The lecture notes based on the newest edition of the textbook Economics for Business. The notes cover topics on how business operates in a market with the influence of the micro and macroeconomics.
Topics:
- business environment
- working of competitive markets
- elasticity of supply and de...
What do Economists Study?
- "SCARCITY"
○ Unlimited wants, limited resources
○ Labour
- Two areas:
○ Microeconomics
Looking at individual economics (personal level, businesses level)
What, how, for whom to product?
Choice and opportunity costs (making choices)
□ Rational choices, marginal costs, marginal benefits
Choices and the firm
□ The firm's objectives
□ Market structure of the firm
○ Macroeconomics
Looking at a bigger picture, nation, countries, politics (international level)
Aggregate demand and supply
Policy and business
□ Demand side policy (encourage spending)
□ Supply side policy (cut taxes to encourage production)
Week 2
Control power
Competition (Are you the only supplier of this product/service)
To decide the price and quantity:
Looking at the goal of the firm: maximise profit, stock value
Internal vs external factors
External factors:
- Political factors: consumer purchase index (cpi), inflation
- Sociocultural factors
- Technology factors: advanced tech
- Environmental factors
- Ethical: sustainability, CSR
- Legal
Industrial Revolution 5.0
- Integrating AI and manufacturing process to create sustainability and production efficiency (HCPS), intelligent
manufacturing
The nature of firms: Production & Management
"The principal-agent relationship"
- There shouldn't be any conflict in interest when the agent makes decisions on behalf of the principal
- Conflict in interests happened when there is imperfect information
Firm as a legal entity - "company"
Types of business organisation
Organisational chart
U-form business organisation
○ Flat
○ Miscommunications between departments
M-form business organisation
○ Multi-divisions operating independently and autonomous
Week 3
BUSINESS AND MARKETS - WORKING OF COMPETITIVE MARKETS
Market price often subject to great fluctuations - supply and demand
Price Maker - able to decide the price (depends on the market power you hold)
Price Taker - a person or a firm has no control over price
Perfectly competitive market - the groups of producers and consumers are too numerous to decide on the price,
everyone is a price taker. Market without any intervention of external factors/parties.
Free market - everyone is free to make demand decisions. Firms are free to decide what to sell and the price,
consumers are free to decide what to buy with their income
price mechanism - price fluctuations due to shortages and surpluses. Shortages --> price increase, surpluses --> price
lowers [supply and demand]
Factor market vs good market
- Factor market
The market where the transactions between resources used to create goods and services happens
Economics for Management (LUBS 1940) Page 1
, ○ The market where the transactions between resources used to create goods and services happens
○ Demand in the good market rises, causes shortage in the factor market, prise rises, suppliers of inputs
supply more
- Good market
○ Transactions between the products of goods and markets
○ Demand for goods rises, shortage, price rise, encourage firms to produce more
Demand curve
- Relationship between quantity of the good demanded and the price of the good (x-axis = Quantity of demand,
y-axis = price)
- Only include market demand, not individual demand
- Only quantity demanded changes, not the actual stuff demanded
Determinants of demand
- Tastes of consumers
- Number and price of alternative (substitute) goods
- Number and price of complementary goods (goods that were to be consumed tgt)
- Income
- Distribution of income (micro-level)
- Expectations of future price changes
Market clearing - a market clears when there is no shortage or surplus (supply = demand)
Supply Curve
- Upward slope (positive relationship), relationship between supply quantity and price (x-axis = supply, y-axis =
price)
- Supply increases when price increase (eg. If more ppl willing to buy at a higher price, supply for that good will
increase)
Determinants of supply
- Costs of production
- Profitability of alternative products
- Profitability of goods in joint supply
- Nature and other random shocks (unexpected factors, eg. weathers)
- Aim of producers
- Expectations of producers
Lecture
Example: House rent increases as the demand increases
How to set the price in a perfectly competitive market - go to the market and look at the prices offered
The price mechanism
Price of a good too low --> no suppliers want to sell --> more demand --> price rises --> supply increases --> demand
decreases and reached an equilibrium
Law of demand --> demand curve
- Income effect
- Substitution effect
Controls in the market (factors that affect the price mechanism, some controls make the mechanism doesn’t work
anymore)
- Minimum prices (price being controlled, eg. By government), price is binding, and market cannot reach an
equilibrium
Scenario 1 (price control):
Economics for Management (LUBS 1940) Page 2
, - Government decide on the minimum price, it is binding
- The market could not go to an equilibrium
- This would create unemployment problem
- Low demand, high supply
- The price is binding at a lower price
- Possible problem/consequence: black market
WEEK 4
Price Elasticity of Demand
Elasticity - responsiveness of one element to another (btw quantity demanded and price)
More elastic = larger change (quantity demanded raised or dropped greatly) when one of the element changed
(price)
More elastic = less steeper slope of the curve
Market demand curve when under perfect competition
- Quantity demanded will increase when the price remained same
Measure price elasticity of demand
- To calculate the size of the change in quantity demanded of a given product with the size of the change in
price
- % change in quantity demanded / % change in price
- No matter its negative or positive, use absolute value
- Elastic demand: value >1
- Inelastic demand: value <1
Determinants of price elasticity of demand
- Number & closeness of substitute goods (elasticity increase when there's more substitute goods available)
- Proportion of income spent on goods (higher proportion of income spent on one good, larger change when
the price increased, ie. Greater elastic when higher proportion)
- Time period (when the price of a good changed, consumers will start looking for alternatives, longer the time
period after the increase in price, more elastic the demand curve) "greater elasticity of demand curve in the
long run"
TR= P x Q
Elastic demand and sales revenue
- When demand is elastic, quantity changes in greater proportion than the price, so when the price increased,
quantity dropped significantly, revenue dropped. When price decreased, quantity increased significantly,
revenue increased)
- When demand is inelastic, the changes in quantity will be less when the price changes. So when price
increased, quantity drop less, revenue increased. When price decreased, quantity increased slightly, revenue
drops)
Price elasticity of supply
- % change in supply / % change in price
Supply curve and demand curve elasticity
Demand curve elasticity
1. Unit elastic demand (price and quantity change in the same proportion, slope = -1) / Unitarily elastic demand
(E = 1)
2. Totally/perfectly inelastic demand (E = 0)
3. Infinitely/perfectly elastic demand (E = infinity)
Eventhough both demand and supply curve will be more elastic in the long run, but
*Supply curve more elastic in the long run compared to the demand curve
S(VSR) - Reason: longer the period, larger the response (larger demand but lower price) --> greater elasticity.
S(SR)
- Short run supply curve is much steeper then long run supply curve
S(LR) - Speculators believe price increased in short run is only temporary (price increased greatly)
S(VLR) & tech become extensive Cross elasticity of demand (Between 2 or more products)
- Positive - when the products are substitute of one another, when the price of one product increases, the
demand for the other product will increase (eg. Coffee and tea)
- Negative - when the product are complementary of one another, when the price of product X increases, the
demand for product X decreases, which would affect the demand for product Y, making the demand for it
decreases
- Zero - when two products do not relate to each other. Price increase for one product does not affect the
demand for another product
Very short run effects on supply curve
Eg. Supply was fixed when suddenly demand increased in one day
Economics for Management (LUBS 1940) Page 3
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