Transcript Post Graduate Diploma in Business Management

POST GRADUATE DIPLOMA IN
BUSINESS MANAGEMENT
November 2013
Lesson 1
WHAT IS ECONOMICS?
Economics is the study of how society managed its scare resources.
Decisions – A household and an economy face many decisions
 Who will work?
 What goods and how many of them should be produced?
 What resources should be used in production?
 At what price should the goods be sold at?
Scarcity
 The management of society’s resources is important because resources are scarce.
–Scarcity means that society has limited resources and therefore cannot produce all
the goods and services people want.
1: PEOPLE FACE TRADE-OFFS
To get one thing, we usually have to give up another thing.
guns or butter
leisure or work
efficiency or equity
Productivity or a clean environment
‘There is no such thing as a free lunch!’
THE DILEMMA
Efficiency or equity
Efficiency means society gets the most that it can from its
scarce resources.
Equity means the benefits of those resources are
distributed fairly among the members of society.
2: THE COST OF SOMETHING IS WHAT YOU GIVE UP TO
GET IT
Decisions require comparing costs and benefits
of alternatives.
Whether to come to class or go home?
Whether to watch the cricket match or take your
family for dinner?
The opportunity cost of an item is what you give
up to obtain that item.
3: RATIONAL PEOPLE THINK
AT THE MARGIN
Marginal changes are small incremental adjustments to an
existing plan of action.
What is a rational person?
4: PEOPLE RESPOND TO INCENTIVES
Marginal changes in costs or benefits motivate people to
respond.
The decision to choose one alternative over another occurs
when that alternative’s marginal benefits exceed its
marginal costs.
MB > MC – an action is performed
What are incentives?
5: TRADE CAN MAKE EVERYONE BETTER OFF
People gain from their ability to trade with one
another.
Competition results in gains from trading.
Trade allows people to specialize in what they
do best.
The oranges and apples example!
6: MARKETS ARE USUALLY A GOOD WAY TO ORGANISE
ECONOMIC ACTIVITY
A market economy is an economy that allocates resources through
the decentralised decisions of many firms and households as they
interact in markets for goods and services.
Firms decide who to hire and what to produce.
Households decide what to buy and who to work for.
A command economy is when a centralized body decides the
above.
Adam Smith's invisible hand!
7:GOVERNMENTS CAN SOMETIMES IMPROVE MARKET
OUTCOMES
Market failure occurs when the market fails to allocate
resources efficiently.
When the market fails (breaks down) government can
intervene to promote efficiency and equity.
Externalities – Positive vs Negative
Market Power – Monopolies
8: THE STANDARD OF LIVING DEPENDS ON A
COUNTRY’S PRODUCTION
A country’s standard of living may be measured in different
ways:
By comparing personal incomes.
By comparing the total market value of a nation’s production.
Productivity is the amount of goods and services produced from
each hour of a worker’s time.
9: PRICES RISE WHEN THE GOVERNMENT PRINTS TOO
MUCH MONEY
Inflation is an increase in the overall level of prices
in the economy.
One cause of inflation is the growth in the quantity
of money.
When the government creates large quantities of
money, the value of the money falls.
POSITIVE VERSUS NORMATIVE ANALYSIS
• Positive statements are claims that attempt to
describe the world as it is.
– Called descriptive analysis.
• Normative statements are claims that attempt
to describe how the world should be.
– Called prescriptive analysis.
Markets and Competition
What happens
1. To the price of petrol when war breaks out in Iran
2. To the price of mangoes when farmers have an abundant
year
3. To the number of tourists when the tsunami hit Sri-Lanka
All of the above show the workings of Supply and Demand
Supply and Demand are the forces that make market economies
work.
They determine the following
• Quantity of Goods produced
• Price of which goods are sold
SUPPLY AND DEMAND
• Supply and demand are economists favourite
words.
• Supply and demand are the forces that make
market economies work.
• Modern microeconomics is about supply,
demand and market equilibrium.
WHAT IS A MARKET?
A group of buyers and sellers of a particular good or service.
Characteristics of markets
Organized markets
Less Organized markets.
A competitive market is a market which has many buyers and
sellers so that each has a negligible impact on price.
For today’s class we will assume that markets are perfectly
competitive.
The goods offered for sale are exactly the same so that no single
buyer or seller has influence over price.
• Buyers determine demand.
• Sellers determine supply.
Quantity demanded is the amount of a good
that buyers are willing and able to purchase.
Quantity supplied is the amount of a good
that sellers are willing and able to sell.
DEMAND
Quantity Demanded – the amount of a good that buyers are willing
and are able to pay.
Law of Demand
The claim that other things equal the quantity
Demanded of a good falls when the price of
The good increases.
Market Demand – the sum of all individual demand for a particular
good or service
DEMAND
Price
Quantity
Demanded
0
6
50
5
100
4
150
3
200
2
250
1
300
0
Shifts in the demand curve
Demand curves can shift
•
To the RIGHT (A)
•
To the LEFT (B)
Shifts to the right means demand has
increased
Shift to the left means demand has
decreased
VARIABLES THAT CAUSE DEMAND CURVES TO SHIFT
•
•
•
•
•
Income
Prices of Related goods
Tastes
Expectations
Number of Buyers
SUPPLY
Quantity Supplied
The amount of a good that sellers are willing and able to
sell.
Law of Supply
The claim that other things equal the quantity
Supplied of a good increase when the price of
The good increases.
SUPPLY
Price of cone
Quantity
Supplied
Shifts in the Supply Curve
0
0
50
0
•
100
1
•
150
2
200
3
250
4
300
5
Shifts to the right increase supply
Shifts to the left decrease supply
SHIFTS IN THE SUPPLY CURVE
• Input Prices
• Costs of inputs. If they increase production decreases,
if they decrease production will increase
• Technology
• Machinery increases productivity
• Expectation
• Number of Sellers
MARKET EQUILIBRIUM
Equilibrium – A situation which the market price has reached the
level at which quantity supplied equals the quantity demanded.
Equilibrium price – the price that balances Qd and Qs
Equilibrium quantity – the quantity that balances Pd and Ps
Law of Supply and Demand
The claim that the price of any good adjusts
to bring the Qd and the Qs for the good into
balance.
SUPPLY AND DEMAND TOGETHER
Demand schedule
Supply schedule
At $2.00, the quantity demanded is
equal to the quantity supplied!
PRICE ELASTICITY OF DEMAND
Price Elasticity
of Demand
We use absolute numbers even though Qd is negatively
related to its price.
|Ped|= △Q/△P
= 20/10 = 2
DIFFERENT TYPES OF DEMAND
•
•
•
•
•
Perfectly Inelastic Demand
Inelastic Demand
Unitary Elastic Demand
Elastic Demand
Perfectly Elastic Demand
DETERMINANTS OF PRICE ELASTICITY
•
•
•
•
•
•
•
•
•
Sustainability
Nature of the Product
Proportion of Income
Definition of Market
The Possibility of new purchases
Time Horizons
Addiction
Complementary goods
Price expectations