1. Introduction to Business Economics
12th of November

2. Topics of this week What do economists study The problem with scarcity
Consumption and production
Branches of economics
The circular flow of income
Opportunity cost and rational choice
10 Principles of Economics

3. What do Economists Study?
Tackling the problem of scarcity
meaning of scarcity
Scarcity is the excess of human wants over what can actually be produced.
Example: resources, money
Not every individual faces an equal problem of scarcity.
Two key elements of satisfying wants:
Production – how much to produce
Consumption – how sensitive consumer demand is to change in prices
Time is the scarcity, and it's the commodity we can't create any more of. Jim Mitchell

4. Ceteris paribus Is Latin for “all other things held constant”
In constructive models, economists make assumptions to eliminate unnecessary details to reduce the complexity of behaviour.

5. What do Economists Study?
Role of the business economist
study of consumer behaviour
study of firms
factors of production
human resources – labour
natural resources – land and raw materials
manufactured resources – capital
State of technology
Business economists study the use of these resources by firms to meet consumer demand. Production therefore reduces the problem of scarcity related to consumption.

6. What do Economists Study?
Demand and supply
actual and potential demand and supply
the role of firms in satisfying demand
business economists’ study the role of firms in this process’ e.g.,
How they respond to demand
How to produce – input mix
How much to produce – majority of the firms are price taker 3

7. Dividing up the subject
Macroeconomics
Examines economy as a whole
Concerned with aggregate demand and supply
Key macroeconomic variables?
Microeconomics
Study individual units: e.g., households, firms and industries
Interrelationships btw these units in determining the pattern of production and distribution of goods and services.
Economics is extremely useful as a form of employment for economists. John Kenneth Galbraith

8. Q Which one of the following is a microeconomic issue?
The government spends more than it receives in tax revenue.
House prices rise more rapidly.
Unemployment rises.
The Bank of England raises interest rates.
Imports exceed exports.
Answer B

9. Q Macroeconomics is a branch of economics which examines
the economic behaviour of aggregates – income, employment, and output – on a national scale.
the functioning of individual industries and the behaviour of individual decision-making units, that is, business firms and households.
ways to understand behaviour and the operation of systems without making judgements.
outcomes of economic behaviour, evaluates them as good or bad, and prescribes preferred courses of action.
Answer B

10. The Macroeconomic Environment
Aggregate demand and supply
Macroeconomic issues
the objective of economic growth
cyclical fluctuations in the economy
recessions
unemployment
inflation
balance of trade deficits
Macroeconomic policy and business
demand-side policy
supply-side policy 4

11. Macroeconomic performance of four industrialised countries
(average annual figures)
Source: based on data in European Economy (Commission of the European Union)

12. Q Which one of the following is an example of demand-side policy?
Building more roads so as to improve the efficiency of industry.
Cutting corporation tax so as to encourage firms to reinvest more in R&D.
Raising interest rates so as to reduce inflation.
Curbing union power.
Removing restrictions on imports in order to encourage greater competition.
Answer B

13. The circular flow of goods and incomes16

14. Microeconomic Choices
Microeconomics and choice
What?
How?
For whom?
Choice and opportunity cost
Opportunity cost – the cost of any activity measured in terms of best alternative forgone.
Rational choices – Weighting up the benefits of any activity against its opportunity cost 17

15. Factors that changed the world we live in
Democracy
The Limited Liability Company
Patent Rights
Literacy and Education.
Education is the most powerful weapon which you can use to change the world. Nelson Mandela

16. Positive vs normative economics
Positive economics
Descriptive statements, claims how the world is. (Scientists)
Normative economics
Prescriptive statements claims how the world ought to be. (Policy Advisors)

17. Forces at play in the real world.
Economic – Supply and Demand
Social – Religion and Culture
Political – Governments.

18. The 10 principals of Economics

19. 1 – People Face Trade Offs10
Principles of
Economics
1 – People Face Trade Offs
Efficiency – Getting the maximum benefit of scarce resources
Equality – Benefits are distributed equally amongst the population.
A family is a risky venture, because the greater the love, the greater the loss... That's the trade-off. But I'll take it all. Brad Pitt

20. 2: the cost of something is what you gave up to get it.10
Principles of
Economics
2: the cost of something is what you gave up to get it.
Opportunity Cost – The next best alternative that is given up when you choose something.
In economics, one of the most important concepts is 'opportunity cost' - the idea that once you spend your money on something, you can't spend it again on something else.
Malcolm Turnbull

21. 3: Rational people think on the margin.10
Principles of
Economics
3: Rational people think on the margin.
Rational people – people who systematically and purposefully do the best they can do to achieve their objectives.
Marginal changes – small incremental adjustments to a plan of action.
Marginal Benefit > Marginal Cost = decision will be made.

22. 4: People respond to incentives.10
Principles of
Economics
4: People respond to incentives.
Incentive – something that induces people to act.
Unintended consequences.
Call it what you will, incentives are what get people to work harder. Nikita Khrushchev

23. 5: Trade can make everyone better10
Principles of
Economics
5: Trade can make everyone better
Country X produces 10 apples and has $100
Country Y produces 10 oranges and has $100
Both apples and oranges cost $10 each
Country X wants 3 oranges
Country Y wants 7 apples.
Everyone benefits with trade.

24. 6: Markets are usually a good way to organize economic activity.10
Principles of
Economics
6: Markets are usually a good way to organize economic activity.
Market economy
Competitive market
Command economy
Soviet style economics
Government decides what/how/to whom

25. 7: Governments can sometimes improve market outcomes.10
Principles of
Economics
7: Governments can sometimes improve market outcomes.
Market failure – a situation in which a market left to its own fails to allocate resources efficiently.
Government's first duty is to protect the people, not run their lives. Ronald Reagan

26. 8: a country’s standard of living depends on its ability to produce goods and services.10
Principles of
Economics
Productivity: the quantity of goods and services produced by each output of labor.
The only way to increase the standard of living is through increasing productivity.
The productivity of work is not the responsibility of the worker but of the manager. Peter Drucker
On my desk I have three screens, synchronized to form a single desktop. I can drag items from one screen to the next. Once you have that large display area, you'll never go back, because it has a direct impact on productivity. Bill Gates

27. 9: Prices rise when the government prints too much money.10
Principles of
Economics
9: Prices rise when the government prints too much money.
Inflation: An increase in the overall levels of prices in the economy.
Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair. Sam Ewing

28. Inflation occurs when the government prints money. 10
Principles of
Economics
10: society faces a short run trade off between unemployment and inflation.
Inflation occurs when the government prints money.
When money is created there is a need to spend it which thereby increase demand.
Higher demand means that firms can charge more, and in the short run encourages firms to higher more employees.
More hiring = lower unemployment.