1 Economics and the Business Environment 1 Economics and the Business Environment

The Firm as a Legal Entity The sole proprietor –limited scope for expansion –unlimited liability The partnership Companies –limited liability –public limited companies (plc) public issues of shares shares traded on the Stock Exchange –private limited companies –consortia –public corporations The sole proprietor –limited scope for expansion –unlimited liability The partnership Companies –limited liability –public limited companies (plc) public issues of shares shares traded on the Stock Exchange –private limited companies –consortia –public corporations

The Internal Organisation of the Firm U-form

U-form business organisation

The Internal Organisation of the Firm U-form –advantages direct control by central executive of the firm clear goals –problems of large U-form firms co-ordination and communication costs distorted information decline in organisational efficiency U-form –advantages direct control by central executive of the firm clear goals –problems of large U-form firms co-ordination and communication costs distorted information decline in organisational efficiency

M-form The Internal Organisation of the Firm

M-form business organisation

The Internal Organisation of the Firm M-form –advantages reduced length of information flows enhanced level of control –problems bureaucracy and communication problems conflicts between divisions The flat organisation The holding company –role of parent company and subsidiaries M-form –advantages reduced length of information flows enhanced level of control –problems bureaucracy and communication problems conflicts between divisions The flat organisation The holding company –role of parent company and subsidiaries

The Aims of the Firm Goals of the firm The traditional theory of the firm Alternative theories –the divorce of ownership from control –the development of the joint-stock company –managerial objectives Goals of the firm The traditional theory of the firm Alternative theories –the divorce of ownership from control –the development of the joint-stock company –managerial objectives

The Aims of the Firm The principal / agent relationship –the principal – agent problem –asymmetric information –dealing with imperfect information monitoring incentives The goal of staying in business –the willingness of firms to take risks –problems of being over cautious The principal / agent relationship –the principal – agent problem –asymmetric information –dealing with imperfect information monitoring incentives The goal of staying in business –the willingness of firms to take risks –problems of being over cautious

The External Business Environment PEST analysis –Political / legal factors –Economic factors the microeconomic environment the macroeconomic environment –Social / cultural factors –Technological factors Using PEST analysis –relations between the four sets of factors –importance of the economic factors PEST analysis –Political / legal factors –Economic factors the microeconomic environment the macroeconomic environment –Social / cultural factors –Technological factors Using PEST analysis –relations between the four sets of factors –importance of the economic factors

The External Business Environment Classifying industries –Classifying production primary production secondary production tertiary production Classifying industries –Classifying production primary production secondary production tertiary production

Output of industrial sectors (as % of GDP) % 2.8% 42.3% Secondary Primary Tertiary Output of industrial sectors (as % of GDP)

% 2.8% 42.3% 70.9% 5.8% 23.3% 2002 Secondary Primary Tertiary Output of industrial sectors (as % of GDP)

% 3.4% 41.9% Secondary Primary Tertiary Employment by industrial sector (% of total employees)

% 3.4% 41.9% 79.8% 1.8% 18.4% 2002 Secondary Primary Tertiary Employment by industrial sector (% of total employees)

Classifying firms into industries –nature of an industry –industrial sectors –why classify firms into industrial sectors? helps in analysing trends identifying specific needs helps to understand relationships between firms Standard industrial classification –nature of the system of classification –sections, subsections divisions, groups and classes Classifying firms into industries –nature of an industry –industrial sectors –why classify firms into industrial sectors? helps in analysing trends identifying specific needs helps to understand relationships between firms Standard industrial classification –nature of the system of classification –sections, subsections divisions, groups and classes The External Business Environment

Standard industrial classification: 1992

Changes in the structure of UK economy –expanding and contracting sections by output by employment Changes in the structure of UK economy –expanding and contracting sections by output by employment The External Business Environment

The Determinants of Business Performance Structure  conduct  performance –relationship between business structure and business conduct (behaviour) competitive markets and competitive behaviour limited competition and collusion –relationship between business conduct and business performance indicators for measuring performance profitability, market share, growth, etc. Structure  conduct  performance –relationship between business structure and business conduct (behaviour) competitive markets and competitive behaviour limited competition and collusion –relationship between business conduct and business performance indicators for measuring performance profitability, market share, growth, etc.

The Economist's Approach to Business Tackling the problem of scarcity –meaning of scarcity –production and consumption role of the business economist –study of consumer behaviour –study of firms –factors of production labour land and raw materials capital Tackling the problem of scarcity –meaning of scarcity –production and consumption role of the business economist –study of consumer behaviour –study of firms –factors of production labour land and raw materials capital

The Economist's Approach to Business Demand and supply –actual and potential demand and supply –the role of firms in satisfying demand –business economists’ study of the supply process Macroeconomics and microeconomics –macroeconomics the balancing of aggregate demand and supply –microeconomics the balancing of the demand and supply for particular products Demand and supply –actual and potential demand and supply –the role of firms in satisfying demand –business economists’ study of the supply process Macroeconomics and microeconomics –macroeconomics the balancing of aggregate demand and supply –microeconomics the balancing of the demand and supply for particular products

The Economist's Approach to Business Microeconomics and choice –What? –How? –For whom? Choice and opportunity cost –the meaning of opportunity cost –rational choices –marginal costs and benefits Microeconomic choices and the firm Microeconomics and choice –What? –How? –For whom? Choice and opportunity cost –the meaning of opportunity cost –rational choices –marginal costs and benefits Microeconomic choices and the firm