Lecfigtp 02

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
factors of production
labour
land and raw materials capital
What do Economists Study?

Demand and supply
actual and potential demand and supply the role of firms in satisfying demand business economists study of the supply process
Dividing up the subject

macroeconomics microeconomics
Q Which one of the following is a microeconomic issue?

A. The government spends more than it receives in tax revenue. B. House prices rise more rapidly. C. Unemployment rises. D. The Bank of England raises interest rates. E. Imports exceed exports.
Q Macroeconomics is a branch of economics which examines

A. the economic behaviour of aggregates income, employment, and output on a national scale. the functioning of individual industries and the behaviour of individual decision-making units, that is, business firms and households. ways to understand behaviour and the operation of systems without making judgements. outcomes of economic behaviour, evaluates them as good or bad, and prescribes preferred courses of action.
B.
C.
D.
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 (% of workforce) USA Japan Germany UK 196170 197180 198190 19902000 200005 4.8 6.4 2.5 3.3 5.0 1.3 1.8 2.5 3.3 5.0 0.6 2.2 6.0 7.9 9.2 1.7 3.8 9.6 7.9 5.0
Inflation (%) USA Japan Germany UK 2.4 7.0 4.5 2.2 2.1 5.6 8.8 2.2 0.4 1.3 2.7 5.1 2.5 2.3 1.3 3.9 13.2 6.2 3.3 1.9
Economic growth (%) USA Japan Germany UK 4.7 3.2 3.2 3.3 2.6 10.1 4.4 3.9 1.5 1.7 4.4 2.8 2.3 1.9 0.8 3.0 2.0 2.6 2.4 2.5
Balance on current account (% of national income) USA Japan Germany UK 0.5 0.9 1.7 1.6 4.8 0.6 0.5 2.3 2.5 2.9 0.9 1.1 2.6 0.7 2.8 0.2 0.7 1.4 1.5 1.9
Source: based on data in European Economy (Commission of the European Union)




cyclical fluctuations in the economy recessions
Macroeconomic policy and business


demand-side policy


demand-side policy supply-side policy
Q Which one of the following is an example of demand-side policy?

A. Building more roads so as to improve the efficiency of industry.
B. Cutting corporation tax so as to encourage firms to reinvest more in R&D. C. Raising interest rates so as to reduce inflation.
D. Curbing union power. E. Removing restrictions on imports in order to encourage greater competition.

The circular flow of income
firms and households real and money flows
The circular flow of goods and incomes

Goods and services

Goods and services
Consumer expenditure

firms and households real and money flows goods and factor markets

Goods and services

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

Goods and services
Wages, rent dividends, etc.
Q Which one of the following does NOT represent a flow of income earned by factors of production?
A. Wages earned by workers in a factory.
B. Rent received by landowners.

C. A machine sold by a firm. D. Profits earned by businesspeople. E. Salaries earned by lecturers.

firms and households real and money flows goods and factor markets macroeconomics: the total flows

Goods and services

firms and households real and money flows goods and factor markets macroeconomics: the total flows microeconomics: individual markets

Goods and services
Microeconomic Choices
Microeconomics and choice
What? How? For whom?
Choice and opportunity cost

the meaning of opportunity cost rational choices marginal costs and benefits
Microeconomic choices and the firm
Q Assume that a firm can produce 6 units of good X or 12 units of good Y per hour with its current resources. The opportunity cost of a unit of X is:
A. 72 units of Y B. 12 units of Y
C. 6 units of Y
D. 2 units of Y E. unit of Y
Techniques of Economic Analysis

Use of diagrams in economics
Effect of a rise in income

Entertainment Food
Expenditure ()
O
Individuals income ()
Expenditure ()
Q In the diagram opposite, the expenditure on which product is more responsive to a rise in income?
A. Food
Effect of a rise in income

Entertainment Food
B. Entertainment
C. Food at lower levels of income and entertainment at higher levels D. Food at higher levels of income and entertainment at lower levels E. There is not enough information in the diagram to say.
Individuals income ()

Use of diagrams in economics Representing statistics

time-series data
Investment in the EU (% changes from previous year)

1981 4.2 1994 1982 1.4 1995 2.9 1983 0.6 1996 2.2 1984 1.7 1997 3.3 1985 2.7 1998 6.9 1986 4.2 1999 5.7 1987 4.8 2000 4.9 1988 8.4 2001 0.5 1989 6.9 2002 1.3 1990 3.8 2003 0.7 1991 0.5 2004 2.8 1992 0.3 2005 2.1 1993 5.8 2006 3.3
10 8
Investment (annual % change)
2.9
6 4 2 0 -2 -4 -6 -8 1980
1985
1990
1995
2000
2005
Investment in the EU (% changes from previous year)

1981 4.2 1994 1982 1.4 1995 2.9 1983 0.6 1996 2.2 1984 1.7 1997 3.3 1985 2.7 1998 6.9 1986 4.2 1999 5.7 1987 4.8 2000 4.9 1988 8.4 2001 0.5 1989 6.9 2002 1.3 1990 3.8 2003 0.7 1991 0.5 2004 2.8 1992 0.3 2005 2.1 1993 5.8 2006 3.3
10 8
Investment (annual % change)
2.9
6 4 2 0 -2 -4 -6 -8 1980
1985
1990
1995
2000
2005
Investment and national income in the EU (% changes from previous year)

Econonmic growth: percentage changes from previous year 1981 0.2 1994 2.8 1982 1.1 1995 2.6 1983 1.9 1996 1.7 1984 2.5 1997 2.7 1985 2.6 1998 3.0 1986 2.7 1999 3.0 1987 2.7 2000 3.8 1988 4.1 2001 1.9 1989 3.5 2002 1.1 1990 3.0 2003 1.1 1991 1.8 2004 2.3 1992 1.3 2005 1.4 1993 0.4 2006 2.0
National income, Investment (annual % change)
10 8 6 4 2 0 -2 -4 -6
Growth in investment
-8 1980
1985
1990
1995
2000
2005
Investment and national income in the EU (% changes from previous year)

Econonmic growth: percentage changes from previous year 1981 0.2 1994 2.8 1982 1.1 1995 2.6 1983 1.9 1996 1.7 1984 2.5 1997 2.7 1985 2.6 1998 3.0 1986 2.7 1999 3.0 1987 2.7 2000 3.8 1988 4.1 2001 1.9 1989 3.5 2002 1.1 1990 3.0 2003 1.1 1991 1.8 2004 2.3 1992 1.3 2005 1.4 1993 0.4 2006 2.0
National income, Investment (annual % change)
10 8 6 4 2 0 -2 -4 -6
Growth in investment
Economic growth
-8 1980
1985
1990
1995
2000
2005

time-series data cross-section data
UK market shares of the largest brewers
1985 (%) Bass Allied Lyons (Carlsberg) Grand Met (Watneys) Whitbread Scottish and Newcastle Courage Others 22 13 12 11 10 9 23 100
2005 (%) ScottishCourage Coors (Carling, Worthington) !nBev (Bass, Becks, Stella) Carlsberg UK Diageo (Guinness) Anheuser-Busch (Budweiser) Others 27 20 19 13 6 2 13 100
Market share (%)

10 15 20 25 30 0
Bass
Allied Lyons Grand Met
1985
Whitbread Scottish and Newcastle Courage Others
Market share (%)

10 15 20 25 30 0
S&N
Coors !nBev Carlsberg UK Diageo Others
2005
Others (23%)
Bass (22%) Diageo (6%) Allied Lyons (13%)
Others (15%)
S&N (27%)
Courage (9%)
Carlsberg UK (13%) !nBev (19%) Coors (20%)
Grand Scottish & Met Newcastle (12%) (10%) Whitbread (11%)
1985
2005

Getting a true picture from statistics


selective use of data


selective use of data graphical presentation


selective use of data graphical presentation absolute and proportional values


selective use of data graphical presentation absolute and proportional values questions of distribution


selective use of data graphical presentation absolute and proportional values questions of distribution real and nominal values

Index numbers
constructing an index
Constructing an index:
UK manufacturing and service industry output: 2002 = 100
1980 Output of Manufacturing Output of Services 79.4 52.7 1981 74.5 52.9 1982 74.4 53.6 1983 76.0 55.4 1984 78.8 57.5 1985 81.0 59.3 1986 82.1 61.7 1987 86.0 64.3 1988 92.3 67.2 1989 96.0 68.6
1990 Output of Manufacturing Output of Services 95.9 69.5
1991 91.1 69.4
1992 91.0 69.7
1993 92.3 71.8
1994 96.6 75.1
1995 98.1 77.8
1996
1887
1998
1999
98.9 100.7 101.3 102.1 80.0 83.0 87.0 90.3
2000 Output of Manufacturing Output of Services
2001
2002
2003
2004
2005
104.6 103.2 100.0 100.1 101.9 101.1 94.3 97.4 100.0 102.7 106.4 109.2
Constructing an index:
UK manufacturing and service industry output: 2002 = 100
1980 Output of Manufacturing Output of Services 79.4 52.7 1981 74.5 52.9 1982 74.4 53.6 1983 76.0 55.4 1984 78.8 57.5 1985 81.0 59.3 1986 82.1 61.7 1987 86.0 64.3 1988 92.3 67.2 1989 96.0 68.6
1990 Output of Manufacturing Output of Services 95.9 69.5
1991 91.1 69.4
1992 91.0 69.7
1993 92.3 71.8
1994 96.6 75.1
1995 98.1 77.8
1996
1887
1998
1999
98.9 100.7 101.3 102.1 80.0 83.0 87.0 90.3
2000 Output of Manufacturing Output of Services
2001
2002
2003
2004
2005
104.6 103.2 100.0 100.1 101.9 101.1 94.3 97.4 100.0 102.7 106.4 109.2

Index numbers
using index numbers to measure % changes

Index numbers

price index

Index numbers

price index use of weighted averages
Constructing a weighted average index
Q Assume that an industry consists of two firms, A and B. Assume that As output is four times larger than Bs. Assume that output of A rises by 10% and that of B by 20%. By what percentage has industry output risen? A. 11%
B. 12%
C. 12.5% D. 17.5% E. 18%

Index numbers

Functional relationships

Index numbers

simple linear functions
Graph of the function: y = 4 + 2x

16 14
x
a 0 1 2 3 4 5
y
4 6 8 10 12 14
Y = 4 + 2x
12
10
0 0 1 2 3 4 5

16 14
x
b 0 1 2 3 4 5
y
4 6 8 10 12 14
Y = 4 + 2x
12
10
b
4
0 0 1 2 3 4 5

16 14
x
0 1 2 3 4 5
y
4 6 8 10 12 14
Y = 4 + 2x
12
c
10
c
6
0 0 1 2 3 4 5

16 14
x
0 1 2 3 4 5
y
4 6 8 10 12 14
Y = 4 + 2x
12
e
d
10
d e f
0 0 1 2 3 4 5

16 14
x
0 1 2 3 4 5
y
4 6 8 10 12 14
Y = 4 + 2x
12
10
c d
d
c
1
2
0 0 1 2 3 4 5
Q Assume that a function changed from y = 4 + 2x to y = 6 + 2x What effect would it have on the graph of the function? The line would
A. shift upwards. B. shift downwards. C. become steeper. D. become flatter.
Q Assume that a function changed from y = 4 + 3x to y = 4 + 2x What effect would it have on the graph of the function? The line would
A. shift upwards.
B. shift downwards. C. become steeper. D. become flatter.

Index numbers

simple linear functions
non-linear functions
Graph of the function: y = 4 + 10x - x 2

30
25
20
x
15
y
4 13 20 25 28 29 28
10
a
5
0 1 2 3 4 5 6
0 0 1 2 3 4 5 6

30
25
20
x
15
y
4 13 20 25 28 29 28
b
10
0 1 2 3 4 5 6
0 0 1 2 3 4 5 6

30
25
20
c
x y
4 13 20 25 28 29 28
15
10
0 1 2 3 4 5 6
0 0 1 2 3 4 5 6
Yearly Inflation Rates of Pakistan ( 1990-91 = 100) Inflation Rates based on Sensitive Price Indicator (SPI), Consumer Price Index (CPI) and Wholesale Price Index (WPI) are Period SPI CPI WPI 1991-1992 10.54 10.58 9.84 1992-1993 10.71 9.83 7.36 1993-1994 11.79 11.27 11.40 1994-1995 15.01 13.02 16.00 1995-1996 10.71 10.79 11.10 1996-1997 12.45 11.80 13.01 1997-1998 7.35 7.81 6.58 1998-1999 6.44 5.74 6.35 1999-2000 1.83 3.58 1.77 2000-2001 4.84 4.41 6.21 2001-2002 3.37 3.54 2.08 2002-2003 3.58 3.10 5.57 2003-2004 6.83 4.57 7.91 2004-2005 11.55 9.28 6.75 2005-2006 7.02 7.92 10.10 2006-2007 10.82 7.77 6.94

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Economics and the World of Business

What do Economists Study?

What do Economists Study?

Dividing up the subject

Q Which one of the following is a microeconomic issue?

Q Macroeconomics is a branch of economics which examines

The Macroeconomic Environment

unemployment inflation balance of trade deficits

Macroeconomic performance of four industrialised countries

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

Macroeconomic performance of four industrialised countries

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

Macroeconomic performance of four industrialised countries

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

Macroeconomic performance of four industrialised countries

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

The Macroeconomic Environment

unemployment inflation balance of trade deficits

Macroeconomic policy and business

The Macroeconomic Environment

unemployment inflation balance of trade deficits

Macroeconomic policy and business

The Macroeconomic Environment

unemployment inflation balance of trade deficits

Macroeconomic policy and business

Q Which one of the following is an example of demand-side policy?

The Macroeconomic Environment

The circular flow of goods and incomes

The circular flow of goods and incomes

The circular flow of goods and incomes

The Macroeconomic Environment

The circular flow of goods and incomes

The circular flow of goods and incomes

Services of factors of production (labour, etc)

The circular flow of goods and incomes

Wages, rent dividends, etc.

Services of factors of production (labour, etc)

B. Rent received by landowners.

The Macroeconomic Environment

The circular flow of goods and incomes

Wages, rent dividends, etc.

Services of factors of production (labour, etc)

The Macroeconomic Environment

The circular flow of goods and incomes

Wages, rent dividends, etc.

Services of factors of production (labour, etc)

Choice and opportunity cost

Microeconomic choices and the firm

Techniques of Economic Analysis

Effect of a rise in income

Effect of a rise in income

Techniques of Economic Analysis

Techniques of Economic Analysis

Investment in the EU (% changes from previous year)

Investment in the EU (% changes from previous year)

Investment and national income in the EU (% changes from previous year)

National income, Investment (annual % change)

Investment and national income in the EU (% changes from previous year)

National income, Investment (annual % change)

Techniques of Economic Analysis

UK market shares of the largest brewers

Market share (%)

Whitbread Scottish and Newcastle Courage Others