Lecture 1 and 2 Introduction to Business Economics PDF

AF1IBE Introduction to Business Economics Dr Jacob Faculty of Transport & Logistics Module Specification The aim of this module is to provide a rigorous introduction to the principles of business economics and their application under a variety of different contexts. S...

AF1IBE Introduction to Business Economics Dr Jacob Faculty of Transport & Logistics Module Specification The aim of this module is to provide a rigorous introduction to the principles of business economics and their application under a variety of different contexts. Students will study a number of core theoretical models used in Microeconomics and Macroeconomics to allow them to be able to analyze real world markets and the impact of economic policy on firms, households and the economy in general. This will equip students with a thorough understanding of the economic environment and how it impacts upon business. Module Learning Outcomes Please read the module learning outcomes on the module outline. The outcomes are aligned to the end of year assessment. (1) Outline economic concepts, relationships and economic policy options and explain how and why they are important to the business environment. (2) Explain why economists use economic models and apply them to various economic contexts at the micro and macro level. (3) Describe and analyse economic data and how it relates to economic theory. (4) Critically evaluate the implications of economic policy options on households firms and the general economic environment.  CLO s At the end of the course you would be able to: (1)Define the basic economic concepts and relationships. (2) Describe and analyse the impact of economic policies on the economic environment. General information Delivery: 2 hours lecture and 1 hour seminar Lectures are split into micro and macro economics. Assessment Overview *In-term examination (Two test) (40%) *Final examination (60%) Resourc es  By the end of the lecture You should be able to: Define economics and differentiate between micro and macro economics. Explain the different economic systems. Differentiate between normative and positive economics. Think like an economist (scarcity, cost-benefit analysis, opportunity cost, production possibility frontier). Lecture framework What is Economics? Thinking like an economist. 8 What is Economics? The word economy comes from the Greek word for “one who manages a household.” What households Economics can be defined as, “the study of choice.” and economies have 9 What is Economics What causes the prices of some goods to fall while others rise!  What is Economics? What causes the prices of some goods to fall while others to rise! What is Economics? "... the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." (Lionel Robbins 1932) Economics addresses problems of resource allocation It is the study of how society decides: What goods and services to make How to produce these goods and services How to share the goods and services What is Economics? Overall, Economics is the study of how society manages its limited resources to satisfy the unlimited wants and needs Why do we need to manage these resources?? 13 What is Economics? Economics include the study of Microeconomics and Macroeconomics. Microeconomics examines how individual consumers and firms make decisions and how the interaction of many individual decisions affects markets. Macroeconomics is the study of the performance of national economics and of the policies that governments use to try to 14 Microeconomics & Macroeconomics Microeconomics: The branch of economics that analyses the market behaviour of individual consumers and firms in an attempt to understand the decision-making process of firms and households. Macroeconomics The field of economics that studies the behaviour of the aggregate economy. What concepts might you encounter in both?  Resources allocation Economic systems can be viewed as: Command/Centrally planned economy: the government makes all the pricing and allocation decisions. Market/ Laissez-fair economy: Prices and allocation decisions are determined by the market forces. How would you characterize USA and the UK? What about China and North Korea? What about the Omani economy? Resources allocation  Resources allocation In reality, most economies are not either or! Mixed economy: An economy that uses both market and non- market signals in allocating goods and resources.  How to study economy? Positive versus normative economy Positive economic statements are descriptive statements. They are attempts to describe the world as it is. We can confirm it or refute it by evidence Normative economic statements are attempts to prescribe how the world should be. Examining it involves values as well as facts When economists make normative statements, they act more as policy advisors than as scientists.  What do Economists do? Academics (such as Dr. Jacob): Write papers, books, blogs explaining economic phenomenon. Government: Operate in the main departments of State by evaluating or designing policy. Financial Services Industry: Provide economic analysis to advise clients or construct forecasts. A Major Impact? Or irrelevant? “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” (Keynes, last paragraph of the General Theory) “Why did nobody notice it?” (HM The Queen in reference to the Financial Crisis)  Thinking like an economist List 3 things you would like to buy. Why have you not bought these things so far?  Thinking like an economist Instead of attending this lecture, what would you rather be doing?  Thinking like an economist What is the full cost of you attending university? Why do you think top athletes prefer to pursue their professional career rather than their higher education?  Thinking like an economist Why do you think top athletes prefer to pursue their professional career rather than their higher education?  Thinking like an economist When was the last time you had a free lunch? Was it totally free? Thinking like an economist  Thinking like an economist The Scarcity principle: Having more of one thing means having less of another thing. This is also known as “the no-free-lunch" theory Is everything surrounding us subject to the scarcity principle? What would happen to Oman's efforts in diversifying its economy if oil prices went up? 27 Thinking like an economist Not all goods confront us with such choices, some goods are free goods. A free good is one for which the choice of one use does not require that we give up another. Can you think of examples? 28 Thinking like an economist All else being equal, which class would you prefer to be in? What is the perfect class size? Would the answer be the same if a professor is replying as if an economist is replying? 3 1  Thinking like an economist Economists use a cost- benefit analysis to resolve such trade- offs. Cost-benefit analysis: A decision is only taken if the benefit exceeds its costs. 30 Case in point: Bill Gates Bill Gates is one of the richest men on Earth. His wealth is estimated at over $100 billion, more than the combined wealth of the poorest 40% of Americans. Gates can buy more houses without having to cut his expenses on other things. Does he face a scarcity and trade-offs in his life? 31 Thinking like an economist How easy is applying the cost-benefit analysis? Would you walk downtown (30 minutes) to save OMR10 on a OMR25 computer game? 32 Thinking like an economist The real difficulty in applying the cost benefit rule is to come up with reasonable measures of the relevant benefits and costs. Only in rare instances will exact dollar measures be conveniently available. 33  Thinking like an economist What are the costs and benefits of the options in the past example? Walking downtown (30 minutes) to save OMR10 on a OMR25 computer game. 34 Thinking like an economist The benefit is clear (saving $10), the cost however is not clear! Suppose your cost of making the trip is $13, in that case, you buy the game from the nearby campus store. What if the cost is $8? Suppose you are watching one of your favorite movies on cable, or that you are tired and would love a short nap, 35 would you still make the trip? Thinking like an economist You are facing a tradeoff. The choice is between a cheaper game and the free time gained by avoiding the trip. In such cases, we say that the opportunity cost of making the trip is high and you are more likely to decide against making the trip. 36 Thinking like an economist Opportunity cost: is the value of what you must sacrifice when choosing an action/option. The forgone benefits that you would have had by an option that you did not choose. 37 Thinking like an economist All costs—both implicit and explicit—are opportunity costs. 38  The production possibility frontier A production possibility frontier (PPF) shows the maximum possible output combinations of two goods or services an economy can achieve when all resources (Land, Labour & Capital) are fully and efficiently employed. Choosing to produce more of one good involves producing less of the other good (opportunity cost). The production possibility frontier Points B, D, and C are efficient. Point X is not attainable given the available resources. Point A is inefficient (I could be better off as some resources are not used). We learnt today Be ready for the tutorial Session Are the following questions usually regarded as microeconomics or macroeconomics? 1. Why do tickets to the best concerts cost so much? 2. How does the threat of global warming affect real estate prices in coastal areas? 3. Why the general level of prices is higher? 4. Is the total level of economic activity rising or falling? 5. Is the rate of inflation increasing or decreasing? 6. Why is the firm not able to break even? 7. What is happening to the unemployment rate? 42 Reflect A free-market system is: A. A system where the government makes the planning decisions but not the pricing ones. B. An economy where the pricing and allocation decisions are totally decided by the market. C. A centrally planned system. D. A system where the government makes all the major decisions. Reflect Are the following statements positive or normative statements? A. The price of tobacco should be increased in order to decrease the demand for it. B. If we increase the prices of tobacco, the demand for it will decrease. Reflect Are the following statements positive or normative statements? A. Minimum wage laws cause unemployment. B. The government should raise the minimum wage.