ECONOMICS FOR BUSINESS LECTURE NOTES
LECTURE 1 – INTRODUCTION
LO1: TEN PRINCIPLES OF ECONOMICS
What is economics?
The word ‘economy’ comes from the Greek word meaning ‘one who manages a household’. Households and economies have
much in common- both face a fundamental problem known as scarcity.
Scarcity: available resources are limited and therefore cannot produce all the goods and services people desire. The problem of
scarcity arises from people having infinite desires, whilst at the same time having limited or scarce resources.
Economics: the study of how society manages its scarce resources. It is the social science that studies the choices that individuals,
businesses, and governments make as they cope with scarcity and the incentives that influence those choices. It is divided into:
a) Microeconomics: focuses on individual agents e.g. firms in the economy and how they make decisions & interact. It looks at:
How scarce resources are allocated among alternative uses.
The role of prices and markets.
How economic policies can lead to better outcomes for society.
b) Macroeconomics: focuses on the economy as a whole. It looks at economy-wide phenomena e.g. inflation, unemployment
and economic growth.
10 lessons from economics
These 10 lessons can be seen as central/unifying ideas of economics:
1. People face trade-offs.
2. The cost of something is what you give up to get it.
How people make decisions
3. Rational people think at the margin.
4. People respond to incentives.
Microeconomics
5. Trade can make everyone better off.
6. Markets are usually a good way to organise economic activity. How people interact
7. Governments can sometimes improve market outcomes.
8. A country standard of living…
9. Prices rise when… How the economy works as a whole Macroeconomics
10. Society faces a trade-off…
Lesson 1: People face trade-offs
Due to scarce resources, making decisions requires trading off one goal for another. In other words, to get one thing, you must
give up something else. If you want more of something, you must give up something else e.g. time, money.
An important trade-off often discussed in economics is the trade-off between efficiency (getting the largest output from available
resources) and equity (distributing those output fairly among society to increase overall well-being). It is difficult to obtain both
equity and efficiency because if you want an equal society you must sacrifice some efficiency.
Lesson 2: The cost of something is what you have to give up to get it
In economics the cost of something is what you have to give up in order to get it- not just monetary costs, but opportunity costs.
Opportunity cost: the opportunity cost of an item is the value of the best opportunity that you have to give up to obtain that item.
It includes both the actual monetary amount paid (the explicit cost) and the monetary value of any other sacrifices made without
direct payment (implicit cost).
When making any decisions, individuals compare costs and benefits. To make a sound decision, it is necessary to be aware of the
opportunity cost of that decision i.e. the true cost of that decision.
Lesson 3: Rational people think at the margin
Rational people choose the best option from available alternatives by comparing costs and benefits at the margin.
Marginal change: a small incremental change or adjustment to an existing plan of action.
Rational people compare the marginal cost of a decision with the marginal benefit. As long as the marginal benefit exceeds the
marginal cost, it is profitable.
Lesson 4: People respond to incentives
Incentive: a reward or punishment that induces a person to act or not to act in a certain way, and there can be both positive and
negative incentives e.g. penalties, bonus to an employee. It is often used by the gov. to encourage or discourage behaviours.
Incentives (rewards and punishments) associated with a given decision alter the cost and benefit of that decision.
Since rational people make decisions considering costs and benefits, they respond to incentives.
E.g. a new law is introduced whereby anybody who is caught rink driving receives a life sentence.
, LO2: THINKING LIKE AN ECONOMIST
The economist as a scientist
Economics is a social science. It is a science because it makes use of the scientific method i.e. observation, theory, more
observation and so on. It develops theories and collects and analyses data to evaluate/test those theories.
An obstacle in testing economic theories arises because it is difficult to use experiments to analyse social/economic phenomena.
Physicists test theories in a laboratory where they can run repeated and controlled experiments- economists cannot. Economics
often can only rely on observations the world happens to give them.
Assumptions and economic models
Assumptions are used to make the world easier to understand. The art in scientific thinking is deciding which assumptions to
make. Assumptions are good if they simplify the problem at hand without substantially affecting the answer. Economists use
different assumptions to answer different questions.
Economic models omit many details to allow us to see what is truly important.
A model is a simplified representation of reality intended to help people understand a complex problem. Models are built on
assumptions. Most economic models are composed of diagrams/graphs and equations.
Production Possibilities Frontier (PPF): a graph showing the combinations of output that an economy can possibly produce given:
a) The available factors of production
b) The available production technology
This model assumes that there are only two goods in the world e.g. cars and computers.
Efficiency and Opportunity Costs
Quantity of Computers
Produced (D) Not feasible (resources are scarce)
3000
2200 (C)
2000 (A) Feasible and efficient
Production possibility frontier
1000 (B) Feasible but inefficient
0 300 600 700 1000 Quantity of Cars Produced
All points on the frontier and below the frontier are combinations of output that can possibly be produced given the available
factors of production and the available technologies of production.
All points on the frontier are efficient e.g. (A), (C).
All points below the frontier are inefficient e.g. (B).
Efficient: an outcome is said to be efficient if the economy is getting all it can from its scarce resources.
Opportunity cost: suppose we are at point (A) and are not happy with having only 2000 computers. We would like instead to have
2200 computers. What’s the opportunity cost of having extra 200 computers if we are at (A)? The opportunity cost is 100 less cars.
Economic growth
Computers Produced
4000
3000
2100 (B)
2000 (A)
1000
0 700 1000 Cars Produced
Suppose a new technology is discovered that increases productivity in computer production. This would create another production
possibility frontier and more computers can be produced for the same amount of cars.
The economist as a policy advisor
When economists try to explain the world, they are scientist. When they try to improve the world, they are policy advisors.
Positive vs. normative analysis: positive statements try to describe the world as it is i.e. descriptive analysis. Normative analysis
try to describe how the world should be i.e. prescriptive analysis. When economists make normative statements, they are acting
more as policymakers.
LECTURE 1 – INTRODUCTION
LO1: TEN PRINCIPLES OF ECONOMICS
What is economics?
The word ‘economy’ comes from the Greek word meaning ‘one who manages a household’. Households and economies have
much in common- both face a fundamental problem known as scarcity.
Scarcity: available resources are limited and therefore cannot produce all the goods and services people desire. The problem of
scarcity arises from people having infinite desires, whilst at the same time having limited or scarce resources.
Economics: the study of how society manages its scarce resources. It is the social science that studies the choices that individuals,
businesses, and governments make as they cope with scarcity and the incentives that influence those choices. It is divided into:
a) Microeconomics: focuses on individual agents e.g. firms in the economy and how they make decisions & interact. It looks at:
How scarce resources are allocated among alternative uses.
The role of prices and markets.
How economic policies can lead to better outcomes for society.
b) Macroeconomics: focuses on the economy as a whole. It looks at economy-wide phenomena e.g. inflation, unemployment
and economic growth.
10 lessons from economics
These 10 lessons can be seen as central/unifying ideas of economics:
1. People face trade-offs.
2. The cost of something is what you give up to get it.
How people make decisions
3. Rational people think at the margin.
4. People respond to incentives.
Microeconomics
5. Trade can make everyone better off.
6. Markets are usually a good way to organise economic activity. How people interact
7. Governments can sometimes improve market outcomes.
8. A country standard of living…
9. Prices rise when… How the economy works as a whole Macroeconomics
10. Society faces a trade-off…
Lesson 1: People face trade-offs
Due to scarce resources, making decisions requires trading off one goal for another. In other words, to get one thing, you must
give up something else. If you want more of something, you must give up something else e.g. time, money.
An important trade-off often discussed in economics is the trade-off between efficiency (getting the largest output from available
resources) and equity (distributing those output fairly among society to increase overall well-being). It is difficult to obtain both
equity and efficiency because if you want an equal society you must sacrifice some efficiency.
Lesson 2: The cost of something is what you have to give up to get it
In economics the cost of something is what you have to give up in order to get it- not just monetary costs, but opportunity costs.
Opportunity cost: the opportunity cost of an item is the value of the best opportunity that you have to give up to obtain that item.
It includes both the actual monetary amount paid (the explicit cost) and the monetary value of any other sacrifices made without
direct payment (implicit cost).
When making any decisions, individuals compare costs and benefits. To make a sound decision, it is necessary to be aware of the
opportunity cost of that decision i.e. the true cost of that decision.
Lesson 3: Rational people think at the margin
Rational people choose the best option from available alternatives by comparing costs and benefits at the margin.
Marginal change: a small incremental change or adjustment to an existing plan of action.
Rational people compare the marginal cost of a decision with the marginal benefit. As long as the marginal benefit exceeds the
marginal cost, it is profitable.
Lesson 4: People respond to incentives
Incentive: a reward or punishment that induces a person to act or not to act in a certain way, and there can be both positive and
negative incentives e.g. penalties, bonus to an employee. It is often used by the gov. to encourage or discourage behaviours.
Incentives (rewards and punishments) associated with a given decision alter the cost and benefit of that decision.
Since rational people make decisions considering costs and benefits, they respond to incentives.
E.g. a new law is introduced whereby anybody who is caught rink driving receives a life sentence.
, LO2: THINKING LIKE AN ECONOMIST
The economist as a scientist
Economics is a social science. It is a science because it makes use of the scientific method i.e. observation, theory, more
observation and so on. It develops theories and collects and analyses data to evaluate/test those theories.
An obstacle in testing economic theories arises because it is difficult to use experiments to analyse social/economic phenomena.
Physicists test theories in a laboratory where they can run repeated and controlled experiments- economists cannot. Economics
often can only rely on observations the world happens to give them.
Assumptions and economic models
Assumptions are used to make the world easier to understand. The art in scientific thinking is deciding which assumptions to
make. Assumptions are good if they simplify the problem at hand without substantially affecting the answer. Economists use
different assumptions to answer different questions.
Economic models omit many details to allow us to see what is truly important.
A model is a simplified representation of reality intended to help people understand a complex problem. Models are built on
assumptions. Most economic models are composed of diagrams/graphs and equations.
Production Possibilities Frontier (PPF): a graph showing the combinations of output that an economy can possibly produce given:
a) The available factors of production
b) The available production technology
This model assumes that there are only two goods in the world e.g. cars and computers.
Efficiency and Opportunity Costs
Quantity of Computers
Produced (D) Not feasible (resources are scarce)
3000
2200 (C)
2000 (A) Feasible and efficient
Production possibility frontier
1000 (B) Feasible but inefficient
0 300 600 700 1000 Quantity of Cars Produced
All points on the frontier and below the frontier are combinations of output that can possibly be produced given the available
factors of production and the available technologies of production.
All points on the frontier are efficient e.g. (A), (C).
All points below the frontier are inefficient e.g. (B).
Efficient: an outcome is said to be efficient if the economy is getting all it can from its scarce resources.
Opportunity cost: suppose we are at point (A) and are not happy with having only 2000 computers. We would like instead to have
2200 computers. What’s the opportunity cost of having extra 200 computers if we are at (A)? The opportunity cost is 100 less cars.
Economic growth
Computers Produced
4000
3000
2100 (B)
2000 (A)
1000
0 700 1000 Cars Produced
Suppose a new technology is discovered that increases productivity in computer production. This would create another production
possibility frontier and more computers can be produced for the same amount of cars.
The economist as a policy advisor
When economists try to explain the world, they are scientist. When they try to improve the world, they are policy advisors.
Positive vs. normative analysis: positive statements try to describe the world as it is i.e. descriptive analysis. Normative analysis
try to describe how the world should be i.e. prescriptive analysis. When economists make normative statements, they are acting
more as policymakers.
