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Economics summaryChapter 1: Economics and the business environment
Economics= study of allocation of scarce resources to competing uses and study of
how decision-making units make choices.
Economics has 4 basic questions:
What to produce and how much? How to produce? For whom to produce? Who
makes economic decisions?
Positive economics= descriptive: What is or what will be?
If minimum wage increases, how many workers will be laid off?
If two firms merge, will the price of their good increase?
If taxes are cut, what fraction of the tax cut will be spent on consumer
spending?
If a nation restricts imports, what is the effect on domestic producers and
consumers?
If the euro depreciates in value, will US exports be competitive?
Normative economics= prescriptive: What should be or ought to be?
Should government raise the minimum wage?
Should government subsidize innovation?
Should agricultural support be abolished?
Should a nation reduce the size of government?
Should government cut taxes to stimulate the economy?
Should the country allow more immigrants?
Two broad fields of economics:
1. Microeconomics= study of the behaviour of individual decision- making units in
the economy such as firms, consumers, government.
2. Macroeconomics= study of collective results of individual decision- making
units as measured by economic aggregates (GNP), the price level,
employment rate.
Use of microeconomic analysis:
To understand markets and predict changes
Will a tax on alcohol reduce traffic accidents?
Will the merger of KLM with Air France reduce air- fares?
To make personal and managerial decisions
Should you resign from your job to open up an Internet café?
Should a firm sell at a bargain of 50% to get rid of old inventory?
To evaluate public policies
Should drug patents be shortened?
Should government abolish agricultural subsidies?
Use of macroeconomic analysis:
To understand why economies grow
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