Business Economics MAN 1071- Notes
Week 1-
Micro and Macro Economics and Policies
MicroEconomics is concerned with the economic behaviour of individual firms and
consumers or households.
MacroEconomics is concerned with the economy as a whole and the economic behaviour of
economy wide issues such as national income, the money supply, the level of inflation,
employment.
Governments are concerned with both macroeconomic variables e.g., interest rates as
changing rates affect borrowing costs/ rates of return and Governments also adopt
microeconomic policies e.g., policies which restrict the maximum hours an individual can
work the introduction of a minimum wage.
Economics Policies pursued by Governments serve various aims;
• Economic Growth- A rising standard of living representing an increase in income in
real terms.
• Inflation Control- Maintaining price inflation to a low stable level.
• Full Employment- Whereby unemployment is low and involuntary unemployment is
short term.
• Balance of Payments Stability- Balance of trade with trading partners.
Governments use a different number of policy tools to achieve their aims;
• Monetary Policy- Aims to influence monetary variables e.g., the rate of interest and
money supply.
• Fiscal Policy- Manages Government Spending and Taxation in order to influence
aggregate demand in the economy.
• Exchange Rate Policy- The strength/ weakness of UK sterling (£) can influence the
volume of UK imports and exports, the balance of payments and interest rates.
• External Trade Policy- Managing the exchange rate, for example, can help to
stimulate exports and promote economic growth.
There may be conflicts in policies and objectives pursued by Governments. For example;
• Growth in the economy may mean using modern technology which is labour saving.
• A lack of domestic and global demand since the financial crisis creates problems with
job creation and growth.
• High imports (in the UK) create a trade balance deficit which weakens the currency.
Therefore, interest rates may need to be kept high. This may deter investment.
Lack of information, time-lags and political pressure all influence policy decisions.
,Business and Economics
• Economies is not about money… Economics is about behaviour… The behaviour of
people, firms, Governments.
• The key economic problem is to reconcile the difference between people’s unlimited
demands and society’s limited ability to produce goods and services to fulfil those
demands.
• Scarcity necessitates decisions… trade-offs and choices.
• We assume individuals and firms behave rationally by comparing the benefits and
costs of alternative choices.
• Economics is concerned with competition, efficiency and choice.
• Economic decisions involve price-value-cost.
Four Factors of Production:
• Land
• Labour
• Capital
• Entrepreneurship
Economic Decisions:
• What Goods and Services are to be produced?
• How are Goods and Services to be produced?
• Who consumes these Goods and Services?
Economic Systems:
• Centrally Planned System- The Government owns, controls the resources (command
economy- Marx) and makes the decisions.
• Free-Market- No Government involvement. Resources are allocated through
competitive markets in which individuals pursue their own self-interest. Invisible
hand (societies goals are met when individuals’ aims are met and therefore
resources are allocated efficiently) (capitalist- A Smith).
• Mixed Economy- Modern economies are mixed; mainly relying on the market but
with some level of Government involvement.
Opportunity Cost, Scarcity and PPF
Scarce Resource; limited in supply and demand.
Economic System; system for allocating scarce resources.
• The basic economic problem is scarcity- not all resources are limited.
• How reconcile the imbalance between people’s unlimited demands and society’s
limited ability to produce goods and services to fulfil those demands?
• There is no formula for allocating scarce resources; choices must be made.
• Choices must be made on how to allocate scarce resources efficiently (equitably).
, • We assume individuals and firms behave rationally by comparing the benefits and
costs of alternative choices.
• Markets are the primary means of allocating scarce resources in the world’s.
• Something that is scarce has value.
• Value is a function of scarcity.
• The scarcer something is the more valued it is.
• Less scarce items are less valuable.
Examples of Scarcity:
• After poor weather, corn crops did not grow resulting in a scarcity of food for people
and animals and ethanol for fuel.
• Over-fishing can result in a scarcity of a type of fish.
• An embargo on imports from a country can result in scarcity of the resources that
country exports.
• Those without access to clean water are experiencing a scarcity of water.
• In 2012, avian flu wiped out millions of chickens in Mexico creating a scarcity of eggs,
a stable of the Mexican diet.
• If a limited amount of the flu vaccine is available to the population, meaning there is
not enough for each individual to be vaccinated. This is scarcity.
• When hurricanes have incapacitated refineries, oil prices increase because of the
possibility of scarcity of gas for vehicles.
• An uneducated population in a country that needs high level skilled workers can
result in a scarcity of labour.
Opportunity Cost- The Value of the Next-Best Alternative
Opportunity cost measures the sacrifice made when scarcity focuses us to make choices.
Opportunity cost considers the potential benefit that is given up when one alternative is
selected over another.
Opportunity cost is a principle defining how people and businesses make economic
decisions and is the basis of trade.
For example, if you were not attending Surrey University, you could be earning £25,000 per
year. Therefore, the opportunity cost of attending Surrey university for one year is £25,000.
Examples of Opportunity Cost
Less Flexibility
£75 Safer?
No Traffic
Less CO2 Emissions
, Production Possibility Frontier
Scarcity means that we make choices on how to use resources: what to produce and for
whom to produce.
An economy with a given amount of workers (limited resources) can allocate them to
several productive activities.
PPF illustrates the competing use of resources and illustrates the sacrifices, trade-offs and
opportunity costs of options.
For example: Imagine a country that produces cars and phones: the amount of each good
that it produces depends on how workers are allocated.
If all workers are allocated to produce cars: Point A
If all workers are allocated to produce phones: Point B
Scaricty- Production Possibility Frontier
PPF shows for each quantity of cars, the quantity of phones that can be produced and vice
versa.
The PPF shows these trade-offs- increasing output of one good means sacrificing output of
the other good.
Given the finite amount of workers, the combinations of output that are possible (points on
and inside the frontier e.g. points A, B, D, E, F) and those that are not possible (areas outside
the PPF e.g. point C).
The most efficient combinations of output are those that lie on the frontier (A, D, E, B).
Inefficient outputs are inside the PPF (F). Unattainable are outside the PPF (C).
Law of diminishing marginal returns shows that, for example, each extra worker added to
produce cars adds less to car output than the previous extra worker added.
