The economics of Business and Society .pdf

Intro to Economics What is Economics? Economics are decisions that ve people make every day that makes us interact with others (government, Business and organizations). A big part of Economics are, Labour, Land and capital (Physical things not money). To understand Economics we use two important co...

Intro to Economics What is Economics? Economics are decisions that ve people make every day that makes us interact with others (government, Business and organizations). A big part of Economics are, Labour, Land and capital (Physical things not money). To understand Economics we use two important concepts, Household and firm. Households are the individuals for example my family that lives under one roof is one household. Firme is the word that describes the organization that buys factors and uses them to create a product or service. The amount of buying and selling that takes place represent the level of economic activity. It is the household and the firms that exchange things with each other over different geographic areas that together creates the economic system. The Economic Problem In our economy we need to face three questions first, what goods and services should be produced? Secondly, how should these goods and services be produced? And lastly, who should get the goods and services that have been produced?. To answer these questions we need to look at the disposal which are classified as land, Labour and Capital. Land is the natural resources that we can take from the earth. This can be minerals such as iron, gold, oil and gas. ect. Labour in this case is the human effort (both mental and physical) that goes into the production. For example a worker in a factory who produces tools, or an investment bank, a teacher, an unpaid carer ect. These are all in the concept of Labour. capital means the equipment and structure that are used to produce a product and services. Capital goods include machinery in factories, buildings, and cooking ovens. capital is anything where the good is not used for its own sake but for the contribution it makes to production. But it is important to know that the answer to the questions can be different depending on which flavor you use for example: 1. Keynesian economics 2. Neoclassical economics 3. Behavioral economics 4. ‘Heterodox’ economics (political, feminist, marxist ect.) Scarcity and choice We often assume that the resources that the earth has given us are unlimited but that's wrong. Resources have a limit and it doesn't matter if it is about time, money or Labour. The household can not meet all the needs (the things that we need to survive as a human like food, water, clothing) and wants (the things we don’t necessary need bet we want to have them, it makes our life more enjoyable and comfortable, like a smartphone, activities like football, ect.) However, we have limited resources which leads to us being unable to produce all the goods and services that the household demands, and this is called Scarcity (The limited nature of society’s resources). The household cannot give every member the things they want because of this limited recourse and the same goes to the society, they cannot give every individual the highest standard of living. And this creates tension between our wants and needs and scarcity decisions must be made by the household and firms on how to allocate our income and resources to meet the wants and the needs in the household or the firm. Definition There is two different definition that describes the concept “economics” 1. ‘Economics is the study of how society makes choices in managing its scarce resources and the consequences of this decision-making.” 2. Economics is the science that studies the choices that individuals, Business make as they cope with scarcity and the incentives that influence those choices.” How people makes decisions Decisions can happen on different levels like Microeconomics that focus on the study of individual decision makers making decisions or it can happen on a bigger level like macroeconomics that focus on the study of larger groups of decision makers for example counties. But unfortunately the different decisions will lead to disagreements that we call Trade-off (the loss of the benefits from a decision to forego or sacrifice one option, balance against the benefit incurred from the choice made). When we are about to make a decision we need to consider what the benefits are from choosing one course of action. to get one thing we like usually means we need to give up another thing that we might also like. and therefore decision making requires trading of the benefit of one action against the other alternative. Political Economy Generalisations Have a more focus on a group level rather than the individual and we can take help of the 4 c’s 1. Context - tells us how economic action incurse/interact 2. Collective behavior - actions resulting from group influence or membership 3. Conflicting interest - Group goals where one group will gain something and the other will lose. 4. Change - instability created by conflicting interests. Summary of chapter 1 Key issues arising in individual decision - making are that people face trade-offs among alternative goals, that the cost of any action is measured in terms of foregone opportunities, that rational people make decisions by comparing marginal cost and marginal benefit, and that people change their behavior in response to the incentives they face. When economic agents interact with each other, the resulting trade can be mutually beneficial. In capitalist economic system, the market mechanism is the primary way in which the questions of what to produce, how to produce and who should get the resulting output are answered. Markets do not always give outcomes that are efficient or equitable. In such circumstances, governments can potentially improve market outcomes. The field of economics is divided into two subfields: microeconomics and macroeconomics. Microeconomists study decision-making by households and firms and the interaction among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole. The fundamental lesson about the economy as a whole are that productivity is a key source of living standards and that money growth can be a primary source of inflation. Production possibilities and opportunity cost Everyday factories produce products and services in the EU that are valued at up to 12 billion euro. But as everything else the service and product are limited, we cannot produce everything as we said earlier, sometimes we need to choose the next best alternative and give up the other. This is called opportunity cost. In the market the companies make decisions everyday on which product to increase and which they need to decrease in order to get a higher value. This is called Trade-off, when you increase one product and need to decrease another. To understand this easier we take help of the Production possibilities frontier (ppf) that is a boundary between the things that can be produced at the things that cannot. To give an example we will look at pizza and cola: The table lists some possible combinations that can be produced between pizzas and colas. The ppf illustrates Scarcity because the points outside the frontier are unattainable. Which means that you cannot produce 5 million pizzas and 15 million colas. But, you can produce everything that goes inside the ppf model because that is attainable. For example you can produce 5 million cols and 4 millions pizzas. This shows clearly that you need the opportunity cost to decide what has more value and what can we reduce in the production.  ‘1 Possibility Pizzas (millions) Cola (millions) A 0 15 B 1 14 C 2 12 D 3 9 E 4 5 F 5 0 Production efficiency We can achieve Production efficiency when we produce goods and services at the lowest cost. this will occur at all points on the ppf. If the point is inside the ppf the production is inefficient because we then are giving up more than we need to. For example at point Z, we produce 3 million pizzas and 5 million colas but we have enough resources to produce 3 million pizzas and 9 million colas which means that we are giving up 4 million cans of colas. we get the lower cost if we produce more colas because of the cost of the pizzas that costs more than producing colas. resources are unused when we don’t use the production efficiency which will lead to some of the factories machines going idle or some workers unemployed. Trade-off along the PPF We discussed that trade-off was when you choose between the two best things and you needed to give up one of those, and every choice along the PPF involved a trade-off because you need to choose one of the two things. At any given time we have a fixed amount of labour, land and capital. Of Course you can employ these resources to produce more but, we are still limited in what we can produce. For example when doctors say that we need to put more time on AIDS and cancer they do a trade off: they trade one medical research for less of something else. or when you want a higher mark on the next exam you do a trade off, where you choose to study more instead of sleep or leisure. All trade-offs involve a cost - an opportunity cost. Opportunity cost The opportunity cost is an action of the highest-valued alternative forgone. The importance is that there are only two goods and you need to choose one of the two goods. and this can be helpt with PPF that shows us what we can do to not give up resources. For example if we look at the pizzas, we produce an additional 1 million pizzas but that means that we need to reduce the production of cola cans by 3 million. The additional 1 million pizzas cost 3 million colas or 1 pizza cost 3 cans of cola. Opportunity cost is a ratio it is the decrease in the quantity production of one good divided by the increase in the qyúantety produced by the other good. for example if we take the pizza and cola production we can see that if we go frpóm c to D, the opportunity cost of the pizza will be 3 cans of colas, but if we do the opposite and go from D to C the opportunity cost of a can of cola must be ⅓ of a pizza. So, the opportunity cost of producing an additional cola is equal to the inverse of the opportunity cost of producing an additional pizza The theory of competitive markets The market forces of supply and demand Economics has many models to explain the world. One of the models has been criticized for its assumptions. because we need to make assumptions to be able to simplify the world into the model but the assumption is not reality so it gets difficult to put it in the real world. but the most important thing is supply and demand. That's what it is about, how sellers and buyers interact with each other. To prove a point the model should only be used as a framework to the world. The assumptions of the competitive market model we use the concept of supply and demand when want to reform to the behavior of people when they interact with each other on the market, (sellers and buyers) and if we are going to explain the concept of market we would say that it is a place where a group of people meet to exchange things with one another. For example, Amazon is one market because you have one person that wants to sell their product and you have multiple buyers that want to buy the product. but it can also be a physical store like ICA where buyers and sellers meet to interact. and in this we use to call the buyers as a group determines the demand (demand for a product). and the sellers determine the supplies (those people manufacture the product). Some argue that the market model represents a neoclassical (critical thinking) explanation. This was developed in the nineteenth century and follows from the world of Adam Smith. One of the most important things of the market model is that, “if the assumption holds, the resulting allocation will be efficient.” This means that the price the buyer is willing to pay for the product is a reflection of the value.and that the price to produce the product is a reflection of the cost and the profit the seller gets from selling the product. The competitive model of supply and demand is based of following assumptions: 1. There are many buyers and sellers in the market. 2. no individual buyer and seller is big enough or has the power to be able to influence price. 3. there is freedom of entry into and exit from the market 4. Goods produced are homogenous (identical) 5. Buyers and sellers act independently and only consider their own position in marketing decisions. 6. There are clearly defined property rights, Which means that producers and consumers consider all cost and benefit when making decision. Competitive market The definition of Competitive markets is that “a market in which there are many buyers and sellers so that each has a negligible impact on the market price” but it only exists if there are two or more firms that are rivals. We need to have competition in the market so that firms now have the ability to control the whole market. (when there is only one firm that can control it is called monopol. for example the Swedish Systembolaget). The meaning with the Competitive market is that the seller shall not determine the price of the product. the hole meaning is that the market determines the price that they are willing to pay, this only works if here are more companies that has the same product. Demand Example quiz 1 1. B 2. A, Answer is B 3. A, answer is D 4. C 5. D, Answer is c 6. D answer is a 7. D answer is b 8. D answer is b 9. A 10. D Du behöver träna på Opportunity cost och hur man ser på diagram samt hur man räknar ut trade-off Here are some flervalsfrågor (multiple-choice questions) based on the provided text about economics: 1. What is the primary focus of economics according to the text? A) The study of money and banking B) The decisions people make in managing scarce resources C) The history of economic thought D) The laws of supply and demand **Correct answer:** B) The decisions people make in managing scarce resources 2. Which of the following is NOT one of the three factors of production mentioned? A) Land B) Labour C) Money D) Capital **Correct answer:** C) Money 3. What does the term "scarcity" refer to in economics? A) The abundance of resources B) The limited nature of society’s resources C) The need for government intervention D) The surplus of goods in the market **Correct answer:** B) The limited nature of society’s resources 4. What is an opportunity cost? A) The total cost of production B) The cost of the next best alternative forgone C) The price of a product in a competitive market D) The benefit received from a decision **Correct answer:** B) The cost of the next best alternative forgone 5. According to the text, what is the Production Possibilities Frontier (PPF)? A) A model representing maximum production efficiency B) A representation of market prices C) A method to calculate government expenditure D) A model for analyzing demand curves **Correct answer:** A) A model representing maximum production efficiency 6. Which economic theory focuses on the behavior of individual decision makers? A) Macroeconomics B) Microeconomics C) Behavioral economics D) Political economy **Correct answer:** B) Microeconomics 7. What are the 4 C's in political economy generalizations? A) Context, Competition, Capital, Cost B) Context, Collective behavior, Conflicting interest, Change C) Choice, Control, Collective, Change D) Context, Capital, Consumption, Conflict **Correct answer:** B) Context, Collective behavior, Conflicting interest, Change 8. In a competitive market, what ensures that no individual buyer or seller can influence the market price? A) Government regulation B) The presence of many buyers and sellers C) Homogeneous goods D) Fixed prices **Correct answer:** B) The presence of many buyers and sellers 9. What is a trade-off in economic decision-making? A) The benefit of producing one good over another B) The cost associated with the highest-valued alternative forgone C) The equal distribution of resources among individuals D) The increase in market prices **Correct answer:** B) The cost associated with the highest-valued alternative forgone 10. Which statement best describes the market mechanism in a capitalist economy? A) It is solely determined by government policies. B) It relies on individual decisions of buyers and sellers to allocate resources. C) It guarantees equal distribution of wealth. D) It focuses exclusively on the production of goods. **Correct answer:** B) It relies on individual decisions of buyers and sellers to allocate resources. 1. What does the term "opportunity cost" describe? A) The total cost of production B) The cost of the next best alternative forgone C) The difference between revenue and costs D) The cost of hiring labor **Correct answer:** B) The cost of the next best alternative forgone 2. How can the concept of "trade-off" be illustrated in a Production Possibilities Frontier (PPF) diagram? A) By showing a straight line B) By showing points outside the curve C) By showing how the production of one good decreases as the production of another increases D) By showing all possible production levels **Correct answer:** C) By showing how the production of one good decreases as the production of another increases 3. If a company increases the production of pizzas by 1 million and must decrease the production of cola by 3 million, what is the opportunity cost in this case? A) 1 million colas B) 3 million colas C) 1/3 of a pizza D) 3/1 of a pizza **Correct answer:** B) 3 million colas 4. Which point on a PPF represents production inefficiency? A) A point on the curve B) A point inside the curve C) A point outside the curve D) A point where resources are fully utilized **Correct answer:** B) A point inside the curve 5. What does it mean if a point lies outside the Production Possibilities Frontier (PPF)? A) The production is efficient B) It is an unattainable level of production with current resources C) It represents an optimal allocation of resources D) It is a theoretical model without practical significance **Correct answer:** B) It is an unattainable level of production with current resources 6. How do you calculate trade-off in a Production Possibilities diagram? A) By summing all costs of production B) By comparing marginal costs and marginal benefits C) By dividing the decrease in production of one good by the increase of another D) By adding the total resources **Correct answer:** C) By dividing the decrease in production of one good by the increase of another 7. If you have a PPF showing the production of two goods, how does an increase in resources (e.g., labor) affect the PPF? A) The PPF shifts inward B) The PPF shifts outward C) The PPF remains unchanged D) The PPF becomes steeper **Correct answer:** B) The PPF shifts outward 8. Which of the following situations represents a trade-off? A) Increasing the production of one good without affecting the other B) Reducing resources for one production to increase another C) Distributing resources evenly among all productions D) Investing in new technology **Correct answer:** B) Reducing resources for one production to increase another 14/18 = 77,77% 1. How does the concept of scarcity influence decision-making in households and firms according to the text? A) It allows for unlimited consumption of goods. B) It forces households and firms to prioritize needs over wants. C) It eliminates the need for trade-offs. D) It has no effect on economic decision-making. **Correct answer:** B) It forces households and firms to prioritize needs over wants. 2. In the context of the PPF, what does an outward shift indicate about the economy? A) Increased inefficiency in resource allocation. B) A reduction in production capabilities. C) An improvement in resource utilization and productivity. D) A decline in the standard of living. **Correct answer:** C) An improvement in resource utilization and productivity. 3. Which of the following statements best captures the essence of trade-offs in the economic decision-making process? A) Every decision involves sacrificing some level of utility for another. B) Trade-offs only occur in market economies, not in planned economies. C) Trade-offs can be ignored when resources are abundant. D) All trade-offs result in negative outcomes for economic agents. **Correct answer:** A) Every decision involves sacrificing some level of utility for another. 4. How do the "4 C's" in political economy generalizations contribute to understanding group behavior? A) They analyze individual choices only. B) They provide a framework for understanding the interactions between different groups. C) They focus solely on economic efficiency. D) They eliminate conflicting interests in decision-making. **Correct answer:** B) They provide a framework for understanding the interactions between different groups. 5. If a household is faced with limited resources and must choose between buying food and a new smartphone, what economic principle does this scenario illustrate? A) Opportunity cost B) Market equilibrium C) Comparative advantage D) Marginal utility **Correct answer:** A) Opportunity cost 6. Which of the following best describes the relationship between microeconomics and macroeconomics as discussed in the text? A) Microeconomics focuses on national trends, while macroeconomics examines individual choices. B) Microeconomics and macroeconomics are completely unrelated fields. C) Microeconomics studies individual decision-making, while macroeconomics looks at the economy as a whole. D) Both fields are exclusively concerned with market structures. **Correct answer:** C) Microeconomics studies individual decision-making, while macroeconomics looks at the economy as a whole.