PART 1

THE ECONOMIC & BUSINESS

ENVIRONMENT – SETTING
THE SCENE
1 What Is Business Economics?
2 Economics and Business
Decision Making
3 The Business Environment
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By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
1 WHAT IS BUSINESS ECONOMICS?
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Chapter Slide 2
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
What is Business Economics?

Business decisions are made by being informed

of the models and tools of economics. Their
decisions also help explain these models.

Business activity is the turning of land, labour

and capital into a product or service sold to
customers. It is carried out by organizations that
set themselves clear aims. For a private
organization, a main aim is to make a profit.

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Chapter Slide 3
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 Classifying Business…
Through an organization’s ownership and its
primary aim:

• Private sector business: Profit.

• Public sector organization: Perhaps to maximize

opportunities to access products and services like
roads, education and health care.

• Third sector organization: To meet the needs of

its beneficiaries.

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Chapter Slide 4
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The Fundamental Questions of Society

What should be produced?

How will products be produced?
Who will get the products?

Capitalist and communist economies have

different ways of deciding these questions.

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Chapter Slide 5
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Types of Economic Systems
 Communist economies: Systems where
resource inputs are largely owned by the state
and exchange and trade are based on social,
political and economic motives.

 Capitalist economies: Systems where resource

inputs are largely owned by private individuals
and where the motive for exchange takes place
primarily for profit.

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Chapter Slide 6
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 Summing up
Economics is the study of how society manages
its scarce resources.

Scarcity is the limited nature of society’s

resources.

Businesses allocate scarce resources among

competing uses, taking into account a range of
stakeholder wants and needs.

Governments get involved and most economies

are a mix of private and public ownership.

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Chapter Slide 7
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 Some Key Ideas in Economics

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Chapter Slide 8
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 People Make Decisions

 Recall that the economy is the collective

interaction between producers and consumers
making and carrying out decisions.

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Chapter Slide 9
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 Idea 1
Decision making involves trade-offs.

 Getting the most from scarce resources means

facing different trade-offs such as:
• How to use your time.
• To decide as a business whether to employ more
people or more machines.
• As a country whether to have more capital or
more consumer goods.
• Whether to have more goods or a cleaner
environment.

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Chapter Slide 10
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Idea 2
The cost of something is what you give up to get it.

 The opportunity cost is whatever is given up to

obtain some item.
 It measures the value of what is foregone.

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Chapter Slide 11
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Idea 3
Rational people and businesses think at the margin.

 Marginal changes describe small incremental

adjustments.
 Many decisions are made at the margins.
 Firms are interested in the marginal costs.

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Chapter Slide 12
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Idea 4
People and businesses respond to incentives.

 People compare the costs and benefits when making

decisions.
• If the price of a good rises, consumers buy less of that
good and buy more of alternative goods.
 Decisions are made by:
• People as consumers
• Businesses as suppliers
• Governments as policymakers

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Chapter Slide 13
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Problem 1
 A smartphone manufacturer invests €20
million in developing a new phone design and
3D interface, but the development is not quite
finished. At a recent meeting, your sales
people report that a rival has just released a
new phone which is estimated to reduce the
expected sales of your new product to €12
million. If it would cost €4 million to finish
development and make the product, should
you go ahead and do so?
 Explain your answer.
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Chapter Slide 14
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Idea 5
Trade can make everyone better off.

 Trade between two economies can make each

economy better off.
 Countries as well as businesses benefit from the
ability to trade with one another.
 Trade allows countries to specialize in what they
do best and to enjoy a greater variety of goods
and services.

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Chapter Slide 15
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Idea 6
Markets are usually a good way to organize
economic activity.

 In a market economy, the decisions of a central

planner are replaced by the decisions of millions
of firms and households.
 In general, markets have promoted economic
well-being.

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Chapter Slide 16
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Idea 7
Governments can sometimes improve market
outcomes.

 Markets are not without their problems. Market failure

is when the market on its own fails to produce an
efficient allocation of resources.
• Property rights exist to provide protection over the
ownership of resources.
• Externalities are the uncompensated impact of a person
or firm’s action on the well-being of a third party.
• Market power is when an economic agent is able to
influence market prices.
 Governments can intervene to improve markets.
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Chapter Slide 17
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Idea 8
An economy’s standard of living depends on its
ability to produce goods and services
 Economic growth is the increase in the amount of
goods and services in an economy over a period of
time.
 Gross domestic product per capita is one useful
indicator of measuring living standards.
 The standard of living measures welfare based on
the amount of goods and services a person’s income
can buy.
 Productivity is directly related to living standards.
• Boosting productivity raises living standards.

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Chapter Slide 18
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
2 ECONOMICS & BUSINESS
DECISION MAKING

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Chapter Slide 19
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
1. Economics: The Science (Or Art)
Of Decision Making

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Chapter Slide 20
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The Economic Problem
 Scarce resources: Scarce because supply of them
is limited in relation to demand.
 Wants: Things people would like to have but are not
essential for life.
 Needs: The essentials of life.
 Competing choices: Limited incomes mean all
wants and needs cannot be satisfied.

Choices have to be made which involve

costs and benefits

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Chapter Slide 21
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The Effect of Human Decision
Making on Business
 Individuals make many decisions every day on
purchases.
 The combined decisions of these individuals send
messages to businesses that will affect business
behaviour.

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Chapter Slide 22
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Value For Money

 Where satisfaction (utility) is greater than the

purchase price.
 Sellers have to consider value for money
propositions.
 Buyers make purchase decisions on the basis of
proposition.
 A market is when buyers and sellers come
together to agree on exchange.

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Chapter Slide 23
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
2. Business Decision Making

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Chapter Slide 24
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Businesses Will Make Their Own
Decisions On…
 How to react to or influence consumer demand.
 How best to organize production to meet demand now
and in the future.

 How much to take account of stakeholder interests.

• Stakeholders include suppliers, employees and the
government.

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Chapter Slide 25
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Investment
 Investment is making money available to develop
a project which will generate future returns.
 Investment has both costs and benefits to
business.
• Some costs and benefits are internal to the
business.
• Some costs and benefits affect stakeholders who
are external to the business.

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Chapter Slide 26
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Growth and Expansion
 Investment decisions:
• Plant, equipment, buildings, land – with a view to future
returns.

 Business consumption decisions:

• Human resources, raw materials, supplier choice –
operating inputs.

 Risk factor – any business decision involves risk.

 Growth can be internal from new investment, and/or
external from mergers and takeovers.

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Chapter Slide 27
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Acquiring and Keeping Customers

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Chapter Slide 28
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Problem 2
 A business calculates that the cost of
acquiring a new customer is €250 and the
average yearly revenue received from each
customer is €260.
 Should the business go ahead with its
customer acquisition spending on this basis?

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Chapter Slide 29
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
3 THE BUSINESS ENVIRONMENT

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Chapter Slide 30
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
What Is Business?
 Businesses buy factor inputs, land, labour and
capital.
 They process inputs into outputs.
 Which are then sold:
• To consumers: Business to consumer (B2C)
• To other businesses: Business to business (B2B)
• From consumer to consumer via auction sites (C2C)

 Generating revenue which is used to help pay for

the costs of acquiring factor inputs.
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Chapter Slide 31
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The Factors of Production

 Land: All the natural resources of the planet.

 Labour: All human effort whether mental or
physical.
 Capital: Any item used in production for its
contribution to production and output.
 Enterprise: The taking of risk in organizing the
factors of production to generate business
activity.

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Chapter Slide 32
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The Transformation Process
 Added value: The difference between the cost of
the factor inputs into production and the amount
consumers are prepared to pay.
• The price consumers are willing to pay represents
the value placed on a product.
• Firms add value in different ways, e.g.
• Product design.
• Customer service.

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Chapter Slide 33
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
 2. The PESTLE Framework

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Chapter Slide 34
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
Internal Process, External Environment
 Firms have some control over the internal process –
they can decide what factor inputs to buy and how
to process them. But – businesses are affected by
the external environment.
 Represented by the acronym PESTLE:
P olitical
E conomic
S ocial
T echnological
L egal
E nvironmental

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Chapter Slide 35
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The External Environment
Political Economic Social Technological Legal Environment

Factor inputs Processed into… Outputs

Consumer

Land, labour, capital,

enterprise costs Revenue

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Chapter Slide 36
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The PESTLE Framework: Political

 Power can be wielded by local governments,

national governments and supernational
governments.
 Examples might include:
• Planning permission (local).
• Minimum wage level (national).
• European regulations on the quality and safety of
products (EU).

 These political holders of power are elected so the

nature of the power is subject to change.
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Chapter Slide 37
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The PESTLE Framework: Economic
 Local, regional, national and international
economies.
 Fluctuations in economic activity according to
demand and other external influences – even the
weather.
 Microeconomic environment: Factors and
issues that affect an individual firm operating in a
particular market or industry.
 Macroeconomic environment: The national or
global economy within which the business
operates.
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Chapter Slide 38
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The PESTLE Framework: Social
 Businesses are affected by various trends, fashions,
moods and changes in society.
 Trends and fashions in society affect business,
e.g. green issues.
 Culture and religion and changing attitudes to the
environment can influence demand and ways of
working.

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Chapter Slide 39
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The PESTLE Framework: Technological

 Technology: The application or use of

knowledge in some way, which enables
individuals or businesses to have greater control
over their environment.
 There has been an explosion in technological
developments providing both opportunities and
threats to business.

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Chapter Slide 40
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The PESTLE Framework: Legal

 Local, national and supranational legal

framework.
 Associated with good governance.
 Legal framework likely to increase costs for
compliance.

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Chapter Slide 41
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The PESTLE Framework: Environmental

 Economic growth and therefore business activity has an

impact on the environment.
• On ecosystems.
• Climate change and global warming.
• Resource endowments (non-renewable resources).

 Businesses need to look at their impact on the environment.

• They need to assess the costs and benefits of reviewing effects
of business activity.

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Chapter Slide 42
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning
The END

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Chapter Slide 43
By N. Gregory Mankiw, Mark P. Taylor, and Andrew Ashwin © Cengage Learning