Business EconomicsBusiness Economics

Lecture 1

Welcome To Business Economics

Farhan Mehboob MBA – Herriot-Watt, Scotland BSBD –Univ of Arizona,USA CCNA, CCNP, MCSE Sun Solaris Certified Administrator Teaching irregularly since 1996 (12 years)

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Topics to be DiscussedThe Themes of MicroeconomicsWhat Is a Market?

Economics

Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people.

PreliminariesMicroeconomics deals with:

– Behavior of individual units• When Consuming

–How we choose what to buy

PreliminariesMicroeconomics deals with:

– Behavior of individual units• When Producing

–How we choose what to produce

Preliminaries

Microeconomics deals with:– Markets: The interaction of consumers

and producers

PreliminariesMacroeconomics deals with:

– Analysis of aggregate issues:–Economic growth, GDP, GNP– Inflation, money supply–Unemployment–Tax & subsidy

Microeconomics vs. Macroeconomics

The Linkage Between Micro and Macro-economics– Microeconomics is the foundation of

macroeconomic analysis

Themes of Microeconomics

According to Mick Jagger & the Rolling Stones– “You can’t always get what you want”

Themes of Microeconomics

Why Not?–Limited Resources–Unlimited Wants

Themes of Microeconomics

Microeconomics–Allocation of Scarce Resources and

Trade-offs–In a planned economy (Socialist)–In a market economy (Capitalist)

Themes of Microeconomics

Microeconomics and Optimal Trade-offs1. Consumer Theory2. Workers3. Theory of the Firm

Themes of Microeconomics

Microeconomics and Prices–The role of prices in a market

economy–How prices are determined

Theories and ModelsMicroeconomic Analysis

–Theories are used to explain observed phenomena in terms of a set of basic rules and assumptions.

– For example–The Theory of the Firm –The Theory of Consumer Behavior

Theories and ModelsMicroeconomic Analysis

–Models:– a mathematical representation of a theory used to make a prediction.

Positive Versus Normative Economics

Positive Economics–Positive economics deals with the

observations or predictions of the facts of economic life.

–For example:

Positive versus Normative Economics

Normative Economics–Normative Economics is the value

judgments about how economics should operate, based on certain moral principles or preferences?”

– For example:

What is a Market?Markets

–A geographically defined area where buyers and sellers interact to determine the price of a product or a set of products.

What is a Market?Markets vs. Industries

– Industries are the supply side of the market.

What is a Market?Defining the Market

–The market parameters must be set before an analysis of the market can take place.

What is a Market?Arbitrage

–Buying a product at a low price in one location and selling at a high price in another

What is a Market?Competitive vs. Noncompetitive Markets

–Competitive Markets–Because of the large number of buyers and sellers, no individual buyer or seller can influence the price.–Example: Most agricultural markets

What is a Market?Competitive vs. Noncompetitive

Markets–Noncompetitive Markets–Markets where individual producers can influence the price.–Example: OPEC

What is a Market?Market Price

–Competitive markets establish one price.

–Noncompetitive markets may set many prices for the same product.

What is a Market?Market Definition - The Extent of a

Market–Market Definition

• Which buyers and sellers should be included in a given market

What is a Market?Market Definition - The Extent of a

Market–Market Extent

• Defines the boundaries of the market–Geographic–Range of products

What is a Market?Examples

–Geographic boundaries• Gold: Lahore vs. Karachi• Housing: Islamabad vs. Rawalpindi

What is a Market?Examples

–Range of Products• Gasoline: regular, super, & diesel• Cameras: Polaroid, point & shoot, digital

What is a Market?Examples

–Markets for Prescription Drugs• Well-defined markets - therapeutic drugs

• Ambiguous markets - painkillers

Summary

Scope of MicroeconomicsThemes of Microeconomics

–Limited Resources & Trade-offs–Prices–Theories & Models

Intro to Econs: Summary

Positive vs. Normative EconomicsMarkets

–Market Defined–Competitive vs. Non-competitive

Markets–Market Extent