Principles of Business

Macro economics and regulations – Part 1

2

Overview

• Overview of what the economy is and how to understand its main levers i.e. Micro vs Macro and interest rates, inflation, employment etc

• Define and describe key economic measures and monitoring activities e.g. CPI and GDP

• What is the role of scarcity in creating economic value and looking at opportunity costs

• What are the key factors of production and how does this flow through the value chain to create economic value

• Explain the forces of supply and demand detailing the impact on the economy

• Provide an overview of the different types of competition in a free-market system i.e. pure competition, monopoly, oligopoly etc.

• Overview of absolute and comparative advantage theories in international business

3

Learning Outcomes

• Define economics and explain why scarcity is central to economic decision making

• Explain the interaction between demand and supply

• Determine the different types of competition in a free-market system

• Demonstrate an understanding of the fundamentals of international trade theory

Economics: Simple or Complex?

Basic economics 101: It’s the most

complicated simple subject there is.

Rush Limbaugh

Lets start with the economy; what is it?

“The sum total of all the economic activity within a given region”

Bovee et al, 2013

“The state of a country or region in terms of the production and

consumption of goods and services and the supply of money.” Google,

Definition, 2014

“An economy or economic system consists of the production, distribution or trade, and consumption of limited

goods and services by different agents in a given geographical location.”

Wikipedia, 2014

Who does it involve & how does it work?

Individuals

Businesses

Organisations

Government

Economic Agents Traditional View

7

Economic Factors of Production

Source: Bovee et al, 2013

What are we missing?

Technology Innovation

?

Also consider the role of:

Education Culture International Trade

History & Politics

Macro Vs Micro Economics

Source: Bovee et al, 2013

Macro Vs Micro Economics

Microeconomics

The study of how consumers, businesses, and industries collectively determine the

quantity of goods and services demanded and supplied at

different prices

Macroeconomics

The study of “big picture” issues in an economy, including competitive

behavior among firms, the effect of government

policies, and overall resource allocation issues

Key Economic Indicators as per ONS

GDP Consumer Prices

IndexInterest Rates

UnemploymentPublic Sector

Borrowing

Government Receipts &

Expenditure

National Accounts

Personal Finances

Prices, Output &

Productivity

GDP – A Good Indicator?

View video: https://www.youtube.com/watch?v=QUaJMNtW6GA#t=16

Types of Unemployment

Source: Bovee et al, 2013

Consumer Prices Index

Source: Bovee et al, 2013

Gross National Income Data

Source: Bovee et al, 2013

A Divided World

Source: Daniels et al, 2013

GNI per Capita, 2011

Source: Daniels et al, 2013

GNI Per Capita, 2011, Adjusted for Purchasing Parity

Source: Daniels et al, 2013

19

Role of Scarcity in Creating Economic Value

Scarcity value is the economic factor that increases an item's relative price based more upon its relatively low supply. Whereas

the prices of newly manufactured products depends mostly on the cost of production (the cost of inputs used to produce them, which

in turn reflects the scarcity of the inputs), the prices of many goods—such as antiques, rare stamps, and those raw materials in

high demand—reflects the scarcity of the products themselves

The Cookie Jar Experiment by Worchel, Lee and Adewole, 1975

The fewer the cookies the

more they are valued!

The Effect of Scarcity

Scarcity has two powerful effects: 1. It creates competition for resources 2. It forces trade-offs on the part of every

participant in the economy.

Opportunity cost The value of the most appealing alternative not

chosen

The Forces of Supply and Demand

Buyers’ willingness and

ability to purchase products at various

price points

A specific quantity of a

product that the seller is able and

willing to provide at

various prices

Demand Supply

A deep dive into Supply and Demand

View video: https://www.youtube.com/watch?v=qt0Hw5EYlqw

Understanding Demand

Source: Bovee et al, 2013

Understanding Supply

Source: Bovee et al, 2013

The Equilibrium Point

• The point at which quantity supplied equals quantity demanded

• Because the supply and demand curves are dynamic, so is the equilibrium point

• As variables affecting supply and demand change, so will the equilibrium price.

The Relationship between Supply and Demand

Source: Bovee et al, 2013

Types of Competition in a Free Market

Source: Bovee et al, 2013

Types of Competition in a Free Market

Competition Rivalry among businesses for

the same customers

Monopoly A situation in

which one company

dominates a market that it can

control prices

Oligopoly A market situation in which a very small

number of suppliers, sometimes only two, provide a particular

good or service

Pure competition A situation in which

many buyers and sellers exist that no single buyer

or seller can individually influence market

prices

Monopolistic competition A situation in which

many sellers differentiate their

products from those of competitors

The Competition Commission

Source: https://www.gov.uk/government/organisations/competition-and-markets-authority/about

International Free Trade Theories

Smith argued that it was impossible for all nations to

become rich simultaneously by following mercantilism because

the export of one nation is another nation’s import and

instead stated that all nations would gain simultaneously if they practiced free trade and specialized in accordance with

their absolute advantage.

Absolute Advantage Comparative Advantage

The law of comparative advantages has been

formulated by David Ricardo who investigated in detail

advantages and alternative or relative opportunity in his 1817

book On the Principles of Political Economy and Taxation

in an example involving England and Portugal.

Adam Smith

David Ricardo

Theory of Absolute Advantage

Production Possibilities under Conditions of Absolute Advantage

Source: Bovee et al, 2013

Theory of Comparative Advantage

Production Possibilities under Conditions of Comparative Advantage

Source: Bovee et al, 2013

Comparative Advantage: Explained

View video: https://www.youtube.com/watch?v=FpTBjRf8lGs

34

Essential work for next week

• Please consult the OLE for details of:– Essential readings*– Seminar/workshop preparation work*– Recommended further readings– Any additional learning

* Essential readings and preparation work must always be completed in time for the next session

Appendix – Sources for illustrations

Slide 4:www.foxnews.com

Slide 5:www.mapsengland.com

Slide 6:www.mrscultz.com

Slide 8:www.ascensionwhispers.com

Slide 10:www.randomoriginal.com

Slide 19: www.cashingonkids.com

Slide 22: www.howthemarketworks.com

End of presentation

© Pearson College 2013