Economic Activity and Scarcity

• These are study notes about economic activity and economics

Economic Activity

• Human needs are unlimited, including the essential needs of food, shelter, and safety.
• Resources are limited, including labor, land, and capital (machines, money), which are scarce as they can be used in multiple ways, but can only do one thing at a time.
• Prosperity is the state of having enough supply of goods and services to fulfill needs.
• Scarcity is when needs exceed what can be produced.
• Economic activity occurs when people and businesses make choices to maximize their prosperity using scarce resources.
• Example of economic activity: consumers earn income by working which enables companies to buy resources, make new products using labor, and sell them.
• Sub-disciplines, such as industry analysis and macroeconomics, analyze different aspects of economic activity.

Industry Analysis and Macroeconomics

• Industry analysis examines the characteristics of markets, including market research on supply and demand dynamics and who sells what at what price.
• An example would be a smartphone company analyzing competition in the market, including the price and quality of competitors' products.
• Macroeconomics focuses on economic activities at the national level, such as total consumption, imports, exports, investment, and government activity.
• How government spending affects the national economy is an example of a macroeconomic consideration.

Monetary and International Economics

• Monetary economics studies the role of money and banks.
• How interest rates influence lending and economic activity falls under monetary economics.
• For example, if a central bank raises interest rates, it becomes more expensive to borrow money, slowing down investments in businesses.
• International economics studies international trade (global trade rules), capital flows, and economic relations between countries.
• If Country A places tariffs on products from Country B, it affects trade between the two nations.

Other factors

• Possible causes of sales decline can include competition, increased production costs, economic downturns, and changes in customer behavior.
• Economics involves dealing with limited resources to maximize prosperity amidst scarcity.
• This can be addressed by analyzing the market, economy, and external factors to find solutions.

The Business Environment

• The business environment has external and internal factors that affect a company's results.
• The direct environment, which the company can control, includes suppliers and customers involves competition, which differs per sector.

Key Elements of a Business

• Key elements include raw material suppliers, capital, and labor.
• Distributors and customers are also key elements, and are like a supply chain.
• Help get the product to the final customers on the market.
• Competitors force a company to innovate and adjust prices.
• Market trends and shifts in consumer preferences shape a business's strategy. Businesses must decided whether to follow the trend or risk something new.

Indirect Environment

• The indirect environment includes external factors that a company can't control, such as government influence (rules and regulations relating to labor, laws, and the general environment), public opinion (reputation and customer loyalty), media influence (shaping public perception and affecting brand image), social environment (shifts towards sustainability), and technology.

Macroenvironment

• The macroenvironment is the broadest level of the business environment, characterized by global or national influences that companies cannot control, but have a major impact on businesses and countries.
• Key elements include the general economy (inflation, recession affecting consumer behavior), trade cycles, exchange rates, wage and energy prices, and interest rates.
• Direct environment: suppliers, customers, and competitors which companies can control.
• Indirect environment: government, media, and social attitudes which is uncontrollable.
• Macroenvironment: economic, technological, and demographic factors, which is an uncontrollable, big picture.

Country Selection

• Country selection for export markets must be flexible, allowing businesses to exit easily if conditions worsen. Alternatively, direct investment requires deeper analysis as companies are committed for the long term.
• Analyze risk and return.

Selection Criteria for Country Selection

• Expected return is measured by economic growth.
• Higher growth yields greater potential sales and profits.
• Expected risk is determined by social consensus, high consensus indicates stability and low risk, while low consensus suggests polarization and conflicts.

Method 1: Country Matrix

• Method 1 uses a country matrix with four categories based on economic growth and social consensus
• Optimal low risk, high returns; ex. Singapore
• Great potential. Significant risks due to instability; ex. Southeast Asian countries
• Stable market, limited growth potential; ex. Western EU countries
• High risk, low return Afghanistan, Africa

Method 2: Filter Method

• Alternative to country matrix method.

Filter Method Steps

• Start with 10 countries in region.
• Do pre-selection criteria apply?
• Macro criteria?
• Industrial and market criteria?
• Result yields 1 country remains as an attractive export market.

Filter method - Step 1 and 2

• Pre-selection criteria simply rule out a country based on factors that make exporting impractical, like factors that conflict with Islam and pork, or no connection to the internet.
• Macro criteria are impactful to the general economy of a country and include political, demographic, culture, legislation, and economic conditions.

Filter method - Step 3

• Industry and market criteria are impactful to the industry, depending on consumer market and/or product quality.
• Industry factors include: competition intensity and demand.
• Market factors include: demand, market size, and market growth.

Country Risk Factors

• Internal and external conflicts
• Size of foreign exchange reserves
• Stability of domestic economy
• Size and composition of foreign debt
• Balance of payments

Markets

• Markets are where goods and services are offered by sellers and bought by buyers.
• The main function of a market is to set prices.
• Equilibrium prices serves as important indicator for supply and demand.

Industries and Value Chains

• Industries are companies that make the same sort of product and belong to a business sector.
• Companies in the same industry are competitors and try to satisfy the same needs.
• Value chains are production stages and each step adds value to the product, from raw material to the final product, involving suppliers, manufacturers, retailers, and consumers.

Economic Order

• Economic order involves rules based on norms and institutions that guide how people (consumers) and companies do business.
• Values are things that people believe are important such as profit, equality, and freedom.
• Norms are rules based on those values.
• Institutions (organizations) enforce the rules and make sure people follow them.

Market Regulation

• The extent relates to market differ according to the extent that they are affected by price mechanisms.
• Regulations make sure products are safe to use.

Factors of Demand

• Demand is the collective demand of consumers and makes up price population.
• Consumer needs: basic needs or luxury can increase demand.
• Price of products: higher prices typically decrease demand, unless the product is a luxury or necessity.
• Price of other goods: Increase demand. Applies to products used together.
• Income and size of population: Higher income and population typically increase demand.

Price Elasticity and Demand

• The law of demand states that lower prices encourage buying more and higher prices encourage buying less.
• The price $ value is the price that consumers want to spend.
• Consumer compare the price to what they want to spend
• Inverse relationship between price and quantity demanded.

Price and Quantity

• Price goes up, people buy cheaper alternatives; 1. Substitution effect, 2. Income effect

Calculations

Graphs Related

• Graph for prices and quantity can tell you if people will buy at that price.

Price Elasticity in Detail

• Price elasticity is how quantity demand changes based on a factor divided by (relative change in price).
• Price:
• elasticity = Percentage change in quantity demand/Percentage change in price
• Cross price:
• = Income elasticity of demand, Income, and price.

More Factors

• Elastic demand occurs:When demand changes a lot (small change in price).
• Buyers do not buy products that are not needed.
• Inelastic demand occurs:When demand doesn't change much buyers must buy.

Price Elasticity of X

• If the demand is inelastic then prices can raise up but make money.
• Price increases by 1% and total revenue increased.

Market Graphs

• Impact change in product demand and value in production.
• Price turnover is described as the extent to which demand changes as a result of 1% price change.

Cross Price Elasticity

• The relative change in the quantity of good demand from a product

Product Graphs

• Demand:
• Subtitutes: price increase/ demand for item to buy increase.