CHAPTER 1: The business environment and business economics
What is economics all about?
● Scarcity → choice → opportunity cost
○ We make choices by responding to incentives
○ There are three main categories of choice that must be made in any society
■ What goods and services are going to be produced, and in what quantity?
■ How are things going to be produced, given that there is normally more than one way of
producing things
■ For whom are things going to be produced?
Problems with economics models
● They oversimplify complex concepts
● They require us to make assumptions, which may not always be accurate
● Fallacy of composition
○ Generalization. You assume that something that applies for one individual will apply for all other
individuals
● Post hoc fallacy
○ A logical fallacy that states "Since event Y followed event X, event Y must have been caused by
event X"
○ Issue of causality
“The business environment”
These are the external influences on a firm:
● Economic
● Social/cultural
● Political
● Technological
● Structure of industry
Economic factors
● Rising cost of widely used raw materials in industries
○ Oil
○ Rubber
● Competition stealing demand
● Current performance of the domestic and world economy
○ 2008/9 financial crisis
The microeconomic environment
1
, ● Includes all the economic factors that are specific to a particular firm operating in a particular market
The macroeconomic environment
● Looks at the national and international economic situation in businesses as a whole operate
Social/cultural factors
● Equal opportunities for different groups of people
○ Regardless of race, religion, color, creed, sexual orientation and gender — In Saudi Arabia
woman can now drive which has encouraged them to enter the workforce and get employed by
businesses
● Change in the population pyramid structure
○ Increased dependency ratio due to an ageing population leading to less economic productivity—
Japan
Political factors
● Actions of governments
○ Taxes — carbon tax in Sweden
○ Subsidies — CAP in the EU
○ Minimum price (price floor) — impacts alcohol sellers
○ Bans — e.g. on smoking on public which affects the tobacco industry
● Terrorism
○ 9/11
Technological factors
● Online shopping allows firms to compete in global markets
● Robots have improved production efficiency
Structure of industry — one of the most important and influential elements of the business environment
How a firm performs depends on the state of its particular industry
Industry refers to a group of firms that produce a particular category of product
● Goods industry
● Holiday industry
● Aircraft industry
● Insurance industry
Classifying firms into industrial groupings…
● Helps economists analyze different trends in the economy, identifying areas of growth and areas of
decline
● Perhaps most importantly, it helps economists and businesspeople to predict the behavior of firms that
are in direct competition with each other
● Depending on the purpose for making these groupings, we may wish to make them more narrow to see
which products are genuine competitors with one another in an economic sense
○ Not all vehicles in the “motor car” industry are in direct competition with each other e.g. cars and
trucks, so by dividing the industry into more narrow categories such as family cars, sports cars,
2
, etc. businesspeople are better able to understand and predict the future of the motor car
industry
Classifying production
● Primary production — raw materials
○ Predominant kind of production in developing nations
● Secondary production — manufactured goods
○ Predominantly the kind of production in more developed and developed nations
● Tertiary production — services
○ Predominant kind of production in developed countries
CHAPTER 2: Economics and the world of business
Basic definitions
Factors of production — the inputs into the production of goods and services
● Land
○ The natural resources available for production, including climatic conditions
○ E.g. water, oil, natural gas, copper, and forests
● Labor
○ The human input into the production process
● Capital
○ They are man-made goods used in the production of others goods
○ E.g. factories, machines, hammers, forklifts, conveyor belts, computers, delivery vans
● Entrepreneurship
○ Entrepreneurs take risks and organize factors of production
Opportunity cost — The opportunity forgone when making an economic decision
— The value of the next best alternative
Rational choices — Choices which involve weighing up the costs and benefits of an alternative against its
opportunity cost
Demand — the quantity of a good or and service consumers are willing and able to purchase at a given
price over a given time period
Supply — the quantity of a good or service producers are willing and able to produce at a given price over
a given time period
Aggregate demand (AD) — The total demand for all goods and services produced by all the industries in a
nation at a given price level over a given time period
Aggregate supply (AS) — The total amount of goods and services that all industries in an economy
produce at a given price level over a given time period
3
, Marginal costs — The increase in the total cost of producing an extra unit of output
The opportunity cost of producing one more unit of a good or service
Marginal benefit — The additional benefit of consuming an extra unit of output
Marginal revenue — The increase in total revenue from producing an extra unit of output
Inflation — A persistent increase in the average price level in the economy
Consumer Price Index (CPI) — The most common method to measure inflation
Base year (for index numbers) — The year for which the index number is set to 100
Barter economy — An economy where people exchange goods and services directly with one another
without any payment of money. Workers would be paid with bundles of goods
Free market or laissez-faire economy — An economy where all economic decisions are taken by
individual households and firms, with no government intervention
Factors of production
“Which of the following is not a factor of production?”
- The management skill of a small business owner
- The wages paid to workers
- The effort of farmers raising cattle
- The water used to cool a nuclear power plant
* Factors of production are inputs into production. Wages are the reward to the labor for their input
Opportunity cost
“During the summer you have made the decision to attend summer school which prevents you from working at
your usual summer job in which you normally earn £6,000 for the summer. Your tuition cost is £3,000 and
books and supplies cost £1,300. The opportunity cost of attending summer school is?”
- £4,300
- £10,300
- £6,000
- £3,000
“How can the opportunity cost of selecting to consume good A for lunch be expressed when goods B and C
were also options for lunch”
- Price of good B
- Not consuming good B or C, whichever is the highest valued alternative
- Ratio of the price of good B to the price of good A
- Price of good C
4
What is economics all about?
● Scarcity → choice → opportunity cost
○ We make choices by responding to incentives
○ There are three main categories of choice that must be made in any society
■ What goods and services are going to be produced, and in what quantity?
■ How are things going to be produced, given that there is normally more than one way of
producing things
■ For whom are things going to be produced?
Problems with economics models
● They oversimplify complex concepts
● They require us to make assumptions, which may not always be accurate
● Fallacy of composition
○ Generalization. You assume that something that applies for one individual will apply for all other
individuals
● Post hoc fallacy
○ A logical fallacy that states "Since event Y followed event X, event Y must have been caused by
event X"
○ Issue of causality
“The business environment”
These are the external influences on a firm:
● Economic
● Social/cultural
● Political
● Technological
● Structure of industry
Economic factors
● Rising cost of widely used raw materials in industries
○ Oil
○ Rubber
● Competition stealing demand
● Current performance of the domestic and world economy
○ 2008/9 financial crisis
The microeconomic environment
1
, ● Includes all the economic factors that are specific to a particular firm operating in a particular market
The macroeconomic environment
● Looks at the national and international economic situation in businesses as a whole operate
Social/cultural factors
● Equal opportunities for different groups of people
○ Regardless of race, religion, color, creed, sexual orientation and gender — In Saudi Arabia
woman can now drive which has encouraged them to enter the workforce and get employed by
businesses
● Change in the population pyramid structure
○ Increased dependency ratio due to an ageing population leading to less economic productivity—
Japan
Political factors
● Actions of governments
○ Taxes — carbon tax in Sweden
○ Subsidies — CAP in the EU
○ Minimum price (price floor) — impacts alcohol sellers
○ Bans — e.g. on smoking on public which affects the tobacco industry
● Terrorism
○ 9/11
Technological factors
● Online shopping allows firms to compete in global markets
● Robots have improved production efficiency
Structure of industry — one of the most important and influential elements of the business environment
How a firm performs depends on the state of its particular industry
Industry refers to a group of firms that produce a particular category of product
● Goods industry
● Holiday industry
● Aircraft industry
● Insurance industry
Classifying firms into industrial groupings…
● Helps economists analyze different trends in the economy, identifying areas of growth and areas of
decline
● Perhaps most importantly, it helps economists and businesspeople to predict the behavior of firms that
are in direct competition with each other
● Depending on the purpose for making these groupings, we may wish to make them more narrow to see
which products are genuine competitors with one another in an economic sense
○ Not all vehicles in the “motor car” industry are in direct competition with each other e.g. cars and
trucks, so by dividing the industry into more narrow categories such as family cars, sports cars,
2
, etc. businesspeople are better able to understand and predict the future of the motor car
industry
Classifying production
● Primary production — raw materials
○ Predominant kind of production in developing nations
● Secondary production — manufactured goods
○ Predominantly the kind of production in more developed and developed nations
● Tertiary production — services
○ Predominant kind of production in developed countries
CHAPTER 2: Economics and the world of business
Basic definitions
Factors of production — the inputs into the production of goods and services
● Land
○ The natural resources available for production, including climatic conditions
○ E.g. water, oil, natural gas, copper, and forests
● Labor
○ The human input into the production process
● Capital
○ They are man-made goods used in the production of others goods
○ E.g. factories, machines, hammers, forklifts, conveyor belts, computers, delivery vans
● Entrepreneurship
○ Entrepreneurs take risks and organize factors of production
Opportunity cost — The opportunity forgone when making an economic decision
— The value of the next best alternative
Rational choices — Choices which involve weighing up the costs and benefits of an alternative against its
opportunity cost
Demand — the quantity of a good or and service consumers are willing and able to purchase at a given
price over a given time period
Supply — the quantity of a good or service producers are willing and able to produce at a given price over
a given time period
Aggregate demand (AD) — The total demand for all goods and services produced by all the industries in a
nation at a given price level over a given time period
Aggregate supply (AS) — The total amount of goods and services that all industries in an economy
produce at a given price level over a given time period
3
, Marginal costs — The increase in the total cost of producing an extra unit of output
The opportunity cost of producing one more unit of a good or service
Marginal benefit — The additional benefit of consuming an extra unit of output
Marginal revenue — The increase in total revenue from producing an extra unit of output
Inflation — A persistent increase in the average price level in the economy
Consumer Price Index (CPI) — The most common method to measure inflation
Base year (for index numbers) — The year for which the index number is set to 100
Barter economy — An economy where people exchange goods and services directly with one another
without any payment of money. Workers would be paid with bundles of goods
Free market or laissez-faire economy — An economy where all economic decisions are taken by
individual households and firms, with no government intervention
Factors of production
“Which of the following is not a factor of production?”
- The management skill of a small business owner
- The wages paid to workers
- The effort of farmers raising cattle
- The water used to cool a nuclear power plant
* Factors of production are inputs into production. Wages are the reward to the labor for their input
Opportunity cost
“During the summer you have made the decision to attend summer school which prevents you from working at
your usual summer job in which you normally earn £6,000 for the summer. Your tuition cost is £3,000 and
books and supplies cost £1,300. The opportunity cost of attending summer school is?”
- £4,300
- £10,300
- £6,000
- £3,000
“How can the opportunity cost of selecting to consume good A for lunch be expressed when goods B and C
were also options for lunch”
- Price of good B
- Not consuming good B or C, whichever is the highest valued alternative
- Ratio of the price of good B to the price of good A
- Price of good C
4
