economics for mba

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Economic Analysis of Business

TBS 905

Session 1, Autumn 2012

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Introduction

Welcome to Economic Analysis for Business.

This Autumn the course will be delivered over 13 weeks asper your schedule.

There will be a Mid-semester test on:

Saturday November 17th

Any make-up classes due to public holidayclashes will be delivered as advised.

The required text for this course is:Stonecash, R., Gans, J., King, S., and Mankiw

N. G. (2009) Principles of Macroeconomics,

4th Edition. Cengage Learning, Australia.

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Agenda

The objective of todays session is to provide an overview of

the course, outline assessment tasks and discuss the use oflibrary resources and turn-it-in.

The overview will centre on the course learning objectives

before turning our focus on the economic approach the

material covered in the first 2 chapters of your text (& chapter4 time permitting) .

For future classes try to read the relevant chapters before

class, this will enable you to get the maximum value out of

each session and help facilitate an interactive learningenvironment. The text has an online companion site whichhas

various other resources to help you with the material covered

in this course (see your texts Resources Guide)

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Agenda

The slides that follow are primarily linked to the text but wewill supplement these from time to time with other slides andresources depending on the topic.

The broad objective of the course is to introduce to students,and develop their understanding of, core economic concepts

relevant to business and managerial decision-making, in orderthat they may identify and interpret those economic eventsand circumstances which influence the operations of business.See your subject outline for a more detailed break-down of thelearning objectives.

We hope you find this course enjoyable, rewarding, stimulatingand challenging!

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Chapter 1

Introduction: 10 lessonsfrom Economics

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Economy

The word economy is defined in the Concise Oxford

Dictionaryas:

economy management (of a house) L. conomia Gr.

oikonom, f. oikonmos manager of a household, steward.Economics is essentially the study of how society manages its

scarce resources. It is a complex and many faceted subject -

however Gregory N. Mankiw, the primary author of your text,

has helpfully listed 10 central ideas that unify the economicapproach which differentiate the economic way of thinking.


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Economic behaviour

These ideas are based on observation of human behaviour

and interaction key observations are as follows:

A household and an economy face many decisions:

Who will work?What goods and how many of them should be

produced?

What resources should be used in production?

At what price should the goods be sold?


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Society and scarce resources:

The management of societys resources is importantbecause resources are scarce.

Individuals tend to have unlimited wants.Scarcity means that society has limited resources

and therefore cannot produce all the goods and

services people want.

This leads us to the definition that Economics is the studyof how society manages its scarce resources.

Scarcity


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How people make decisions.

1. People face trade-offs.

2. The cost of something is what you give up to get it.

3. Rational people think at the margin.

4. People respond to incentives.

Ten lessons from economics


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How people interact with each other.

5. Trade can make everyone better off.

6. Markets are usually a good way to organise economicactivity.

7. Governments can sometimes improve market

outcomes.



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How the economy as a whole works.

8. A countrys standard of living depends on its ability to

produce goods and services.

9. Prices rise when the government prints too much

money.

10. Society faces a short-term trade-off between inflation

and unemployment.



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Why should managers and business students study

economics?

To develop the economic insight necessary to identify yourbusiness competitive advantage.

To identify how the ups and downs in economy-wideeconomic activity will impact your business.

To improve your business profitability.

In essence, our aim must be to understand the impacts and

effects of the external economic environmenton the operation

of business.


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The economic environment

13Source

: Nellis and Parker (2005)


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Structure: Roadmap

Concepts

Trade-offs

Costs

Models

Tools

&Mechanism

Markets

D & S

Efficiency

The

Economy

Overall

Growth

Savings

Government

actions

The

Open Economy

Exchange rates

Foreign

investment

The

Short Run

Economy

Aggregate

D & S

Monetary &

Fiscal policy

How to Measure

GDP

CPI

other key variables

Money

Types

Role


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Structure: Assessment

Assessment is detailed in the subject outline:

You have a major written assignment (30%) which involvesthe analysis of two economies (the UAE and Australia) we

will discuss this in class at regular intervals. There is a class test (20%) on Saturday the 17th November

And a final exam worth 50%

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Chapter 2

Thinking like an

Economist

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Thinking like an economist

Every field of study has its own jargon:

Mathematics

integrals, axioms, vector spaces

Psychology

ego, id, cognitive dissonance

Law

promissory estoppel, torts, venues

Economics supply, demand, opportunity cost, elasticity, consumer

surplus, comparative advantage, deadweight loss


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Thinking like an economist

Economics trains you to

Think in terms of alternatives.

Evaluate the cost of individual and social choices.

Examine and understand how certain events and issuesare related.


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The economist as a scientist

The economic way of thinking

involves thinking analytically and objectively

makes use of the scientific method


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The scientific method

Uses abstract models to help explain how a complex, realworld operates.

Develops theories, collects and analyses data to evaluatethe theories.


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The role of assumptions

Economists make assumptions in order to make the worldeasier to understand.

The art in scientific thinking is deciding which assumptionsto make.

Economists use different assumptions to answer differentquestions.


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Economic models

Economists use models to simplify reality in order toimprove our understanding of the world.

Two of the most basic economic models include:The circular-flow diagram

The production possibilities frontier


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The circular-flow diagram is avisual model of the economy thatshows how dollars flow through

markets among households andfirms.

Popular model for many years,even physical apparatus built itemphasises the bilateral nature of

all transactions

http://www.nzier.org.nz/SITE_Default/SITE_Publications/x-files/1439.pdf

Our first model: The circular-flow diagram
http://www.nzier.org.nz/SITE_Default/SITE_Publications/x-files/1439.pdfhttp://www.nzier.org.nz/SITE_Default/SITE_Publications/x-files/1439.pdf


24/46Copyright 2004 South-Western

Spending

Goods and

services

bought

Revenue

Goods

and services

sold

Labour, land,and capital

Income

= Flow of inputs

and outputs

= Flow of dollars

Factors ofproduction

Wages, rent,

and profit

FIRMS

Produce and sell

goods and services

Hire and use factors

of production

Buy and consume

goods and services

Own and sell factors

of production

HOUSEHOLDS

Households sell

Firms buy

MARKETS

FOR

FACTORS OF PRODUCTION

Firms sell

Households buy

MARKETSFOR

GOODS AND SERVICES

The circular-flow diagram


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The circular-flow diagram: key elements

Firms

Produce and sell goods and services.

Hire and use factors of production.

Households

Buy and consume goods and services.

Own and sell factors of production.


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The circular-flow diagram: key elements

Markets for goods and services

Firms sell

Households buy Markets for factors of production

Households sell

Firms buy

Factors of production Inputs used to produce goods and services.

Land, labour and capital.


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Our first model: The circular-flow diagram

In this session we have illustrated a simple two-sectorcircular flow model in later sessions we will expand it to

include other sectors such as the government and

financial sectors.


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Our second model: The PPF

The Production Possibilities Frontier(PPF) is a graph thatshows the various combinations of output that the

economy can possibly produce given the available factors

of production and the available production technology.


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Copyright2003 Southwestern/Thomson Learning

Production

possibilities

frontier

A

B

C

Quantity of

cars produced

2,200

600

1,000

3000 700

2,000

3,000

1,000

Quantity of

computers

produced

D

The production

possibilities frontier


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Our second model: key elements

Concepts illustrated by the production possibilitiesfrontier:

efficiency

trade-offs opportunity cost

economic growth

Bare in mind this is a generalised model it does not cope

well with elements such as: economies of scale

specialisation

etc.


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A shift in the PPF

Copyright 2004 South-Western

E

Quantity ofcars produced

2,000

700

2,100

7500

4,000

3,000

1,000

Quantity of

computers

produced

A


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Other models

Models proliferate the economics literature, perhaps the mostcommon is demand and supply a simple illustration ofmarketinteraction. Others models may focus on more conceptual

elements such as utility (indifference curves) or distribution(Lorenz curves).

We will focus more on markets in the next session but the nextslide presents a simple illustration of the demand and supply

framework:


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Markets

Source: St John and Fargher (2004)

Economics typically

represents the

interaction of buyers

and sellers in a

market usingdemand (D) and

supply (S) curves

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Microeconomics and macroeconomics

Economics is divided into two key strands or sub-fields:

Microeconomicsfocuses on the individual parts of theeconomy.

How households and firms make decisions and howthey interact in specific markets.

Macroeconomicslooks at the economy as a whole.

Economy-wide phenomena, including inflation,

unemployment and economic growth.


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Markets and the macroeconomy

Source: St John and Fargher (2004)35

The macroeconomy

can be viewed as

the interaction of a

raft of markets


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Positive versus normative analysis

Positive statements are claims that attempt to describethe world as it is.

Called descriptive analysis. Normative statements are claims that attempt to describe

how the world should be.

Called prescriptive analysis.


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Positive versus normative analysis

Positive or normative statements?

The income gains from a higher minimum wage areworth more than any slight reductions in employment.

NORMATIVE

State governments should be allowed to collect fromtobacco companies the costs of treating smoking-

related illnesses among the poor.

NORMATIVE


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Economists in government

serve as advisers in the policy-making process offederal, state and local government and in independent

government agencies.

Examples include

UAE: Central bank of the United Arab Emirates

Ministry of Economy

Ministry of labour

Australia: Treasury

Productivity Commission

Reserve Bank of Australia


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Why economists disagree

They may disagree about the validity of alternativepositive theories about how the world works.

They may have different values and, therefore, differentnormative views about what policies should try to

accomplish.


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Ten propositions with which most economists

agree

Copyright 2004 South-Western


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Summary

Economists try to address their subjects with a scientistsobjectivity:

They make appropriate assumptions and build simplified modelsin order to understand the world around them.

Two simple economic models are the circular-flow diagram and

the production possibilities frontier. Economics is divided into two subfields:

Microeconomists study decision making by households andfirms in the marketplace.

Macroeconomists study the forces and trends that affect the

economy as a whole.


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Summary

The economist variously tries to explain the environment weoperate in and suggest improvements:

A positive statement is an assertion about how the world is.

A normative statement is an assertion about how the worldought to be.

When economists make normative statements, they are actingmore as policymakers than scientists.

Economists who advise policymakers offer conflicting adviceeither because of differences in scientific judgments orbecause of differences in values.

At other times, economists are united in the advice they offer,but policymakers may choose to ignore it.


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Summary

In this session we have provided a general overview of the

subject and an introduction to the economic way of thinking.

Over the remaining sessions we will develop these themes

further in the next session we will focus on demand and

supply and market structure. We will also introduce the

concept of elasticity and look at the role of government inthe economy.

In preparation please read chapters 4 & 5 in the text.

Also start planning for your assignment by coming up with alist of web-sites that will help you access relevant data

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