Business Economics Basics
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Questions and Answers

What is the definition of economics?

Economics is the study of how society manages its scarce resources.

Define scarcity.

Scarcity is the limited nature of society's resources.

What is opportunity cost?

Opportunity cost is whatever is given up to obtain some item; it measures the value of what is foregone.

Why can specialization and trade improve people's choices?

<p>All of the above</p> Signup and view all the answers

What is a tariff?

<p>A tax on foreign goods and services entering a country.</p> Signup and view all the answers

Trade can make everyone worse off.

<p>False</p> Signup and view all the answers

What is the difference between efficiency and effectiveness?

<p>Efficiency is concerned with doing things right (concerned with inputs and outputs), while effectiveness means doing the right things.</p> Signup and view all the answers

What is the main objective of marketing according to the content?

<p>Creating customer value and satisfaction</p> Signup and view all the answers

Building long-term customer relationships places emphasis on ______.

<p>long-term relationships as opposed to transaction-based exchanges</p> Signup and view all the answers

Match the following market segmentation types with their descriptions:

<p>Behavioral Segmentation = Segmentation based on benefits sought by consumers Psychographic Segmentation = Segmentation based on lifestyle characteristics Profile Segmentation = Segmentation based on geographic locations</p> Signup and view all the answers

Strong brands provide a weak barrier to competition.

<p>False</p> Signup and view all the answers

What does the circular flow of income describe in a simple economy?

<p>All the transactions between households &amp; firms</p> Signup and view all the answers

What is inflation?

<p>Situation in which the economy’s overall price level is rising</p> Signup and view all the answers

Define total revenue.

<p>Total revenue is the product of the price of a good or service and the quantity of that good or service sold.</p> Signup and view all the answers

Define the Consumer Price Index (CPI).

<p>Measure of the overall prices of the goods &amp; services bought by a typical customer</p> Signup and view all the answers

What is the formula for economic profit?

<p>Total Revenue - (Total Explicit Costs + Total Implicit Costs)</p> Signup and view all the answers

In the short run, all costs can be altered.

<p>False</p> Signup and view all the answers

What are the 4 steps involved in calculating the CPI?

<p>Compute the basket’s cost</p> Signup and view all the answers

The ___ shows the amount of output that can be produced given different combinations of factor inputs.

<p>production function</p> Signup and view all the answers

How is unemployment measured?

<p>By claimant count or Labour Force Surveys</p> Signup and view all the answers

What is the Balance of Payments?

<p>The official account of international payments for the import &amp; exports of goods, services &amp; capital</p> Signup and view all the answers

Match the term with its definition:

<p>Monopoly = A firm that is the sole seller of a product without close substitutes Oligopoly = Occurs when a few firms share a large proportion of the industry Duopoly = An oligopoly with two members</p> Signup and view all the answers

What is the economic rule of decision making?

<p>If costs ≤ benefits, do it. If costs ≥ benefits, don’t do it.</p> Signup and view all the answers

Why do governments intervene in markets?

<p>To correct market failures, unsafe conditions, unfair profits, among others</p> Signup and view all the answers

Define service in the context of business.

<p>Service in the context of business refers to any act or performance one party can offer to another that is essentially intangible and does not result in the ownership of anything.</p> Signup and view all the answers

Explain the concept of servitization.

<p>Servitization refers to offering service as a side business, such as to support the sale of goods or provide after-sales services of a producer.</p> Signup and view all the answers

What are the industries where services are the main business? Select all that apply.

<p>Banks</p> Signup and view all the answers

What are challenges associated with the perishability of services? Select all that apply.

<p>Lost business during downtime</p> Signup and view all the answers

Customer is integrated and has direct contact with staff in services. True or False?

<p>True</p> Signup and view all the answers

What does the AIDA model stand for in the communication process?

<p>Get Attention, Hold Interest, Arouse Desire, Obtain Action</p> Signup and view all the answers

What are the key dimensions of the Digital Age in marketing?

<p>Advances in digital technology</p> Signup and view all the answers

Standardization in international marketing means producing goods in the same way via set guidelines.

<p>True</p> Signup and view all the answers

The __________ model outlines the stages of Get Attention, Hold Interest, Arouse Desire, and Obtain Action in marketing.

<p>AIDA</p> Signup and view all the answers

Study Notes

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

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Learn the fundamentals of business economics, including the definition of economics, scarcity, and opportunity cost, and how trade and specialization improve people's choices.

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