Summary for the first economics test of the 1st year International Business course at the HHS.
The chapters discussed in this summary are;
- chapter 1
- chapter 2
- chapter 3.1
- chapter 15.1 and 15.4
International Business and Management Studies / IBMS
Economics for International Business
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Economics year 1.
Chapter 1.
1.1 What do economists’ study?
Economists are concerned with:
Production of goods and services: how much an economy produces and how,
both in total and individual.
Consumption of goods and services: what people choose to save and spend, on
what they spend their money and how this is affected.
Wants are unlimited. However, they vary according to income levels and tastes. The
means of fulfilling these wants are limited because we can only produce so much and
have a limited amount of resources. There are 3 types of resources, also called factors
of production:
Human resources (labour): labour force is limited in number and skills.
Natural resources (land & raw materials): land as well as raw materials are
limited.
Manufactured resources (capital): capital are all inputs that have been produced
themselves. Examples are machines, factories etc. This is limited by technology.
Scarcity is the excess of human wants over what can actually be produced. Because of
scarcity, various choices have to be made between alternatives. Everyone experiences
scarcity but to a different extend.
Consumption and production are also called demand and supply. Demand is related to
wants and supply to resources. The demand and supply should be balanced. Total
spending should balance total production.
Macroeconomics (economy as a whole)
Societies are concerned that their resources should be used as fully as possible and that
their national output should grow. Why do they want to grow? When output grows, more
wants can be satisfied.
Full growth and full use of resources is hard. Economies experience periods of growth that
alternate with periods of recession. This is known as the business cycle.
Macroeconomic problems are related to balance the total demand and total supply. If the
demand is too high relative to the supply, inflation and trade deficits are likely. Inflation
refers to a general rise in prices. By comparing price levels between different periods, we
can measure the rate of inflation.
Recession is where output in the economy declines for two successive quarters or
longer.
Macroeconomics focus either on the demand side (influence spending levels which affects
production, price and employment) or the supply side (influence the production directly).
Microeconomics (individual parts of the economy)
Because resources are scarce, we have to make choices. There are 3 categories:
What goods and services are going to be produced and in what quantities?
How is everything going to be produced? With which resources and in which
quantities?
For whom are things going to be produced? How will the country’s income be
distributed?
Choice involves sacrifice. The production or consumption of one thing, involves the
sacrifice of alternatives. This sacrifice is known as opportunity cost. This involves looking
at costs and benefits.
, Economics year 1.
Rational choices involve weighing up marginal costs and marginal benefits. These are the
costs and benefits of doing a little bit more or a little bit less of one activity. If the
marginal benefit exceeds the marginal cost, it is rational to do the activity.
Microeconomics is concerned with the allocation of scarce resources: what, how and for
whom. These questions will be answered dependent on society’s objectives; efficiency
and equity:
Efficiency
If altering what is produced or the way how would make us better off, it would be
efficient. To achieve full economic efficiency, 3 conditions must be met.
1. Efficiency in production: production of each item is at minimum cost here.
2. Efficiency in consumption: here, the consumption results in maximum
satisfaction.
3. Efficiency in specialisation and exchange: Firms here specialize in producing
goods for sale to consumers, and where individuals specialise in doing jobs in
order to buy goods, so that everyone maximises the benefits they achieve
relative to the costs of achieving them.
Equity
Even though current levels of production and consumption might be efficient, they
could be regarded as unfair. Therefore, another goal is equity. Income distribution
is regarded as equitable if it is considered to be fair. However, everyone sees fair
in a different way.
1.2 Different economic systems
Scarcity is handled in different ways with different degrees of government control.
Planned/command economies: all decisions are made by the government.
Free-market economy: no government intervention at all.
Mixed economies: mix of the two extremes. Most economies are mixed.
The command economy
Here land and capital are collectively owned. The state plans the allocation of resources
at 3 levels:
1. Allocation of resources between current consumption and investment for the
future. By sacrificing some present consumption, it can increase the growth rate
later on.
2. It plans the output of each industry and firm, the used techniques, labour etc. To
ensure the inputs are available, there will be an input-output analysis. This shows
the sources of all the inputs and the destination of all the outputs.
3. Distribution of output between customers. The way this is done is dependent on
goals.
Central planning could lead to high growth rates. In reality, this could only be achieved at
considerable social and economic costs. Reasons are:
The larger and more complex the economy, the harder the task of collecting and
analysing the information essential to planning and the more complex the plan.
More complex is more expensive.
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