S121 ECO504 BUSINESS ECONOMICS

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Session-01-handouts.pdf

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ENVIRONMENT – SETTING

THE SCENE

THE ECONOMIC & BUSINESS

Session 1

2 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

Scarcity + …

Scarcity = limited nature of society’s resources

Businesses allocate scarce resources among

competing uses, taking into account a range of

stakeholder wants and needs

Economics is the study of how society manages

its scarce resources

3 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

… + Making Decisions

 The management of the scare resources is down

to people’s individual and group decisions

 People want to get the most from scarce resources

whether they are buyers, producers or sellers

 There are key principles about how people and

business make decisions

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4 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

Principle 1

 Getting the most from scarce resources:

• Technical efficiency

• Productive efficiency

• Allocative efficiency

• Social efficiency

 Equity is about fairness

 Efficiency refers to the size of the economic cake

and equity refers to how the cake is divided

Decision making involves trade-offs

5 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

 The opportunity cost is

whatever is given up to obtain some item

 It measures the value of what is foregone

The cost of something is what you give up to get it

Principle 2

6 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

 Marginal changes describe small incremental

adjustments

 Many decisions are made at the margins

 Firms are interested in the marginal costs

Rational people and businesses think at the margin

Principle 3

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7 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

 People compare the costs and benefits when

making decisions

 Decisions are made by

people as consumers,

businesses as suppliers and

governments as policy makers

People and businesses respond to incentives

Principle 4

8 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

 Trade between two economies

can make each economy better off

 Countries as well as businesses

benefit from the ability to trade with one another

 Trade allows countries to

specialize in what they do best and

to enjoy a greater variety of goods and services

Trade can make everyone better off

Principle 5

9 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

 Communist countries adopted central planning, but

these have been abandoned in favour of markets

 In a market economy, the decisions of a central

planner are replaced by the decisions of millions of

firms and households

 In general, markets have promoted

economic well-being

 Markets are not without their problems

Markets are usually a good way to organize

economic activity

Principle 6

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10 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

 Market failure is when the market on its own fails

to produce an efficient allocation of resources

 Externalities are the uncompensated impact of a

person or firm’s action on the well-being of a third

party

 Market power is when an economic agent is able

to influence market prices

 Governments can intervene to improve markets

Governments can sometimes improve market

outcomes

Principle 7

11 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

 The standard of living measures welfare based on

the amount of goods and services a person’s

income can buy

 Gross domestic product per head is one useful

indicator of measuring living standards

 Productivity is directly related to living standards

 Boosting productivity raises living standards

An economy’s standard of living depends on its

ability to produce goods and services

Principle 8

12 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

 Inflation measures the overall increase in prices

 Printing money leads to price rises, because the

value of money falls

Prices rise when the government prints too much

money

Principle 9

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13 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

 In the short-run there is a trade off between

unemployment and inflation as shown in

the Phillips curve

 Increase the money supply and therefore inflation can

lower unemployment in the short-term

 The short-term can last several years

 Economies undergo irregular and largely unpredictable

fluctuations or cycles in economic activity

Society faces a short-run trade-off between

inflation and unemployment

Principle 10

14 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

The Economic Problem

 Scarce resources (demand > supply) +

 Unlimited wants and needs =

 Economic Problem  which means

 Decisions have to be made between

competing choices

15 of 38 For use with Business Economics 1e By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin

ISBN: 978-1-4080-6981-3

 Where satisfaction (utility) > purchase price

 Sellers have to consider value for money

propositions

 Buyers make purchase decisions on basis of

proposition

 Where buyers and sellers interact a market

Value for Money