Economics and Business Environment

• Study notes on economics and business environment

Introduction to Economics and Business Environment

• Microeconomics addresses how product prices are determined.
• Microeconomics addresses how firms decide on production methods
• Microeconomics addresses what factors influence the number of workers a firm hires
• Microeconomics studies how businesses finance operations and decisions to expand, downsize, or close
• Globalization is the increasing interconnectivity of businesses, organizations, and economies.
• Globalization allows organizations to take advantage of lower labor costs in developing countries
• Globalization also allows countries to leverage technical expertise from developed economies.
• Globalization may improve living standards
• Globalization raises concern about its impact on local economies
• Key questions to consider are the benefits and drawbacks of globalization
• Trade barriers may protect local workers and industries

Microeconomics – Factors, Frontiers, and Choices

• Labor represents human effort compensated through wages or salaries
• Capital includes physical assets like machinery and factories
• Natural Resources: Land and materials, categorized as renewable or non-renewable
• Entrepreneurship involves organizing resources and taking risks to create profitable businesses
• The Circular Flow Model describes the flow of money, goods, and services between households and firms
• Households provide labor and capital in return for income
• Businesses use these factors to produce goods and services, generating revenue
• Division of labor increases productivity as individuals focus on tasks they perform best
• Division of labor leads to economies of scale, reducing per-unit production costs
• The ILO defines labor as including both employed and unemployed working-age individuals
• The quality of labor depends on education, skills, and population demographics
• Financial Capital includes money, loans, and commodities used for production
• Physical Capital is broken up into:
  • Fixed Capital: Long-term assets such as machinery and buildings, subject to depreciation
  • Circulating Capital: Raw materials and energy used up in production

Microeconomics – Markets & Government

• Consumers aim to maximize utility within their budget limits
• Indifference Curves show different combinations of goods that yield the same satisfaction
• Elasticity of Demand measures how quantity demanded responds to changes in price, income, or availability of substitutes
• Cross Elasticity of Demand measures how the quantity demanded of one good changes when the price of another good changes
• Substitutes are goods with positive cross-elasticity (e.g., coffee and tea)
• Complements are goods with negative cross-elasticity (e.g., cars and gasoline)
• Equilibrium happens when supply meets demand, stabilizing prices
• Price Ceilings set a legal maximum price, often leading to shortages
• Price Floors set a legal minimum price, often leading to surpluses (e.g., minimum wage laws)
• Governments intervene to correct market failures, regulate monopolies, and provide public goods
• Externalities are negative (pollution) or positive (education) effects not reflected in market prices
• Subsidies encourage production or consumption of beneficial goods
• Taxes discourage harmful behaviors (e.g., carbon taxes)

Microeconomics – Market Structures & Firm Decision-Making

• Perfect Competition involves many firms, identical products, price-taking behavior
• Monopoly: One firm dominates, restricting competition
• Oligopoly: A few firms with market influence, may engage in collusion
• Monopolistic Competition: Many firms offering differentiated products
• Antitrust Laws prevent monopolistic practices and encourage competition
• Collusion and Cartels: Firms may cooperate to set prices, but this is illegal in many economies

Efficiency in Perfect Competition:

• Allocative Efficiency means resources are distributed according to consumer preferences
• Productive Efficiency means goods are produced at the lowest cost