Chp:2 – ECONOMICS &

THE WORLD OF
BUSINESS
SCARCITY

MACROECONOMICENVIRONMENT
MICROECONOMIC CHOICES
 PROBLEM OF SCARCITY

 Scarcity: a central problem to all

individuals & societies.

 “Excess of human wants over what can

actually be produced.”

 Leads to choice to be made between

alternatives.
 SATISFYING WANTS

 Consumption: act of using goods &

services to satisfy wants & involves
purchase-consumption decisions.

 Production: transformation of inputs into

outputs by firms in order to earn profit
either in the short run or the long run.
 FACTORS OF PRODUCTION

 The inputs into the production of goods

and services.
1. Labor: all forms of human input.
2. Land: all resources provided by nature.
3. Capital: produced inputs.
4. Entrepreneurship: the assembling of
resources to produce new or improved
products & technologies.
 DEMAND & SUPPLY

 Demand related to wants & supply related

to production.

 Potential demand exceeding potential

supply leads to scarcity.

 Solution: curtail demand or increase

supply or a combination of both.
MICRO – MACRO ECONOMICS

 Macroeconomics: study of the whole

economy & concerned with aggregate
demand (total spending) & aggregate
supply (total national output).

 Microeconomics: study of individual parts

of the economy and concerned with
demand – supply of particular goods &
services.
 MACROECONOMIC
ENVIRONMENT
 Balance between aggregate demand &
aggregate supply.
 aggregate demand > aggregate supply:

INFLATION

BALANCE OF TRADE DEFICITS

 MACROECONOMIC
ENVIRONMENT
 aggregate demand < aggregate supply:

RECESSION

UNEMPLOYMENT
 MACROECONOMIC POLICY

 Focus: Balancing aggregate demand &

aggregate supply.

 Demand side policy: influence spending &

so production, prices & employment.

 Supply side policy: directly influence

production levels.
 MACROECONOMIC POLICY:
business impact

 Demand side & supply side policies affect

business.

 Need to study macroeconomic

environment: forecast firm’s demand &
assess firm’s cost as well as profitability
 MICROECONOMICS & CHOICE

 What to produce & in  Product decision.

what quantities to
produce?
 Technology decision.
 How to produce?

 For whom to  Market segmentation

produce? decision.
 CHOICE & OPPORTUNITY COST

 Choice involves sacrifice.

 Opportunity cost: cost of something in

terms of what you give up for it i.e. cost
measured in terms of the best alternative
forgone.
 RATIONAL CHOICES
 Choice involving a comparison between
benefit of an activity & its opportunity.

 Comparing marginal benefit & marginal

cost of any activity.

 Marginal benefit > Marginal cost = profit.

 Marginal benefit < Marginal cost = loss.

 MARGINAL COSTS & BENEFITS

 Marginal: a little more or a little less of an

activity.

 Marginal costs: additional cost of doing a little

bit more (one more unit) of an activity.

 Marginal benefit: additional benefit of doing a

little bit more (one more unit) of an activity.
PRODUCTION POSSIBILITY
CURVE / FRONTIER
 Illustration of opportunity cost & scarcity
of resources.

 Determine limits of output.

 PP schedule summarizes hypothetic

production possibilities.
 PPC / PPF
 Describes various possible output.

 Combinations with available resources

and technology.

 Each point is an alternative mix of output.

 Producing more of one means producing

less of another.
 PPC / PPF CONCAVITY

 Reflects increasing opportunity costs.

 Forego increasing quantities of one good

for obtaining more of another.

 Lack of perfect mobility of resources

between activities.
 EFFICIENCY

 Efficiency: maximum output from a given

amount of resources.

 All the points on the PPC implies full

employment of available resources.
 INEFFICIENCY

 Actual output being less than the potential

output.
 Points inside the PPC / PPF.
 Can produce more of a good without
cutting back on the output of the other
good.
 Implies some unemployment of available
resources
 ECONOMIC GROWTH
 Output combinations outside the PPC are
unattainable with available resources and
technology.

 With more resources or better technology

or better skill potential output possibilities
increase – PPF shifts outward.

 Fundamentally implies economic growth.

 READINGS

 Bradley R. Schiller, The Microeconomy

Today, Part.1, chp. 1,pp. 1 – 26.

 John Sloman & Mark Sutcliffe,

Economics for Business, Part A, Chp.1,
pp. 30 – 47 & chp. 2, pp. 48 – 68.