertinent to the decision-making process. The importance of managerial economics in a business and industrial enterprise as follows:
- Accommodating traditional theoretical concepts to the actual business behaviour and conditions: Managerial economics amalgamates tools, techniques, models and theories of traditional economics with actual business practices and with the environment in which a firm has to operate. According to Edwin Mansfield, “Managerial Economics attempts to bridge the gap between purely analytical problems that intrigue many economic theories and the problems of policies that management must face”.
- Estimating economic relationships: Managerial economics estimates economic relationships between different business factors such as income, elasticity of demand, cost volume, profit analysis etc.
- Predicting relevant economic quantities: Managerial economics assists the management in predicting various economic quantities such as cost, profit, demand, capital, production, price etc. As a business manager has to function in an environment of uncertainty, it is imperative to anticipate the future working environment in terms of the said quantities.
- Understanding significant external forces: The management has to identify all the important factors that influence a firm. It assists the management to know internal and external factors influence the business. These factors can broadly be divided into two categories. Managerial economics plays an important role by assisting management in understanding these factors. External factors: A firm cannot exercise any control over these factors. The plans, policies and programmes of the firm should be formulated in the light of these factors. Significant external factors impinging on the decision-making process of a firm are economic system of the country, business cycles, fluctuations in national income and national production, industrial policy of the government, trade and fiscal policy of the government, taxation policy, licensing policy, trends in foreign trade of the country, general industrial relation in the country and so on. Internal factors: These factors fall under the control of a firm. These factors are associated with business operation. Knowledge of these factors aids the management in making sound business decisions.
- Basis of business policies: Managerial economics is the founding principle of business policies. Business policies are prepared based on studies and findings of managerial economics, which cautions the management against potential upheavals in national as well as international economy.
- It provides tool and techniques for managerial decision making.
- It gives answers to the basic problems of business management.
- It supplies data for analysis and forecasting.
- It provides tools for demand forecasting and profit planning.
- It guides the managerial economist. Thus, managerial economics is helpful to the management in its decision-making. Nature of Managerial Economics
- Microeconomics: It studies the problems and principles of an individual business firm or an individual industry. It aids the management in forecasting and evaluating the trends of the market.
- Normative economics: It is concerned with varied corrective measures that a management undertakes under various circumstances. It deals with goal determination, goal development and achievement of these goals. Future planning, policy-making, decision-making and optimal utilisation of available resources, come under the banner of managerial economics.
- Pragmatic: Managerial economics is pragmatic. In pure micro-economic theory, analysis is performed, based on certain exceptions, which are far from reality. However, in managerial economics, managerial issues are resolved daily and difficult issues of economic theory are kept at bay.
- Uses theory of firm: Managerial economics employs economic concepts and principles, which are known as the theory of Firm or 'Economics of the Firm'. Thus, its scope is narrower than that of pure economic theory.
- Takes the help of macroeconomics: Managerial economics incorporates certain aspects of macroeconomic theory. These are essential to comprehending the circumstances and environments that envelop the working conditions of an individual firm or an industry. Knowledge of macroeconomic issues such as business cycles, taxation policies, industrial policy of the government, price and distribution policies, wage policies and antimonopoly policies and so on, is integral to the successful functioning of a business enterprise.
- Aims at helping the management: Managerial economics aims at supporting the management in taking corrective decisions and charting plans and policies for future.
- A scientific art: Science is a system of rules and principles engendered for attaining given ends. Scientific methods have been credited as the optimal path to achieving one's goals. Managerial economics has been is also called a scientific art because it helps the management in the best and efficient utilization of scarce economic resources. It considers production costs, demand,
produced (output) and the factors or resources (inputs) used. The inputs employed for producing these goods and services are called factors of production. Variable factor of production: The input level of a variable factor of production can be varied in the short run. Raw material inputs are deemed as variable factors. Unskilled labour is also considered in the category of variable factors. Fixed factor of production: The input level of a fixed factor cannot be varied in the short run. Capital falls under the category of a fixed factor. Capital alludes to resources such as buildings, machinery etc. Production theory facilitates in determining the size of firm and the level of production. It elucidates the relationship between average and marginal costs and production. It highlights how a change in production can bring about a parallel change in average and marginal costs. Production theory also deals with other issues such as conditions leading to increase or decrease in costs, changes in total production when one factor of production is varied and others are kept constant, substitution of one factor with another while keeping all increased simultaneously and methods of achieving optimum production
3. Theory of Exchange or Price Theory: Theory of Exchange is popularly known as Price Theory. Price determination under different types of market conditions comes under the wingspan of this theory. It helps in determining the level to which an advertisement can be used to boost market sales of a firm. Price theory is pivotal in determining the price policy of a firm. Pricing is an important area in managerial economics. The accuracy of pricing decisions is vital in shaping the success of an enterprise. Price policy impresses upon the demand of products. It involves the determination of prices under different market conditions, pricing methods, pricing policies, differential pricing, product line pricing and price forecasting. 4. Theory of profit: Every business and industrial enterprise aims at maximizing profit. Profit is the difference between total revenue and total economic cost. Profitability of an organization is greatly influenced by the following factors: Demand of the product Prices of the factors of production Nature and degree of competition in the market Price behaviour under changing conditions Hence, profit planning and profit management are important requisites for improving profit earning efficiency of the firm. Profit management involves the use of most efficient technique for predicting the future. The probability of risks should be minimized as far as possible. 5. Theory of Capital and Investment: Theory of Capital and Investment evinces the following important issues: Selection of a viable investment project Efficient allocation of capital
Assessment of the efficiency of capital Minimizing the possibility of under capitalization or overcapitalization. Capital is the building block of a business. Like other factors of production, it is also scarce and expensive. It should be allocated in most efficient manner.
- Environmental issues: Managerial economics also encompasses some aspects of macroeconomics. These relate to social and political environment in which a business and industrial firm has to operate. This is governed by the following factors: The type of economic system of the country Business cycles Industrial policy of the country Trade and fiscal policy of the country Taxation policy of the country Price and labour policy General trends in economy concerning the production, employment, income, prices, saving and investment etc. General trends in the working of financial institutions in the country General trends in foreign trade of the country Social factors like value system of the society General attitude and significance of social organisations like trade unions, producers unions and consumers’ cooperative societies etc. Social structure and class character of various social groups Political system of the country The management of a firm cannot exercise control over these factors. Therefore, it should fashion the plans, policies and programmes of the firm according to these factors in order to offset their adverse effects on the firm. ECONOMIC EFFICIENCY Economic Efficiency is a broad term that implies an economic state in which every resource is optimally allocated to serve each person in the best way while minimizing waste and inefficiency. When an economy is economically efficient, any changes made to assist one person would harm another. In terms of production, goods are produced at their lowest possible cost, as are the variable inputs of production. In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services. An economic system is said to be more efficient than another (in relative terms) if it can provide more goods and services for society without using more resources. In absolute terms, a situation can be called economically efficient if:
