02 - Chap02

Economics and the
World of Business
What do Economists Study?
 Tackling the problem of scarcity

 meaning of scarcity
 production and consumption
• role of the business economist
• study of consumer behaviour
• study of firms
Capital:
 factors of production - Physical
• human resources – labour - Human
• natural resources – land and raw materials

• manufactured resources – capital
Entrepreneurship
What do Economists Study?
 Demand and supply

 actual and potential demand and supply
 the role of firms in satisfying demand – response to
demand or creation of demand; efficient use of
resources; quantity produced; price charged;
investment decisions.
 Dividing up the subject

 macroeconomics
 microeconomics
The Macroeconomic Environment
 Aggregate demand and supply

 Macroeconomic issues
 the objective of economic growth
• cyclical fluctuations in the economy
• recessions
 unemployment
 inflation
 balance of trade deficits

Macroeconomic performance of four industrialised countries
(average annual figures)
Unemployment Inflation Economic growth Balance on current account

(% of workforce) (%) (%) (% of national income)
USA Jap Ger UK USA Jap Ger UK USA Jap Ger UK USA Jap Ger UK
1961–70
1971–80
1981–90
1991–00
2001–10
2011–13
Source: based on data in European Economy (Commission of the European Union)


1961–70 4.8 1.3 0.6 1.7
1971–80 6.4 1.8 2.2 3.8
1981–90 7.1 2.5 6.0 9.6
1991–00 5.6 3.3 7.8 7.9
2001–10 6.1 4.7 8.9 5.6
2011–13 8.0 4.4 5.3 8.7


1961–70 4.8 1.3 0.6 1.7 2.4 5.6 2.7 4.0
1971–80 6.4 1.8 2.2 3.8 7.0 8.8 5.2 13.4
1981–90 7.1 2.5 6.0 9.6 4.5 1.8 2.6 6.2
1991–00 5.6 3.3 7.8 7.9 2.2 0.5 1.8 3.2
2001–10 6.1 4.7 8.9 5.6 2.4 –0.3 1.6 2.1
2011–13 8.0 4.4 5.3 8.7 2.4 –0.2 2.2 3.0


1961–70 4.8 1.3 0.6 1.7 2.4 5.6 2.7 4.0 4.2 10.1 4.4 2.8
1971–80 6.4 1.8 2.2 3.8 7.0 8.8 5.2 13.4 3.2 4.4 2.9 2.0
1981–90 7.1 2.5 6.0 9.6 4.5 1.8 2.6 6.2 3.2 4.6 2.3 2.7
1991–00 5.6 3.3 7.8 7.9 2.2 0.5 1.8 3.2 3.4 1.2 2.1 2.5
2001–10 6.1 4.7 8.9 5.6 2.4 –0.3 1.6 2.1 1.6 0.8 0.9 1.7
2011–13 8.0 4.4 5.3 8.7 2.4 –0.2 2.2 3.0 2.2 0.9 2.1 0.8


1961–70 4.8 1.3 0.6 1.7 2.4 5.6 2.7 4.0 4.2 10.1 4.4 2.8 0.5 0.6 0.9 0.2
1971–80 6.4 1.8 2.2 3.8 7.0 8.8 5.2 13.4 3.2 4.4 2.9 2.0 0.9 0.5 1.1 –0.7
1981–90 7.1 2.5 6.0 9.6 4.5 1.8 2.6 6.2 3.2 4.6 2.3 2.7 –1.7 2.3 2.6 –1.4
1991–00 5.6 3.3 7.8 7.9 2.2 0.5 1.8 3.2 3.4 1.2 2.1 2.5 –1.6 2.5 –0.7 –1.5
2001–10 6.1 4.7 8.9 5.6 2.4 –0.3 1.6 2.1 1.6 0.8 0.9 1.7 –4.6 3.4 4.5 –2.2
2011–13 8.0 4.4 5.3 8.7 2.4 –0.2 2.2 3.0 2.2 0.9 2.1 0.8 –4.3 3.1 5.8 –2.2

 Aggregate demand and supply

 Macroeconomic issues
 the objective of economic growth
• cyclical fluctuations in the economy
• recessions
 unemployment
 inflation
 balance of trade deficits
 Macroeconomic policy and business
 demand-side policy Fiscal (gov) and monetary (central banks) policy
 supply-side policy
 The circular flow of income
 firms and households
 real and monetary flows

The circular flow of goods and incomes
Households
Firms
Goods and services
Goods and services
€
Consumer
expenditure
 goods and factor markets

Goods and services
€
Consumer
expenditure
Goods and services
€
Consumer
expenditure
Services of factors of production (labour, etc)

Goods and services
€
Consumer
expenditure
Wages, rent
dividends, etc.
€

 macroeconomics: aggregate flows

Goods and services
€
Consumer
expenditure
Wages, rent
dividends, etc.
€

 macroeconomics: aggregate flows
 microeconomics: individual markets

Goods and services
€
Consumer
expenditure
Wages, rent
dividends, etc.
€

Microeconomic Choices
 Microeconomics and choice remind: scarcity
 What?
 How?
 For whom?
 Choice and opportunity cost

 the meaning of opportunity cost
 rational choices
 marginal costs and benefits

Techniques of Economic Analysis
 Use of diagrams in economics

Effect of a rise in income
Entertainment
Food
Expenditure (€)
O
Individual’s income (€)

 Representing statistics
 time-series data - Time series graphs make trends
easy to spot. These trends are important as they
can be used to project into the future as variables
exhibit cyclical patterns: the variable being studied
does not exhibit a continual increase or decrease,
but instead goes up and down depending upon the
time of year. These cyclical patterns are also easy
to see with a time series graph.
Investment in the EU(15) (% changes from previous year)
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
–4.5 –1.3 0.3 1.7 3.0 4.2 5.0 8.7 7.0 3.8 –0.2 –0.5 –5.9 3.0 3.2 2.2 3.3
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
7.2 5.7 4.5 0.9 -0.8 1.0 2.7 3.1 5.9 5.5 –1.9 –12.8 0.4 1.1 –2.5 0.1
10
8
6 Growth in
Investment (annual % change)
investment
4
2
0
-2
-4
-6
-8
-10
-12
-14
1980 1985 1990 1995 2000 2005 2010
Economic growth and changes in investment in the EU(15)
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
0.2 1.1 1.8 2.6 2.5 2.8 2.8 4.2 3.7 3 1.8 1.1 -0.3 2.8 2.5 1.7 2.7
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
3 3 3.9 2.1 1.2 1.3 2.4 1.9 3.1 3 0 –4.3 2.1 1.4 –0.4 0.3
10
National income, Investment (annual % change)
8
6 Growth in
investment Growth in
4 investment
2
0
-2
-4
-6
-8
-10
-12
-14
1980 1985 1990 1995 2000 2005 2010
Economic growth and changes in investment in the EU(15)
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
0.2 1.1 1.8 2.6 2.5 2.8 2.8 4.2 3.7 3 1.8 1.1 -0.3 2.8 2.5 1.7 2.7
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
3 3 3.9 2.1 1.2 1.3 2.4 1.9 3.1 3 0 –4.3 2.1 1.4 –0.4 0.3
10
National income, Investment (annual % change)
8
6 Growth in
investment GrowthEconomic
in
4 investment
growth
2
0
-2 Economic
growth
-4
-6
-8
-10
-12
-14
1980 1985 1990 1995 2000 2005 2010

 Representing statistics
 time-series data
 cross-section data - different observations made
at the same time. For example, we could show
market shares of firms in the same industry,
quantities of two goods (food, clothing, electrical
appliances) bought at different levels of income,
opinion polls during a pre-election campaign,
production cost for different quantities, etc.
UK market shares of cider brands
2009 (%) 2011 (%)
Strongbow 28.5 27.2
Own-label 8.6 7.9
Magners 8.3 7.5
Lambrini 6.5 4.5
Bulmers Original 4.5 3.8
Frosty Jack's 2.9 4.1
Bulmers Pear cider 2.8 2.6
Jacques Fruits De Bois 2.7 2.2
Scrumpy Jack 2.5 2.4
Kopparberg 1.7 2.2
Stella Artois Cidre n/a 3.2
Others 31.0 32.4
100.0 100.0
Source: Mintel Cider UK Report, February 2012
Market share (%)
0
5
10
15
20
25
30
35
40
Strongbow
Own-label
Magners
Lambrini
Bulmers Original
Frosty Jack's
Bulmers Pear cider
Jacques Fruits De Bois
2007
Scrumpy Jack
Kopparberg

Others
Market share (%)
0
5
10
15
20
25
30
35
40
Strongbow
Own-label
Magners
Lambrini
Bulmers Original
Frosty Jack's
Bulmers Pear cider

2011

Scrumpy Jack
Kopparberg
Stella Artois Cidre
Others
Strongbow
Own-label
Magners
Lambrini
Bulmers Original
Frosty Jack's
Bulmers Pear cider
Scrumpy Jack
Kopparberg
Stella Artois Cidre
Others
2009 2011

 Index numbers
 constructing an index
Constructing an index
UK manufacturing and service industry output: 2003 = 100
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
Output of manufacturing
78.8 73.9 73.8 75.4 78.2 80.4 81.5 85.4 91.6 95.2 95.1 90.4 90.3 91.6 95.9 97.4
Output of services
49.6 49.8 50.5 52.2 54.1 55.8 58.1 60.5 63.3 64.6 65.5 65.3 65.7 67.7 70.7 73.1
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
98.1 99.9 100.5 101.6 103.9 102.5 100.3 100.0 102.1 102.0 103.9 104.9 102.3 92.3 95.8 97.9
Output of services
75.8 79.0 83.1 86.9 91.1 94.3 96.6 100.0 103.0 107.5 111.0 116.2 116.0 113.5 114.8 116.2
Source: based on data in National Accounts, Blue Book data. Sourced from www.ons.gov.uk
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
78.8 73.9 73.8 75.4 78.2 80.4 81.5 85.4 91.6 95.2 95.1 90.4 90.3 91.6 95.9 97.4
Output of services
49.6 49.8 50.5 52.2 54.1 55.8 58.1 60.5 63.3 64.6 65.5 65.3 65.7 67.7 70.7 73.1
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
98.1 99.9 100.5 101.6 103.9 102.5 100.3 100.0 102.1 102.0 103.9 104.9 102.3 92.3 95.8 97.9
Output of services
75.8 79.0 83.1 86.9 91.1 94.3 96.6 100.0 103.0 107.5 111.0 116.2 116.0 113.5 114.8 116.2
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
78.8 73.9 73.8 75.4 78.2 80.4 81.5 85.4 91.6 95.2 95.1 90.4 90.3 91.6 95.9 97.4
Output of services
49.6 49.8 50.5 52.2 54.1 55.8 58.1 60.5 63.3 64.6 65.5 65.3 65.7 67.7 70.7 73.1
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
98.1 99.9 100.5 101.6 103.9 102.5 100.3 100.0 102.1 102.0 103.9 104.9 102.3 92.3 95.8 97.9
Output of services
75.8 79.0 83.1 86.9 91.1 94.3 96.6 100.0 103.0 107.5 111.0 116.2 116.0 113.5 114.8 116.2
 Index numbers
 using index numbers to measure % changes
 price index
 use of weighted averages
Constructing a weighted average index
 Index numbers
 using index numbers to measure % changes
 price index
 use of weighted averages
 Functional relationships
 simple linear functions
Graph of the function: y = 4 + 2x
y 16
14 x y
Y = 4 + 2x
a 0 4
12
1 6
2 8
10 3 10
4 12
8 5 14
4
a
2
0
0 1 2 3 4 5
x
y 16
14 x y
Y = 4 + 2x
0 4
12
b 1 6
2 8
10 3 10
4 12
8 5 14
6
b
4
0
0 1 2 3 4 5
x
y 16
14 x y
Y = 4 + 2x
0 4
12
1 6
c 2 8
10 3 10
4 12
8 5 14
c
6
0
0 1 2 3 4 5
x
y 16
14 x y
Y = 4 + 2x
0 4 f
12
1 6
2 8
e
10 d 3 10
e 4 12 d
8 f 5 14
0
0 1 2 3 4 5
x
y 16
14 x y
Y = 4 + 2x
0 4
12
1 6
c 2 8 d
10 d 3 10
4 12 c 2
8 5 14
1
6
0
0 1 2 3 4 5
x

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02 - Chap02

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Economics and the

 Tackling the problem of scarcity

• natural resources – land and raw materials

 Demand and supply

 Dividing up the subject

 Aggregate demand and supply

 balance of trade deficits

Unemployment Inflation Economic growth Balance on current account

Source: based on data in European Economy (Commission of the European Union)

Unemployment Inflation Economic growth Balance on current account

1961–70 4.8 1.3 0.6 1.7

1971–80 6.4 1.8 2.2 3.8

1981–90 7.1 2.5 6.0 9.6

1991–00 5.6 3.3 7.8 7.9

2001–10 6.1 4.7 8.9 5.6

2011–13 8.0 4.4 5.3 8.7

Source: based on data in European Economy (Commission of the European Union)

Unemployment Inflation Economic growth Balance on current account

1961–70 4.8 1.3 0.6 1.7 2.4 5.6 2.7 4.0

1971–80 6.4 1.8 2.2 3.8 7.0 8.8 5.2 13.4

1981–90 7.1 2.5 6.0 9.6 4.5 1.8 2.6 6.2

1991–00 5.6 3.3 7.8 7.9 2.2 0.5 1.8 3.2

2001–10 6.1 4.7 8.9 5.6 2.4 –0.3 1.6 2.1

2011–13 8.0 4.4 5.3 8.7 2.4 –0.2 2.2 3.0

Source: based on data in European Economy (Commission of the European Union)

Unemployment Inflation Economic growth Balance on current account

Source: based on data in European Economy (Commission of the European Union)

Unemployment Inflation Economic growth Balance on current account

Source: based on data in European Economy (Commission of the European Union)

 Aggregate demand and supply

 The circular flow of income

 firms and households

 real and monetary flows

 The circular flow of income

 firms and households

 real and monetary flows

 goods and factor markets

Services of factors of production (labour, etc)

Services of factors of production (labour, etc)

 The circular flow of income

 firms and households

 real and monetary flows

 goods and factor markets

 macroeconomics: aggregate flows

Services of factors of production (labour, etc)

 The circular flow of income

 firms and households

 real and monetary flows

 goods and factor markets

 macroeconomics: aggregate flows

 microeconomics: individual markets

Services of factors of production (labour, etc)

 Microeconomics and choice remind: scarcity

 Choice and opportunity cost

 marginal costs and benefits

 Use of diagrams in economics

 Use of diagrams in economics

 Use of diagrams in economics

Source: Mintel Cider UK Report, February 2012

Market share (%)

Bulmers Pear cider

Jacques Fruits De Bois

Source: Mintel Cider UK Report, February 2012

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