Business Economics PDF

Business Economics What is Economics? The study of how we manage resources that are limited. Resources are limited so we need to decide how we will use them. Scarcity implies choices. How enterprises decide to use the resources to respond to their own wants as well as the customers. The gov are inv...

Business Economics What is Economics? The study of how we manage resources that are limited. Resources are limited so we need to decide how we will use them. Scarcity implies choices. How enterprises decide to use the resources to respond to their own wants as well as the customers. The gov are involved in our economy and provide an economic set up with a different interest. Limited resources = scarcity but limited wants. So, we must make choices which implies: how do we produce, what should we produce, how should we distribute it We are facing an opportunity cost and we end up with a system of resource allocaCon = we must decide collecCvely and individually how we are going to distribute the different resources. 3 potenCal choices: State that decides = centrally planned Market economy/ mixed economy = private agents are interacted Free market We must find a way to distribute resources. We will look at how business make decisions about it. Economics is the study of how society manages its scarce resources. Scarcity is the limited nature of society’s resources. Why we should think about it? It quesCons the resource allocaCon and then implies compeCng choices (trade-offs) Businesses (or firms) allocate scarce resources among compeCng uses, considering a range of stakeholder wants and needs. Governments get involved and most economies are a mix of private and public ownership. Key concepts in Economics People make decisions. Recall that the economy is the collecCve interacCon between producers and consumers making and carrying out decisions. Economy: collecCve interacCons btw different producers and consumers that are parCcipaCng in deciding how to allocate resources. Our economy will be the sum of all those interacCons. Decision making involves trade-offs. GeVng the most from scarce resources means facing different trade- offs. Woods and workers: they have a given number of chairs and tables they can produce. We can draw the producCon possibility curve. It gives all the combinaCons to produce a given number of chairs and tables using efficiently the resources. You can choose any point on the line. The main point is that whether the firm is in point A or B on the curve, the firm is making a trade-off = uses its resources to produce either more tables than chairs or more chairs than tables. The firm is facing a trade-off: the use of its resources = decision making. The cost of something is what you give up geVng it. Opportunity cost concept. Opportunity cost is implied in all our decisions: what you need to give up in order to have or to do something (we are watching him, we are invesCng in our educaCon in order to improve our wellbeing and get beZer job opportuniCes, but we give up on other potenCal acCviCes (working and gaining money) = it is our opportunity cost).  Economic agents respond to incenCves. Cost-benefit analysis to maximise uClity (benefit). E.g. if price of a good goes up consumers buy less. The choices will depend on the incenCve (= difference btw cost and benefits) firms have. They can be related to opCmising each agent uClity = firms/individuals/gov are trying to maximize they uClity. They will be facing an environment where there are incenCves. The trade-off will be btw what it will cost them and their benefits. Economic agents respond to incenCves, which can allocate scarce resources to provide the highest uClity to each agent. For the entrepreneur in a firm, the incenCve for taking risks is profit. (Car owners purchase more gasoline from a gas staCon that sells gasoline at a lower price than other rival gas staCons in the area, banks do not take steps to increase security since they believe it is less costly to allow some bank robberies than to install expensive security monitoring equipment, and firms produce more of a parCcular DVD when its selling price rises. These agents are all choosing the opCon that they think will cost them the least in the long run.) What is Business Economics? Business decisions are made by being informed of the models and tools of economics. Their decisions also help explain these models. Business acCvity (=producCon) is the transformaCon of inputs (labour, capital, land…) into a product or service sold to customers. Business acCvity = producCon = transformaCon process of some inputs into a product or service sold to the customers. Aim is o`en to make profit. It is carried out by organizaCons that have aims. For a private organizaCon, a main aim is to make a profit. Classifying Business… Through an organizaCon’s ownership and its primary aim: Private sector business: Profit. Public sector organizaCon: Perhaps to maximize opportuniCes to access products and services like roads, educaCon and health care. Third sector organizaCon: To meet the needs of its beneficiaries. Business Decision Making Businesses make every day running decisions and longer-term decisions to improve efficiency. Short-term decisions: ordering stock, interacCng with customers Longer term decisions: involve how to add value to their products or services by recruitment and investment. Also adjust to compeCCon. What is Business? Businesses buy factor inputs (natural resources, labour and capital (and, intermediate inputs) => They process inputs into outputs which are then sold: To consumers: Business to consumer (B2C) To other businesses: Business to business (B2B) From consumer to consumer via aucCon sites (C2C) (Amazon) => GeneraCng revenue which is used to help pay for the costs of acquiring factor inputs. The Factors of ProducCon Natural Resources (or “Land”): All the natural resources of the planet. Labour: All human effort whether mental or physical. Capital: Any item used in producCon for its contribuCon to producCon and output. Intermediate inputs: goods/services (including raw and natural resources) used to produce other goods or services (rather than for final consumpCon). Intermediate inputs are consumed in the making of the final  good while Capital goods are not consumed, they are not destroyed and can be used again for another final good. A firm or enterprise decides to take a risk in organising the factors of producCon to generate business acCvity. The TransformaCon Process Added value: The difference between the cost of the factor inputs into producCon and the amount consumers are prepared to pay. Added value = the cost of the producCon that we put into the inputs taken out of the final value of the product. The price consumers are willing to pay represents the value placed on a product. Firms add value in different ways: product design, customer service, etc. Firms can add value to the product all along the producCon of it in many ways and will make profit out of it. Internal Process, External Environment Firms have some control over the internal process – they can decide what factor inputs to buy and how to process them. But – businesses are affected by their external environment represented by the acronym PESTLE: PoliCcal, Economic, Social, Technological, Legal, Environmental. Will influence the transformaCon process The PESTLE Framework: PoliCcal PoliCcal power by local governments, naConal governments and supernaConal governments (urban plan, taxes, planning permission (local), minimum wage level (naConal), European regulaCons on the quality and safety of products (EU)). Economic policies => The nature of the poliCcal power is subject to change so is its impact on business. The PESTLE Framework: Economic Local, regional, naConal and internaConal economies. FluctuaCons in economic acCvity according to demand and other external influences (cycles, wars, weather…) Microeconomic environment: Factors and issues that affect an individual firm operaCng in a parCcular market or industry. (cycles: tomatoes only in summer) Macroeconomic environment: The naConal or global economy within which the business operates. The PESTLE Framework: Social Trends and fashions in society and business (e.g. green issues). Changes in the age distribuCon, tastes, sociological composiCon, etc. changes opportuniCes for business acCvity. Culture and religion and changing aVtudes to the environment for ex. can influence demand and ways of working. The growth of social networks with viral messaging offers business both opportuniCes and threats. The PESTLE Framework: Technological Technology: The applicaCon or use of knowledge in some way, which enables individuals or businesses to have greater control over their environment. There has been an explosion in technological developments providing both opportuniCes and threats to business. The PESTLE Framework: Legal Local, naConal and supranaConal legal framework associated with good governance can be perceived by firms as a cost (legal framework can increase costs for compliance) or as a benefit (confidence in support of legal process, freedom in running business acCvity). The PESTLE Framework: Environmental Economic growth and therefore business acCvity have a central impact on the environment, on ecosystems, on climate change and on global warming. But also, on resource endowments (non-renewable resources). => Businesses need to look at their impact on the environment. What is an (economic) model? We will be using different models and theories to explain decision making. The reality is very complex so we will set up simplified versions to illustrate it. You would say it is a house. However, this is very far away from a real house, it is a very simplified version of a house, it is a framework. We could call that a theoreCcal version of a house = to make a point, to explain something simply. Market Forces of Supply and Demand Supply and demand are the forces that make market economies work. Supply and demand determine the quan'ty of each good produced and the price at which it is sold. Price is the amount of money a buyer (a business or a consumer) must give up in order to acquire something. Price is different from cost. Cost refers to the payment to factor inputs in producCon. The supplying demand will determine the quanCty of good are going to be produced and at what price. In a market set up, price provides the opportunity cost of smgt. Price is not cost; they are not equal. (Main) AssumpCons of the Model of Supply and Demand Many buyers and sellers. Homogenous goods. Perfect informaCon. Freedom of entry and exit. Buyers and sellers are clearly defined. Clearly defined and enforced property rights. Zero transacCon costs. RaConal behaviour. Too much diversity in the way buyers and sellers interact to define every market. Given a set of assumpCon, we are in a compeCCve market model: 1. we are in a market with many buyers and sellers, they are plenty enough that they cannot individually influence the market price. 2. All suppliers produce and sell similar characterisCc goods. 3. Both have all the info they need to make the exchange and at no cost. 4. Buyers and sellers have no cost before making a transacCon or a`er = no fixed cost to pay to enter a market or else they are not prohibited enough to prevent firms from entering the market. We can just produce sometg and sell it. Fixed costs are not high enough, firms can enter market. 5. We can disCnguish buyers from sellers (in the stock market we cannot see demand and supply clearly). 6. Fees to have access to some inputs/ electricity some will have to pay other not = need to avoid that. 7. Cost to pay to make an exchange = no extra cost to make a transacCon. No need to change currency = otherwise would be an extra transacCon cost. 8. People try to make the best choices for them, what is raConal = they should follow that. People try to maximize their well-being under the constraint of a limited wage for example. Will expect people to buy the cheapest good. PredicCons can be rejected in a situaCon where we don’t meet the assumpCons: different mechanism than those defining the model = cannot encompass all the situaCons, models. PredicCons/implicaCons based on this model will be accurate enough even if the assumpCons are not quite saCsfied = liked by the economists. We will see how different assumpCon will influence our understanding of business environment and what they should do. Markets and CompeCCon There are different types of market and compeCCon So far, we will be focusing on one specific “type”: Perfectly compe''ve market We will need the supply and demand model to analyse one market model. What is a market? Markets exist in many forms. Market have buyers and sellers. Buyers and sellers don’t have to meet to make a deal. A compe''ve market has many buyers and sellers; none has a significant impact on determining the market price. The way to describe it: situaCon when they come together to make an exchange BS. Car industry in France or car market in general will be different. Market doesn’t have to be in one locaCon. CompeCCon: Perfect & Otherwise (Main) CharacterisCcs of a perfectly compeCCve market: 1. Homogenous goods: Goods offered are all the same. 2. Price takers: Numerous buyers and sellers, each unable to influence prices. Consequence of 1 & 2: no individual buyer/seller has “market power”: cannot influence market price If 1 and 2 are not met, then the market is not perfectly compeCCve. CompeCCon: Perfect & Otherwise Market structures depend on the market power of sellers or buyers. =economic agents involved Other (main) market structures: Oligopoly: A few sellers not always aggressively compeCng with each other. Will have market power. Imperfect or monopolis'c market: Many sellers each offering a slightly different product. Many buyers and sellers, car industry: all cars are similar but not exactly same, have different characterisCcs. Monopoly/Monopsony: One supplier or buyer. Many buyers are facing one supplier or vice versa. (Not perfectly compeCCve market cases should be covered later) Market power = you can influence the price market. Supply: RelaConship b/n Price and QuanCty Supplied The quanCty supplied is the amount that sellers are willing and able to sell. Law of supply. When the price of a good: Rises, the quanCty producers are willing to supply also rises. Falls, the quanCty supplied falls as well. 1, rela'vely inelas'c when