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Summary economics chapter 1,2 ,3 ,4 ,5 and 9
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This is my summary from the economics book in the first year of international hotel management.
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Chapter 1, 2, 3, 4, 5 and 9Chapter 1:
1.1 The business organisation
Three key things that affects the behaviour of firms:
The legal status of the business
The way in which firm is organised – whether as a simple top-down organisation or as a
more complex multi departed or multi-division organisation
The aims of the firm – is profit maximisation the objective of the firm, or are there other
aims?
The sole proprietor. Here, the business is owned by just one person. Owners of small shops, builders
and farmers etc. They are easy to set up and only need a minimum starting capital. There are 2
disadvantages:
1. Limited scope for expansion: finance is limited to what the owner can raise personally, for
example through savings or a loan. And there is a limit size for the company that one person
can effectively control.
2. Unlimited liability: The owner is personally liable for any loses that the business might make.
This could result in the owner selling his house, car and other assets to pat off his debts if
the business fails.
The partnership. This is where two or more people own the business. In most partnerships, there is a
legal limit of 20 partners. Partnerships do mean a loss of control because you share the company.
Extra finance can usually be raised and as partners can specialise in and control different areas of the
business, a larger organisation can become more viable (rendabel). Where large amounts of capital
are required and/or when risks of business failure are relatively high, partnerships are not generally
an appropriate form of organisation. In such case it is the best to form a joint-stock company.
Companies: A company is a legally separate from its owners. This means that it can enter into
contracts and own property. Any debts are its debts, not the owners. The owners are called
shareholders. Each shareholder receives his or her share of the companies distributed profit: these
payments are called dividends. The owners have only limited liability. This means that they will lose
their invested money if the company goes bankrupt. Shareholders often don’t take part in running
the company. They may elect a board of directors which decides broad issues of company policy.
Public limited companies (Plc.): These are companies that can offer new shares publicly. A public
limited company must hold annual shareholders.
Private limited companies (Ltd): these companies can not offer their share publicly. Shares have to
be sold privately. They tend to be smaller than public companies because its harder to raise finance.
Private limited companies are easier to set up than public companies.
Co-operatives: There are two types of co-operatives.
1. Consumer co-operatives. These are officially owned by the consumers, although they play no
part in running the business.
2. Producer co-operatives. These are owned by the firm’s workers, who share in the firm’s
profits.
The internal organisation of the firm:
,The internal operation structures of firms are frequently governed by their size. Small firms tend to
be centrally managed, with decision making operating through a clear managerial hierarchy. In large
firms the structure tends to be more complex.
U-form business organisation: One in which the central organisation of the firm is responsible both
for the firm’s day-to-day administration and for formulating its business strategy. In a bigger
business this becomes inefficient. To overcome these organisational problems, the firm can adopt an
M (multi-divisional) form of managerial structure. M-form business organisation: One in which the
business is organised into separate departments, such that responsibility for the day-to-day
management of the enterprise separated from the formulation of the business’s strategic plan. This
suits larger firms. This leads to the following benefits:
Reduced length of information flows
The chief executive being able to concentrate on overall strategic planning
An enhanced level of control, with each division being run as mini ‘firm’, competing with
other divisions for the limited amount of company recourses available.
Flat organisation: One in which technology enables senior managers to communicate directly with
those lower in the organisational structure. Middle managers are bypassed. This speeds up the
communication in a company.
The holding company: As many business expanded their operations, often on a global scale, more
complex forms of business organisation have evolved. One such organisation is the H-form or
holding company. A holding company is one that owns a controlling interest in other smaller
companies.
Principal-agent problem: One where people (principals), as a result of lack of knowledge, cannot
ensure that their best interest are served by their agents.
Asymmetric information: A situation in which one party in an economic relationship knows more
than another.
The problem of managers not pursuing the same goal as the owners is an example of the principal-
agent problem. Agents (the managers) may not always carry out the wishes of their principals (the
owners). Because of asymmetric information, managers can pursue their own aims, as long as they
produce results that satisfy the owners. The solution for owners is for there to be a better means of
monitoring the performance of managers, and incentives for the managers to behave in the owners’
interests.
1.2 The external business environment
The external business environment is commonly divided into four dimensions: political (firms are
directly affected by the actions of government and other political events). Economic (Businesses are
affected by a whole range of economic factors, such as rise in the cost of raw materials, a price cut
by a rival firm, new taxes etc). Social (This aspect of the business environment concerns social
attitudes and values. These include attitudes towards working conditions, the length of a working
day etc.) Technological (Over the past 30 years, there has been rapid technological change. This had
a huge impact not only on how the firms produce, advertise and sell products, but also on how their
business is organised. Or in seven dimensions where the other three are environmental, legal and
ethical. PEST (or STEEPLE) analysis: where the political, economic, social and technological factors
shaping a business environments are assessed by a business so as to devise future business strategy.
STEEPLE analysis also considers ethical, legal and environmental factors.
, The economic dimension of the business environment is divided into two: the microeconomics
environment and the macroeconomic environment. The microenvironment refers to the particular
market in which the firm operates. The macroenvironment refers to the national and international
economy in which all firms operate.
The increasingly global market place means that many companies must consider an international
dimension within their external business environment.
Production is divided into primary (The production and extraction of natural resources, plus
algaculture), secondary (The production from manufacturing and construction sectors of the
economy) or tertiary (The production from the service sector of the economy) sectors. The
contribution to output of these different sectors of production has changed over time. Over the
years the tertiary sector has grown, while the secondary sector has become smaller. Gross Domestic
Product (GDP) is the value of output produced within the country over a 12-month period.
Deindustrialisation is the decline in the contribution to production of the manufacturing sector of
the economy.
Firms are classified into industries (A group of firms producing a particular product or service) and
industries into sectors (A grouping of industries producing similar products of services). Such
classification enables us to chart changes in industrial structure over time and to assess changing
patterns of industrial concentration.
1.3 The economist’s approach to business
The central economic problem is that of scarcity (the excess of humans wants over what can actually
be produced to fulfil these wants). We have endless wants, but there is a limited supply of resources.
As such, it is impossible to provide everybody with everything they want. Potential demands exceed
potential supplies.
Because resources are scarce, people have to make choices. Society has to choose by some means or
other what goods and services to produce, how to produce them and for whom to produce them.
Factors of production (the transformation of inputs into outputs by firms in order to earn profit) are
the inputs into the production of goods and services: labour (all forms of human input, both physical
and mental, into current production), land and raw materials (inputs into production that are
provided by nature: e.g. unimproved land and mineral deposits in the ground). Microeconomics
studies these choices.
Rational choices involve weighing up the marginal benefits (the additional benefits of doing a little
bit more of an activity) of each activity against it marginal opportunity costs. If the marginal benefit
exceeds the marginal costs (the additional cost of doing a little bit more of an activity), it is rational
to choose to do more of that activity.
Business are constantly faced with choices: how much to produce, what inputs to use, what price to
charge, how much to invest, etc.
Opportunity cost are the cost of an activity measured in terms of the best alternative foregone. And
rational choices are choices that involve weighing up the benefit of any activity against its
opportunity cost.
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