Leidenschaft

fürs Leben.

Fundamentals of Economics
and Management
Ekaterina Aleshchenko, PhD, MBA
Course Structure

01 13. October
Introduction to the Economic Theory. Fundamentals of the Theory of Consumer
Behavior.

02 17. October
Fundamentals of the Theory of Demand and Supply.

03 26. October
Theory of Company Behavior. The Company Under Imperfect Competition.

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Course Structure. Prof Stecker

01 28. October
Macroeconomics and Macroeconomic Policy: Wealth of nations. Macroeconomic
indicators.

02 1. November
Macroeconomics and Macroeconomic Policy: Economics and regulatory policy.
Economies of scale and innovation patterns.
03 4. November
New institutional economics: Market failure and state failure. International
economics and international business: Business in the global economy.
04 8. November
International economics and international business: strategy and
organization. Repetition and feedback.
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Course Structure. Prof Hessel

24. November
Evaluation of Management. Management Process. Management Tools.

24. November. Exam

- 10 test questions on microeconomics (40 Points)

- two open questions on macroeconomics and business (50 Points).

90 minutes. 90 Points.

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Lecture 1

1. Short self-presentation round

2. Introduction to the Economic Theory
3. Fundamentals of the Theory of Consumer Behavior

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1. Short self-presentation round

- Who am I?
- Where are I come from?
- Have I ever studied economics / management?
- Economic definitions game (give your definition of a term
given, suggest your own term to define to the next student)

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2. Introduction to the economic theory

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Needs and wants

• A need is something you have to have, something you can't do without. A

good example is food. If you don't eat, you won't survive for long.

• A want is something you would like to have. It is not absolutely necessary,

but it would be a good thing to have. A good example is music. Now, some
people might argue that music is a need because they think they can't do
without it. But you don't need music to survive. You do need to eat.

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Needs and wants

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Needs and wants

• In addition, people need resources to meet their needs and desires.

• These resources can not be infinite. But the needs and desires can.
• People have to make decisions about how to use limited resources
• Economists study this choice

Economics is the study of the use of scarce

resources that can have alternative uses

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Needs and wants

• The necessity to satisfy all these needs induces a person to carry out certain
activities (finding job, the production of material goods and services, etc.).
• Such activity is the interaction of actors in order to adapt the environment
to meet their needs.
• This activity, along with its conditions, results, and patterns is studied by
economics.

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Why is it improtant to study economics?

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Methodology of economics

• Economic phenomena are complex, so economists model economic

behaviors. In constructing a model, economists:
- Make assumptions which cut away unnecessary details; and
- Reduce the complexity of the economic behavior.

• The economic behavior is then presented as a relationship between a

dependent variable and few independent variables.

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Methodology of economics

• The economic behavior being explained is the dependent variable while the
variables explaining that economic behavior are the independent ones.
• Frequently, the dependent variable is presented as depending upon one
independent variable, with the influence of the other independent variables
held constant.
e.g. C = f (Q/T, W, D) that is
C depends upon Q (while other independent variables T, W and D are held
constant).

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Methodology of economics

An economic model will, also, specify the type of relationship between the
dependent and independent variables. This can be positive or negative.
• Positive relationship: when the dependent variable moves in the same
direction as the independent variable e.g. positive relationship between
price (independent variable) and supply (dependent variable), ceteris
paribus.
• Negative relationship: when the value of the dependent variable increases
as the value of the independent variable decreases e.g. as the price of
commodity increases, its demand decreases.

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What econimic problems can you name?

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What is scarcity?

Since the unlimited needs of all subjects of economic relations cannot be fully
satisfied, each person, firm or state must make a choice from the desired.

Limited Resources + Unlimited Wants =

Scarcity

The problem of scarcity underlies many economic concepts, since it

determines our behavior in the economy.

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Economic resources

• are the goods or services available to individuals and businesses used to

produce valuable consumer products.

• are also called the factors of production. The factors of production describe
the function that each resource performs in the business environment.

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Economic resources. Land.

• is the economic resource encompassing natural resources found within a

nation economy.
• This resource includes timber, land, fisheries, farms and other similar
natural resources.
• Land is usually a limited resource for many economies. Although some
natural resources, such as timber, food and animals, are renewable, the
physical land is usually a fixed resource.

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Economic resources. Labor.

• represents the human capital available to transform raw or national

resources into consumer goods.
• Human capital includes all able-bodied individuals capable of working in
the nation’s economy and providing various services to other individuals or
businesses.
• Human capital is flexible and can also be improved through training or
educating workers to complete technical functions or business tasks when
working with other economic resources.

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Economic resources. Capital.

• can represent the monetary resources companies use to purchase natural

resources, land and other capital goods. Monetary resources flow through a
nation economy as individuals buy and sell resources to individuals and
businesses.
• also represents the major physical assets individuals and companies use
when producing goods or services. These assets include buildings,
production facilities, equipment, vehicles and other similar items.

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Economic resources. Entrepreneurship.

• is considered a factor of production because economic resources can exist

in an economy and not be transformed into consumer goods.
• Entrepreneurs usually have an idea for creating a valuable good or service
and assume the risk involved with transforming economic resources into
consumer products.
• Entrepreneurship is also considered a factor of production since someone
must complete the managerial functions of gathering, allocating
and distributing economic resources.

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Economic resources. Information and innovation.

• Information is a data that contributes to the most profitable production.

• Innovation is a "new idea, creative thoughts, new imaginations in form of
device or method". However, innovation is viewed as the application of
better solutions that meet new requirements, unarticulated needs, or
existing market needs.
• They are aimed at increasing productivity and, as a rule, at obtaining
additional income.

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Scarcity and opportunity cost.

• as soon as one set of benefits is selected, the opportunity to choose another

is lost. The multiplicity of economic goals with limited resources poses the
problem of economic choice - the choice of the best alternative from all
alternatives available, which gives the maximum satisfaction of needs for
the same costs.
• Economists describe this situation with the concept of opportunity cost, or
imputed costs.

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Scarcity and opportunity cost.

• also known as alternative cost, of making a particular choice is the value of

the most valuable choice out of those that were not taken.
• the loss of potential gain from other alternatives when one alternative is
chosen

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Scarcity and opportunity cost.

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Main economic questions

Each economic system as a whole also solves this problem.

By doing this, it answers the following questions:

What will be produced?

How it will be produced?
For whom it will be produced?

Three major economic questions that determine the functioning of the

economic system as a whole

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Main economic questions

• What to produce – this involves decisions about the kinds and quantities of
goods and services to produce
• How to produce – this requires decisions about what technologies will be
used and how the economic resources are to be combined in producing
output
• For whom to produce – this involves decisions on the distribution of output
among the members of a society

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Economic system

• The economic system is a system of social production, i.e., a set of

productive forces and production relations. This is a complex dynamic
system, covering the processes of production, exchange, distribution and
consumption.
• Depending on how this or that economic system answers the questions
raised above, it is defined as traditional, command (centralized), market or
mixed.

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Main economic questions and type of economic
system
Limited resources Unlimited needs and wants

Problem of
scarcity
What we have to
decide?
• What will be produced?
• How it will be produced?
• For whom it will be produced?
Our choice determines

Traditional Command Mixed Market

economy economy economy economy

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Economic system. Subsistence economy.

• The subsistence economy is based on direct connections, i.e., direct

satisfaction of needs without a deed of sale. Subsistence farming is
production for oneself. Distribution of products is carried out within the
economy (community) on the basis of the principle of "fairness". The main
feature of subsistence farming is the need for an equalization distribution
based on physiological needs in conditions of poverty.
• The list of benefits, the technology of production and the distribution of
benefits are based on time-honored customs. The economic roles of
individuals are determined by heredity and caste.

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Economic system. Command economy.

• It is a system in which public (state) ownership of the means of production,

collective economic decision-making, and centralized management of the
economy through state planning dominate.
• All answers to major economic questions are made by the state. All
resources are state-owned. Central planning covers all levels - from
household to government. The distribution of resources is carried out on the
basis of long-term priorities, which is why production of goods constantly
lags behind social needs.

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Economic system. Market economy.

• It is a system based on private property, freedom of choice and competition,

based on personal interests and the limited role of government.
• Freedom of consumption is expressed in the freedom of consumer choice in
the market for goods and services. Independent distribution of own
resources in accordance with own interests means freedom of
entrepreneurship. The market economy involves both personal freedom in
making economic decisions and personal economic responsibility. Personal
interest is the main motive and driving force of the economy. Freedom of
choice becomes the basis of competition.

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Economic system. Market economy.

• “What?” Is determined by effective demand, by voting with money. The

consumer decides for what he is willing to pay money, and the
manufacturer will strive to satisfy this desire.
• "How?" - the manufacturer will decide, seeking to get the most revenue.
Since prices are set by the market and, in fact, do not depend on the
manufacturer, he is forced to use a more advanced technology, improve
quality, give his products new consumer properties. Competition pushes him
to this.
• The question "For whom?" Is solved in favor of the consumer with the
highest income.

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Economic system. Mixed economy.

• it is an economic system that combines elements of market and command

economies, actively complementing the mechanism of the market with
state activity.
• The advantage of a mixed economy is the efficiency of resource use and
economic freedom of producers. It promotes the introduction of more
modern technologies. An important non-economic argument is a accent on
personal freedom.

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The circular flow of resources, money, goods and
services

• circular movement of real economic benefits, accompanied by a counter-

flow of cash receipts and expenditures.
• This is a schematic representation of the interrelated major market flows in
the economy.
• In the process of circulation, two streams are formed:
1) counterclockwise - the flow of economic resources;
2) clockwise - cash flow, consumer spending and production costs.

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The circular flow of resources, money, goods and
services

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Which basic participant is absent in the
model?

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The circular flow of resources, money, goods and
services

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State functions in a simple mixed economy model

• collects taxes;
• redistributes income through transfer payments;
• pays wages to public sector employees and civil servants;
• buys in the markets of economic resources and products;

• acts as a producer of public goods, as well as other goods and services.

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3. Fundamentals of the Theory of
Consumer Behavior

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Imagine you have 100 Euro to spend this week

Identify:
• 5 goods or services you would spend your money on.
• The approximate price of each product, and
• The quantity you would buy

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Questions

• How did you decide which items to put in your “basket”?

• Is your basket identical to your classmates? Why or why not?
• How would a change in the price of one of the items affect the quantity you
buy?
• How would a change in your budget affect the composition of your basket?

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Why it differs?

• Every consumer behaves rationally: Consumers try to get the "most for
their money" to maximize their total utility
• Every consumer has different preferences: Consumers have clear cut
preferences and can determine how much marginal utility they get from
consuming more units of a product
• Every consumer is under a budget constraint: All consumers face a budget
constraint, therefore must make decisions about what they buy based on
their limited budget
• Every product has a price: Every product has a price, so consumers must
weigh their purchasing decisions based on their marginal utility from
consumption and the price of the goods they consume

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Utility

• Rational consumers wish to maximize their happiness, or utility when buying

goods and services
• Utility – the want-satisfying power of a good or service
• Basically it is another word for satisfaction
• Purely subjective – you can’t measure MY utility.

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Utility

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Utility

Total Utility (TU): This is the total happiness of a consumer at a particular

level of consumption. Total utility will generally increase as total consumption
of particular good increases, until the consumer has “had too much” of the
good, when total utility will begin to decline.

Marginal Utility (MU): This is the increase in total utility resulting from the
consumption of each additional unit of a particular good.

∆𝑇𝑈
𝑀𝑈 =
∆𝑄
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Utility

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Law of diminishing marginal utility

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Task

Explain the small case given in economic terms

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