Economics and Business Environment
This domain supplies the economic reasoning behind business decisions: demand and elasticity, costs, forms of organisation, banking, insurance and the modern business environment. Expect definitions plus one short numerical on elasticity.
Core concepts
- Scarcity forces choice; the next best alternative given up is opportunity cost. Factors of production and rewards: land–rent, labour–wages, capital–interest, entrepreneur–profit.
- Law of demand: price and quantity are inversely related, other things equal. A price change moves you along the curve; income, taste or the price of substitutes shifts the curve. Giffen goods and Veblen goods are exceptions.
- Elasticity of demand = percentage change in quantity ÷ percentage change in price. Advertising, habit and availability of substitutes change it.
- Forms of organisation: sole proprietorship, partnership, HUF, co-operative society and company. A private company needs 2 members and 2 directors; a public company 7 members and 3 directors.
- Banking: RBI regulates currency, credit and foreign exchange; NEFT, RTGS and UPI handle transfers. Insurance rests on insurable interest, utmost good faith and indemnity.
- Business environment: LPG reforms of 1991, MSME classification by investment and turnover, Make in India, Digital India and rising FDI.
Worked example
Price falls from ₹10 to ₹8 and quantity sold rises from 100 to 140 units. Quantity changed by 40 ÷ 100 = 40%; price fell by 2 ÷ 10 = 20%. Elasticity = 40 ÷ 20 = 2, so demand is elastic and the firm's total revenue rises from ₹1,000 to ₹1,120. Cutting price pays when elasticity exceeds 1.
Traps
Writing elasticity as 0.5 by inverting the formula; calling a price change a shift in demand; confusing micro (a firm's pricing) with macro (national income, inflation).