Business Economics Basics

What is Economics?

• Study of how society manages its scarce resources
• Scarcity: limited nature of society's resources
• Economics involves decision-making with trade-offs due to limited resources

Business Economics

• Business: allocate scarce resources among competing uses, taking into account stakeholders' wants and needs
• Private organization: aim is to make a profit, which is a reward for taking risks in carrying out business activity
• Decision making involves:
  • Trade-offs
  • Opportunity cost (what is given up to obtain something)
  • Sunk cost (cost beyond recovery, ignored in decision-making)

Key Ideas in Economics

• Decision making involves trade-offs
• The cost of something is what you give up to get it (opportunity cost)
• Rational people and businesses think at the margin (small incremental adjustments)
• People and businesses respond to incentives
• Trade can make everyone better off
• Markets are usually a good way to organize economic activity
• Governments can sometimes improve market outcomes
• An economy's standard of living depends on its ability to produce goods and services

Management and Marketing

• Management: forecasting, planning, organizing, controlling, and coordinating activities
• Marketing: identify, anticipate, and satisfy customer needs at a profit
• Micro-environment: internal analysis of a company's strengths, weaknesses, opportunities, and threats
• Macro-environment: external analysis of political, economic, social, technological, legal, and environmental factors
• Meso-environment: setting between micro and macro, including policies, procedures, and infrastructure

International Trade and Macroeconomics

• Countries engage in international trade to benefit from differences and achieve economies of scale
• International trade theory relies on the concept of comparative advantage
• Governments may impose trade barriers to protect domestic industries or for national security
• Exchange rates: the price of one currency in terms of another
• Appreciation: a currency strengthens and buys more foreign currency
• Depreciation: a currency weakens and buys less foreign currency

Macroeconomic Environment of Business

• Gross Domestic Product (GDP): total income and expenditure in an economy
• Inflation: a sustained increase in the general price level
• Unemployment: the percentage of the labor force that is out of work
• Balance of Payments: a record of international transactions between a country and the rest of the world

Government Intervention in the Economy

• Governments intervene in the economy to correct market failures, protect consumers, and regulate business
• Reasons for government intervention:
  • Unfair business practices
  • Unsafe working conditions
  • Environmental damage
  • Economic instability and unemployment
• Methods of government intervention:
  • Regulation
  • Direct payments to individuals
  • Ownership and production of goods and services
  • Taxation and subsidies

Market Failure

• Market failure: when the market does not allocate resources efficiently
• Sources of market failure:
  • Imperfect knowledge
  • Goods not being homogenous
  • Resource immobility
  • Externalities (positive or negative)
• Dealing with externalities:
  • Direct regulation
  • Indirect regulation (taxes or subsidies)

Supply and Demand

• The law of supply: the relationship between price and quantity supplied
• The law of demand: the relationship between price and quantity demanded
• Market equilibrium: where the supply and demand curves intersect
• Shifts versus movements along the curve:
  • Changes in price affect quantity supplied or demanded
  • Changes in other factors affect the entire supply or demand curve### Demand and Supply
• Demand schedule: shows the relationship between the price of a good and the quantity demanded
• Demand curve: a graphical display of the demand schedule
• Market demand: the sum of all individual demands for a particular good or service
• Market demand curve: shows how the total quantity demanded of a good varies with the price of the good, holding all other factors constant

Shifts and Movements

• A movement along the demand curve occurs when there is a change in price
• A shift in the demand curve is caused by a factor affecting demand other than a change in price
• Factors that cause a shift in the demand curve:
  • Income (income effect)
  • Prices of related goods (substitution effect)
  • Advertising/Tastes
  • Population
  • Consumer expectations

Demand and Supply Together

• Equilibrium: the price at which the quantity supplied equals the quantity demanded
• Equilibrium price and quantity are found at the intersection of the supply and demand curves

Elasticity

• Elasticity: a measure of how much buyers and sellers respond to changes in market conditions
• Price elasticity of supply: measures how much the quantity supplied responds to changes in the price
• Price elasticity of demand: measures how much the quantity demanded responds to a change in price

Production, Costs, and Profit Maximization

• Factors of production: land, labor, and capital
• Total cost (TC): the market value of inputs used in production
• Total revenue (TR): the price of the good multiplied by the quantity sold
• Profit: total revenue minus total cost
• Opportunity costs: the costs of what you give up to get something
• Explicit costs: input costs that a firm needs to buy
• Implicit costs: do not require an outlay of money by a firm
• Economic profit: total revenue minus the total explicit and implicit costs
• Accounting profit: total revenue minus the total explicit costs

Production Function

• Shows the amount of output that can be produced given different combinations of factor inputs
• Labor-intensive industries: rely on large amounts of labor relative to the other factors
• Capital-intensive industries: rely on large amounts of capital relative to the other factors

Short Run and Long Run

• Short run: some factors of production cannot be changed (fixed costs)
• Long run: all costs can be altered (variable costs)
• Marginal product: the increase in quantity of output obtained from one additional unit of an input
• Diminishing marginal product: the property whereby the marginal product of an input declines as the quantity of input increases

Costs

• Average total cost: total cost divided by the quantity of output
• Average fixed cost: fixed costs divided by the quantity of output
• Average variable cost: variable costs divided by the quantity of output
• Marginal cost: the increase in total cost that arises from an extra unit of production

Decision Making

• Economic rule of decision making: if costs ≤ benefits, do it; if costs ≥ benefits, don't do it
• Economic rule of marginal decision making: if marginal costs ≤ marginal benefits, do it; if marginal costs ≥ marginal benefits, don't do it

Market Structures

• Perfect competition: a market structure where there are many sellers and buyers, and no single firm has the power to influence the market price
• Characteristics of perfect competition:
  • Large numbers of buyers and sellers
  • Homogenous goods and services
  • Free entry and exit for firms
  • Perfect knowledge by buyers and sellers
• Implications of perfect competition:
  • A single market price is determined by the interaction of demand and supply
  • Firms earn zero economic profit in the long run

Imperfect Competition

• Firms have some degree of market power, making them more able to determine prices
• Types of imperfect competition:
  • Monopoly: a single firm is the sole seller of a product without close substitutes
  • Oligopoly: a few firms compete with each other in a market
  • Duopoly: a special type of oligopoly with two firms

Monopoly

• Fundamental cause of monopoly: barriers to entry
• Types of barriers to entry:
  • Monopoly resources: owning the outright use of a resource
  • Government-created monopolies: patent and copyright laws
  • Natural monopolies: when a single firm can supply a good or service to an entire market at a lower cost than could two or more firms
  • External growth: acquisition, merger, or takeover, leading to industry concentration

Oligopoly and Duopoly

• Oligopoly: a market structure where there are only a few firms competing with each other
• Characteristics of oligopoly:
  • Interdependent decision-making
  • Non-price competition
  • Entry barriers
• Duopoly: a special type of oligopoly with two firms

Consumer Behavior and Business-to-Business Marketing

• Consumer behavior: the study of how individuals, groups, and organizations make decisions to acquire, consume, and dispose of products and services
• Market orientation: a business approach that focuses on identifying and meeting the needs of customers
• Marketing mix: a set of tools used to influence the market and stimulate purchases
• Key components of marketing mix:
  • Product
  • Price
  • Promotion
  • Place

Consumer Buying Behavior

• Who buys: the roles of the buying center
  • Initiator
  • Influencer
  • Decider
  • Buyer
  • User
• How do they buy: the consumer decision-making process
  • Problem recognition
  • Information search
  • Evaluation of alternatives
  • Purchase
  • Post-purchase evaluation

Business-to-Business Marketing

• Organizational buying behavior: the decision-making process by which organizations establish the need for purchased products and services
• Types of business-to-business markets:
  • Industrial markets
  • Reseller markets
  • Government markets

Environmental Scanning

• Environmental scanning: the process of monitoring and analyzing the marketing environment of a company
• Components of the marketing environment:
  • Microenvironment: the internal and external factors that affect the company's marketing activities
  • Macroenvironment: the broader external factors that affect the company's marketing activities### Organizational Buying
• Characteristics of Organizational Buying:
  • Decision Making Units (DMUs) in B2B markets
  • Types of Choice Criteria:
    • Economic (e.g. price, ROI)
    • Technical (e.g. reliability, delivery)
    • Social (Organizational) (e.g. status, office politics)
    • Personal (e.g. personal risk reduction, liking/disliking)

Market Segmentation

• Identification of individuals or organizations with similar characteristics that have significant implications for the determination of marketing strategy
• Advantages:
  • Process:
    • Segmenting consumer markets
    • Evaluating market segments: market attractiveness
    • Target marketing strategies

Market Segmentation Examples

• Behavioral (Benefits Sought) Segmentation: Coca-Cola
• Psychographic (Lifestyle) Segmentation: Sky Group
• Profile (Geographic) Segmentation: Unilever (e.g. USA: Ben&Jerry’s, Caress, Noxzema; India: Pepsodent, Comfort, Lifebuoy)

Target Marketing Strategies

• Purpose: to choose one or more segments to enter
• Types:
  • Undifferentiated Marketing (single marketing mix for the whole market)
  • Differentiated Marketing (separate marketing mixes for separate segments)
  • Focused (Niche) Marketing (single marketing mix aimed at one target market)
  • Customized Marketing (separate marketing mix for each customer)

7 Ps of Marketing

• Place
• Price
• Product
• Promotion
• People
• Process
• Physical Evidence

Branding

• Product: anything that can satisfy customer needs
• Brand: a distinctive name, packaging, and design to distinguish the offering from competing products/services
• Product line: a group of brands that are closely related in terms of their functions and the benefits they provide
• Product mix: the total set of brands marketed in a company
• Why are strong brands important?
  • Add value to companies
  • Provide a powerful barrier to competition
  • Command high profits, strong market shares, and brand loyalty
  • Provide foundation for brand extensions
  • A form of quality certification for customers
  • Customers tend to trust strong brands

Brand Equity

• A measure of the strength of a brand in the marketplace
• Measured in two terms:
  • Customer-based brand equity
  • Proprietary-based equity

Building a Brand

• Augmenting a core product with distinctive values that distinguish it from the competition
• Quality
• Positioning
• Repositioning
• Communications
• Being first
• Long-term perspective

Service Marketing

• Service: any act or performance one party can offer to another that is essentially intangible and does not result in the ownership of anything
• Characteristics of Services:
  • Intangibility
  • Perishability (Time Elasticity)
  • Inseparability
  • Variability

Managing Services

• To manage services effectively, service providers should understand the whole of the customer journey
• Key aspects:
  • Managing service quality
  • Managing service productivity
  • Managing customer relationships
  • Managing service staff

Relationship Marketing

• Process of creating, maintaining, and enhancing strong relationships with customers and other stakeholders
• Key concepts:
  • Core service
  • Relationship quality

Customer Relationship Management (CRM)

• Methodologies, technologies, and e-commerce capabilities used by companies to manage customer relationships
• CRM software packages aid the interaction between the customer and the company, enabling the company to coordinate all of the communication effort so that the customer is presented with a unified message and image

Pricing Strategies

• Cost-Oriented Pricing
• Full Cost Pricing
• Direct-Cost (Marginal Cost) Pricing
• Competitor-Oriented Pricing
• Market-Oriented Pricing
• Penetration pricing strategy
• Competitive pricing
• Psychological pricing
• Loss leader
• Skimming
• Premium pricing

Ethical Issues in Pricing

• Price Fixing
• Predatory Pricing
• Deceptive Pricing
• Price discrimination
• Penetration pricing and obesity
• Product dumping

Digital Marketing

• Newest and fastest-growing channels for communicating and selling directly to customers
• Opportunities for greater interaction and individualization for marketers and consumers
• Very few marketing programs are complete without a meaningful digital component

Marketing Communications

• How firms attempt to inform, persuade, and remind consumers – directly or indirectly – about the products and brands they sell
• Mass marketing communications
• Direct marketing communications
• Integrated marketing communications

The New Marketing Communications Model

• Consumers are changing
• Marketing strategies are changing
• Advances in digital technology

Key Dimensions of the Digital Age

• Direct and digital marketing
• Integrated marketing communications

Communication Process

• Designing a message
• AIDA Model: Get Attention, Hold Interest, Arouse Desire, Obtain Action
• Message content and structure
• Common communication platforms