Understanding Business & Economic Environment: Lecture 1

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Questions and Answers

What are the two types of environment of business?

Internal and external environment

Which of the following is the key assumption of traditional theories of the firm?

  • Firms trade-off different objectives.
  • Owners have different aims from shareholders.
  • Businesses make decisions based on a PEST analysis.
  • Production is organised through markets.
  • Firms seek to maximise profits. (correct)

Economists say that the main cause of the principal-agent problem is:

  • that principals are agents of other people.
  • the separation of ownership and control.
  • the different aims of principals and agents.
  • that agents know more than principals. (correct)
  • the conflict of interest between principals and agents.

The Structure → Conduct → Performance paradigm implies that business performance is strongly affected by the:

<p>degree of competition the firm faces. (B)</p> Signup and view all the answers

Which one of the following is a microeconomic issue?

<p>House prices rise more rapidly. (E)</p> Signup and view all the answers

Assume that a firm can produce 6 units of good X or 12 units of good Y per hour with its current resources. The opportunity cost of a unit of X is:

<p>2 units of Y (C)</p> Signup and view all the answers

Name four factors of production.

<p>Labour, Land, Capital, Entrepreneurship</p> Signup and view all the answers

Flashcards

Internal Environment

Factors within a company's control; affects operations and performance.

External Environment

External factors influencing business; beyond company control.

Aims and Objectives

Goals guiding a firm's actions and resource allocation.

Business Performance

The financial health and success of a business.

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PESTLE

Political, Economic, Social, Technological, Legal, Environmental factors.

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Sole Proprietor

Business owned and run by one person.

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Unlimited Liability

Debts and obligations that can extend to personal assets.

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Partnership

Business owned by two or more individuals.

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Limited Liability

Liability limited to investment in the company.

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Public Limited Company (PLC)

Company selling shares to the public.

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Private Limited Company (Ltd)

Company whose shares are not publicly traded.

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Consortia

Group of companies working together

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Co-operative

Business owned and controlled by its members.

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Goals of the Firm

A business's fundamental objectives.

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Profit Maximisation

Assumption that firms seek to make the most profit.

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Divorce of Ownership from Control

Separation of company ownership from management.

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Dividend

Payment made to shareholders from company profits.

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Principal-Agent Relationship

Owners(principal) delegate control to managers(agent).

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Asymmetric Information

An example of information asymmetry.

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Sustainability

Keeping a business running for long term.

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Structure-Conduct-Performance (SCP)

Market structure influences firm behavior, affecting performance.

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Microeconomics

Examining choice under scarcity.

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Opportunity Cost

The next best alternative foregone

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Marginal Costs and Benefits

Comparing additional costs to additional benefits.

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Scarcity

Limited availability of economic resources.

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Consumption

Activities using goods/services to fulfill needs/wants.

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Factors of Production

Inputs used in production.

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Labour

The labor required to produce goods and service

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Land

Raw materials needed to produce goods and service

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Capital

Goods used to produce other goods, not for consumption

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Study Notes

  • Lecture 1 introduces the Understanding the Business and Economic Environment (UBEE) course
  • The lecture focuses on the internal business environment

Business Organization

  • Businesses operate within internal and external environments.
  • The Internal Environment includes the aims and objectives of the business and overall business performance.
  • The External Environment takes into account PESTLE (Political, Economic, Social, Technological, Legal, and Environmental factors).
  • External factors include uncertainty, inflation, growth, and new governmental policies.
  • The sole proprietorship has limited scope for expansion and unlimited personal liability.
  • Partnerships can be either limited or unlimited liability.
  • Partnerships have the advantage of spreading risk.
  • Companies offer limited liability, which enables them to take risks.
  • Public limited companies (plc) can issue shares to the public and trade them on the stock exchange.
  • Companies can also be private limited companies (Ltd).
  • Consortia are different business groupings working together.
  • Public corporations and co-operatives, including consumer and producer co-operatives like the John Lewis Partnership, also exist.

The Aims of the Firm

  • Goals of the firm are important.
  • Traditional theory assumes profit maximization.
  • Alternative theories consider the divorce of ownership from control
  • Managerial objectives may differ from owner's objectives.
  • Development of the joint-stock company raises questions about dividends.
  • Managerial objectives include stability, cost management, and share price.

The Principal-Agent Relationship

  • The Principal (owner) - Agent (manager) problem involves asymmetric information
  • Asymmetric information involves dealing with imperfect information.
  • Monitoring and reporting back are crucial.
  • Incentives, like bonuses for reaching profit targets, are used.
  • Staying in business is a key goal
  • Willingness of firms to take risks is important for sustained success.
  • Problems arise from being overly cautious because firms must innovate, make new products, and then launch them

Determinants of Business Performance

  • The structure-conduct-performance framework defines the relationship
  • Business structure and conduct (behavior) are related.
  • Competitive markets foster competitive behavior.
  • Limited competition can lead to collusion.
  • Consumer tastes and technology significantly impact performance.
  • The relationship between business conduct and business performance is key.
  • Indicators for measuring performance include profitability, market share, and growth.

The Economist's Approach to Business

  • Microeconomics relates to choice, addressing what to produce, how to produce, and for whom.
  • Choice and opportunity cost are crucial concepts.
  • Opportunity cost represents the forgone opportunity.
  • Rational choices involve assessing costs and benefits.
  • Marginal costs and benefits are considered.
  • Microeconomic choices impact firms.
  • Tackling scarcity needs an understanding that scarcity is an issue "to some extent".
  • Production and consumption and the role of the business economist are essential.
  • Business economists study consumer behavior and firms.
  • Factors of production include labor, land and raw materials, capital, and entrepreneurship.
  • Demand and supply involve actual and potential aspects.
  • Firms play a role in satisfying demand.
  • Business economists study the supply process.
  • Macroeconomics and microeconomics are distinct, micro looks and products, and macro looks at aggregate supply and demand

Key Terms

  • Internal environment of a business.
  • External environment of a business.
  • Aims of modern firms.
  • Structure – Conduct – Performance.
  • Scarcity and choice.
  • Factors of production.
  • Opportunity cost.
  • Topics in Microeconomics
  • Topics in Macroeconomics

Next Lecture

  • PESTLE

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Business Economics: Understanding the Business Environment - Lecture 1, PDF

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