Intro to Business and Economics - Lecture 1
Introduction
- Business is important in di erent elds e.g. Sustainable Development goals
(Ensure Environmental Sustainability, Partnership Development, Universal Primary
Education etc.)
- Economics as a Disciple: The study of economics is also a toolbox e.g. Why do
bars charge for water but give peanuts for free
CASE 1:
Criminality
- The idea was that criminals are mentally ill, Karl Menninger (Psychiatrist) changed
this idea in his book ‘Crime and Punishment’ (1966)
- According to Gary Becker, economic thinking applied to issues believed to be
non-economic. Acts of crime bring bene ts and costs and rational criminals
balance these, someone (anyone?) commits crime if the bene ts outweigh the
costs
- Would anyone commit a crime? Yes, but mind the broad de nition of costs and
bene ts.
• Monetary rewards
• Risk of being punished
• Joy of breaking rules
• Opportunity costs
• Ethical costs
=> Individual di erences a ect these bene ts and costs but the main reason that
someone becomes interesting in committing a crime depends on these individual
di erences.
- Researcher Sudhir Venkatesh who wanted to study the life of poor people in
Chicago, made a survey and was caught by a criminal gang in that area and
captured. The ‘gang’ was surprised by the Researcher decided not to kill him
after evaluating their options and gained the trust. Venkatesh decided to join the
gang a few years after to observes and made some discoveries.
• There was Hierarchy (Foot soldiers, middle men, Top executives) functioning like a
regular business.
What would Becker say?
• People would join the Black Disciples because of wage, prospect of becoming a
gang leader is an appeal, downside risks are insured, ethical costs are tackled by
legitimating e orts - and NOT because they are mentally ill
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, - Large drop of criminality in the early 1990’s so that people even did not believe it
- Increased number of police, stronger economy, innovative policing strategies,
increased reliance on prisons, changes in the drug market, ageing of the
population, tougher gun law controls were some of the possible reasons of the
drop
- Only one explanation that holds for the big drop is the legalisation of abortion
years earlier: When a woman doesn’t want to have a child she usually has a good
reason (Unmarried, Bad relationship, Too poor, Too young, Unstable life, Drinking/
Drug abuse)
=> Children born under these circumstances have a higher chance of becoming
criminals
Lecture 2 - The Rise and Fall of Markets (Bus.Econ)
Basics of Economic Analysis
Orthodox Economics:
- Individuals want to be better of and Markets reach an equilibrium
Pluralistic Economics:
- Individuals may be satis ed at some point, may be irrational or may want
depending on what they can get
- Markets are rarely in equilibrium for a long time so why bother
- Context is what matters
• WHY BUSINESSES EXIST:
- Division of Labor: Core concept in economics with important consequences
1. Specialising in one eld will help you grow in that eld, leads to a further division
of labor since the specialised task can also be divided.
2. More than enough produce in a farther reach, helping other people in the society
to produce valuable tasks (New jobs arise)
3. No self-su ciency anymore engaging in cooperation is necessary
=> Creating a market for “exchange products”
=> Central gure that leads the other producers by collecting excess and
redistribution, this is called organisation
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, Externalities: When economic activity a ects others, which is not re ected in the
price, E ects may be positive or negative
- Pollution, a side e ect of production process, e.g. when a factory uses water to
cool its machinery and then pumps the water back into the river, factory consumes
at no cost clean water, when a factory pollutes in the air its emits toxic emissions
then it consumes clean air with no costs => Negative e ect
- When you consume education you get a private bene t e.g. you are able to
educate other people and therefore they bene t as a result of your education =>
Positive e ect
- Many problems of today like global warming are the result of the accumulation of
externalities of individual decision makers (One factory producing pollution would
not a ect that much on global warming compared to an industrial area polluting,
which in that case would be a reason to the problems if today that arise)
=> This result is usually not taken into consideration in individual decision making
E ect of A Tax: If the cost curve is lower, then the manufacturer will push his
production towards a price level that equals the cost that is lower than he will
produce
- Negative e ects impose costs on other people
What can be done about Externalities?
1. Information campaign: People would care about the cost they cause for other
people but don’t know about it, can be e ective to the point that the decision
makers are e ecting others with their actions
2. Command-and-control policy: Policy that restricts supply or increases supply
with regulation e.g. Smoking regulations in public places
3. Tax or subsidy: If the tax that is imposed is at the same level as the costs
caused by the negative externality then the decision maker will take their actions
in account e.g. produce less because the government takes tax, positive
externality could be subsidised
Why dressing externalities is di cult
=> Many predicting processes come with both positive and negative externalities,
addressing these can cause changes in both and becomes more complicated
=> problems addressed don’t stop at national borders, addressing more complex
externalities requires coordination across jurisdictional areas making it more di cult
Economic Impact of Climate Change
- If the climate change is limited to 1.1% above pre-industrial levels the e ect on
economy will be positive, above 1.7% it starts to be a negative e ect
- For increases that are likely to happen the total e ect on the world economy is
(slightly) negative
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