Transcript Lessons 1 -2

Economics of the business environment
Lessons 1 and 2
March study group meeting
This document summarises lessons 1 and 2 of the economics module
Things to note about this pack
 A lot of the theory in this only works if you assume things
 Ben knows more than all of us so expect him to tell us where this is wrong at any point.
 Ignore the notes we were sent in the file. I have and have read the book which is so much
more helpful although have read notes as well to make sure we do not miss anything.
 The notes jump around all over the place so I have tried to make things appear in a more
logical order although everything only belongs each lesson
 Ask any bloody questions you can, no matter how stupid you think it is. I guarantee
someone else is thinking the same thing. i.e. What hell is the person talking about?
This is actually the kicker on our global template. How horrible is burgundy and yellow! Well
don’t to the marketing team…
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Contents
 Executive summary
TO BE DONE
4
 Background
5
 September 2008 intake results
6
-
Assessment of the hosting process
7
-
Information and support
9
-
Passport forms
11
-
Lessons learned
12
 CU SPoC results
13
-
Roles in the hosting process
14
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Expectations of SPoCs
15
-
Passport forms
16
-
Interviews and information packs
18
 Summary and recommendations
20
 Appendices (Including survey questions)
24
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Lesson 1 – Internal economics of business – The long and the short run
 Reading:
 Book - Chapter 3 – sections 3.1 to 3.4
 Book – Chapter 7 – pages 151 – 156
 Lesson 1 of the notes provided by WBS
Short run
Long run
• A period of time where one factor is fixed. Assume
capital is fixed and labour is a variable.
• All factors of production are assumed to be variable
The nature of productivity and costs in the short run
 In assessing productivity we need to distinguish between:
-
Total product – Total output produced by a firms workers
-
Marginal product – Addition to total product after employing one more unit of an input factor e.g. 1 more worker
Bear with me, there is a point to all of this!
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The nature of productivity and costs in the short run
 Below is a table to demonstrate a few key concepts:
Labour
Input
Marginal
product
Output
Comments
Total
Workers product of labour
X
Y
(=Y / X)
1
40
40 Worker does all of the tasks
2
90
45 2nd woker helps and drives another van
3rd worker specialises in admin to reduce
3
145
48 burden on the other two
4th worker specialises in supply chin e.g.
4
205
51 picking orders
5
255
51
At this point there is to many workers for
the avialbale resources and therfore start
6
295
49 to become inefficient
7
325
46
8
345
43
9
355
39
10
360
36
1 – This is task specialisation –
Where production
is split into components and
assigned and the worker becomes
an expert in a specific task.
1
2
2 – The refers to an economic
concept – The law of diminishing
returns – As more of a variable (e.g.
labour) factor of production is added
to a fixed factor then returns to the
variable factor will diminish (i.e.
people become inefficient)
When we begin to over resource the production process there is no more capital to utilise
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Costs in the short run – Page 54 of the book
Some formula for you
Costs and formula
• Three types of costs:
• Variable
• Fixed
• Total – Simply fixed + variable
Average Variable Costs
• = total variable costs / nos of units produced
Average fixed costs
• = total fixed costs / nos of units produced
• Average total costs
• = total costs/ nos of units produced
• Marginal cost
• = change in total cost . Change in output
What does it mean if you plot these on a graph
• 1 = Fixed costs
• 2 = Short run variable
costs (SRVC) –
Slows as output
increases and
variable costs
• 3 Short run total
costs (SRTC) Simply
add 1 and 2 together.
• Marginal cost – Since
this is the cost of
producing 1 more unit
the change in output
should be 1
otherwise why
bother.
This is based on a simplistic model. This is only to highlight the fundamentals of the theory
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Costs in the short run – Page 54 of the book
Background and Objectives
Average
Marginal costs
Output
What does this graph show
• Simply put – the formula we mentioned previously
plotted on a graph. The formula are not important
but knowing what this show is.
What does this graph show
• The key points are as follows:
• The AVC and ATC will always be U - shaped.
This represents the law of diminishing returns
mentioned earlier
• Towards the left output is low – small workers
using fixed capital.
• Employ more = increased output, however, as
more workers productivity falls and cost per
unit increases.
• This makes the marginal cost curve increase.
• As labour becomes less productive costs of
additional units must increase.
• Marginal cost curve must cut through AVC and
ATC due to relationship. When marginal lower
or higher than average then will move down
accordingly.
• Fixed costs will always go lower as you
spread the overhead. As spread over larger
output will reduce,
By knowing these you can make production decisions in the short run
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Lesson 2 - Demand curves – Book page 4 and 25
Demand curves
• Illustrates the relationship between price and quantity demanded of a particular product.
Positive
Negative
This is mentioned a lot in the notes but not a lot in the
book
• Basically shows the maximum amount of a product that
can be produced given a finite amount of resources.
The decisions are based on knowing how the curves will move based on decisions. This is
actually simple production rules of a business with some fancy names and a graph
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Four reasons for movement in demand curves – Book page 26
Types of costs
•Four types of costs:
•Price of substitutes and complements
•Price increase or decrease encourages a switch into/ out of other products
•Income
•Price rise/ falls reduce/ increase purchasing power and therefore shift the demand curves
•Tastes and preferences
•Demand increases as consumers are informed about nature and availability of product.
E.g. Market creates strong brand so demand increases.
•Price expectation
•Beliefs about how prices in future will change e.g. new technology on the market
•Normal goods – demanded more when consumer income increases and less when it falls e.g.
expensive wine
•Inferior goods – Demanded more when income levels fall and demanded less when they rise
e.g. supermarket own label products
We can now begin to produce the law of demand
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Measuring demand responsiveness – Book page 32
Costs and formula
•Law of demand says that as long as the four points remain constant, there must be a
negative relationship between price and quantity.
•Elasticity is a measure of responsiveness of demand to a change in price
•This is determined by a number of factors:
1. Substitutes
2. Time
3. Definition of the market
•
There are two ways to measure:
•
•
1 - % change in demand / % change in price
2 – (change in demand / change in price) x (price x quantity demanded)
Elasticity is how demand or quantity is affected by price movement or vice versa
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Types of elasticity – Book page 34
Once elasticity is calculated there are four types
•1 – Where elasticity is less than 1 demand is described as inelastic. i.e. change
in price = a small change in demand
•2 – When elasticity = 1 demand has unit elasticity or demand is equally
responsive to change in price
•3 – where elasticity is greater than 1 demand is said to be elastic and therefore
responsive to a change in price
•4 – When elasticity is 1 or infinity the market is perfectly elastic and therefore
demand is very responsive to price.
Elasticity decreases as you move decreases as you move down a negative demand curve
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The product life cycle and elasticity – Book page 40
The product life cycle
•1 – Launch – Goods are unique and therefore inelastic
•2 – Growth – Competition increases and demand begins to increase and
therefore elasticity increases.
•3 Maturity – Competition at its highest and therefore high price elasticity and
therefore little control by firm over pricing. This is a market focus.
•4 – Decline – Prices begin to be more inelastic as consumers and producers
begin to exit the market.
Elasticity moves in conjunction with the product life cycle
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That’s all folks
What to remember
•1 – This is simplistic and high level
•2 – The book really helps this
•3 – Demand curves are based on price and output
•4 – They are affected by market forces and internal forces e.g. labour wages.
•5 – There are lots of formula in the book and notes which I have not mentioned
but I have not mentioned here as I am not sure how much we need to memorise
them or just apply the concepts behind them.
In my opinion this is the worst module but it is not so bad when you read the book
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