concepts. to introduce certain terms and concepts, revisit to provide a background concepts:...
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Concepts
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To introduce certain terms and concepts, revisit
To provide a background Concepts:
1.Firms, consumers, government2.Demand, supply3.Price-elasticity, makers, takers4.Joint costs, allocation5.Profit maximization, perfect competition6.Business and government
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Is business +economics What is economics: deals with-privatization,
unemployment, exchange rates, profitability, competition……..
Concerned with production and consumption of goods and services
Goods ( tangible products) e.g. cars, books, food
Services( intangible products) e.g. banking, transportation
Business economics
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More precisely it deals with◦ What goods and services societies produce ( type-cars, wine, housing, health)◦ How they produce them ( by firms, govt assistance, govt ownership)◦ For whom they are produced ( available for all or to those who can pay)
and◦ How resources are allocated to do the above
Business is exchange of goods or services for a consideration
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Firms)
Consumers) ………Market-framework for buyers and sellers
Government)
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A firm/business/enterprise-legally recognized organization designed to make goods and services
Objective-generation and receipt of financial return for work and acceptance of risk
Different forms of business ownership-sole proprietorship, partnership, corporation
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What a firm must ask itself
◦ What it should produce
◦ How should it organize production
◦ At which segment should the output be aimed e.g. the growth of a supermarket from a grocery shop to a global retailer
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Issues for the firm:◦ Source of raw materials and costs◦ Competition
Players substitutes
◦ Demand and Supply◦ Pricing
◦ Consumers◦ Resource allocation in a competitive market
environment
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Why are consumers important?◦ Have the needs for which firms compete to
satisfy◦ Determine the consideration for satisfaction of
need-- price◦ They determine way markets behave◦ How they grow or decline◦ How fast they change◦ E.g. Levi Jeans blues blamed for 700 job losses!
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Consumer sovereignty –’consumption choices of individuals in competitive markets condition production patterns’.
Producers must follow lead given by purchasing pattern of consumers
Hence consumers exercise sovereignty over producers. E.g. environmentally friendly products, vegan, cosmetics without animal testing
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Free market: One in which there is no govt interference-
what , how and for whom decided by market forces
State intervention:1.State may be a producer- with or instead of
firms2.State may not produce but regulate e.g.
empowerment of health inspectors for hotels
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Firms Free market Consumer
Firms
Market Consumer
Govt
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Business firm Market Consumers
Govt as regulator
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Definitions Price Costs
◦ Fixed costs◦ Variable costs◦ Marginal costs◦ Average costs◦ Long term costs◦ Short term costs◦ Joint costs
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Definitions Revenues
◦ Total revenues◦ Marginal revenue
Profits
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Quantity demanded: The amount of a good or service that consumers wish to purchase at a particular price. ( assuming all other influences are constant)
Factors influencing demand-substitutes, consumer preferences, complements ( CD and player)
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The price of the product in question. The income available to the household. The household’s amount of accumulated
wealth. The prices of related products
available to the household. The household’s tastes and
preferences. The household’s expectations about
future income, wealth, and prices.
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PRICE (PER
CALL)
QUANTITY DEMANDED (CALLS PER
MONTH)$ 0 30
0.50 253.50 77.00 3
10.00 115.00 0
ANNA'S DEMAND SCHEDULE FOR
TELEPHONE CALLS
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The law of demand states that there is a negative, or inverse, relationship between price and the quantity of a good demanded and its price
This means that demand curves slopeThis means that demand curves slopedownwarddownward
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• Changes in determinants of demand, Changes in determinants of demand, other than price, cause a change in other than price, cause a change in demanddemand, or a , or a shiftshift of the entire demand of the entire demand curve, from curve, from DDAA to to DDBB..
• Summarize:Summarize:• 1.Change in price leads to movement 1.Change in price leads to movement
along curvealong curve• 2.Change in income, tastes, substitutes 2.Change in income, tastes, substitutes
leads to shift of curveleads to shift of curve
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Quantity supplied is the amount that firms wish to sell at a particular price
Factors influencing supply: price, Input costs ( decrease in cost of beans, tins etc will increase supply of baked beans ) technology ( Henry Ford’s introduction of mechanized assembly line reduced cost of car production)
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0
1
2
3
4
5
6
0 10 20 30 40 50Thousands of bushels of soybeans
produced per year
Pri
ce o
f so
ybea
ns
per
bu
shel
($)
PRICE (PER
BUSHEL)
QUANTITY SUPPLIED
(THOUSANDS OF BUSHELS
PER YEAR)$ 2 0
1.75 102.25 203.00 304.00 455.00 45
CLARENCE BROWN'S SUPPLY SCHEDULE
FOR SOYBEANS
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• When supply shifts to the right, supply increases. This causes quantity supplied to be greater than it was prior to the shift, for each and every price level.
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The operation of the market depends on the interaction between buyers and sellers.
An equilibrium is the condition that exists when quantity supplied and quantity demanded are equal.
At equilibrium, there is no tendency for the market price to change.
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• At Po the wishes of buyers and sellers coincide.
• In equilibrium the quantity demanded and quantity supplied are equal
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Price takers are firms that are forced to accept the market price when selling goods and service. Accept prices set by demand and supply. E.g. firms small wrt market size
Price makers determine their own price. E.g. a monopoly
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“Elasticity of demand may be defined as the ratio of the percentage change in demand to the percentage change in price.”
We measure the degree of price elasticity with the coefficient Ed
Ed = Percentage change in Quantity demanded / Percentage change in price
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Demand is elastic if a specific percentage change in price results in a larger percentage change in quantity demanded.e.g luxury goods. Ed>1
If a specific percentage change in price produces a smaller percentage change in quantity demanded, demand is inelastic. Ed<1e.g. necessities
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Elastic demand
Demand is elastic if a specific percentage change in price results in a larger percentage change in quantity demanded
Ed = 0.4/0.2 = 2Ed > 1
Examples include luxuries
P
O
Q
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Inelastic Demand
If a specific percentage change in price produces a smaller percentage change in quantity demanded, demand is inelastic
Ed = 0.1/0.2 = 0.5
Ed < 1Examples include
Necessities
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Perfectly Elastic◦ Ed = infinity
◦ Quantity demanded changes without any change in price
Perfectly inelastic◦ Ed = 0
◦ Change in price brings no change in Quantity demanded
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Characteristics: A common manufacturing process produces simultaneously two or more products from common input
Joint costs-costs of the common manufacturing process
Joint Products-products from a common –input and manufacturing process
Split –off point-the stage in manufacturing where joint products are separated
Cost allocation
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Firms maximize profit when:Cost of producing last unit (MC) is equal to
revenue generated by sale of last unit (MR)
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Many (small) firms, producing a homogeneous (identical) product, none of which having an impact on the price; each firm's product is non-distinguishable from other firms' product.
b. Many buyers none of whom having any effect on the price.
c. No barriers to entry and exit: in the long run firms can shut down and leave the industry or new firms can come into the industry freely.
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d. No interference in the market process: No price control or restrictions on production
e. All firms have equal and complete access to the available inputs (input markets) and production technology; all firms have the same production and cost functions.
f. All sellers and buyers have perfect information about the market conditions.
g. Making above-normal profits by existing firms will result in new entries into the industry. Firms that have losses shut down and leave the industry in the long run.
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In real markets, monopoly & oligopoly undermine consumer sovereignty
Inimical to consumer interests Rationale for govt intervention in markets Business therefore has various relationships
with govt
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Arises when the market either fails to provide certain goods or fails to provide them at their optimum or most desirable level
As per economic theory 3 kinds of market failures:
1.Monopoly2.Public Goods3.Externalities
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May distort functioning of market Government may limit commercial freedom
E.g. The case of Walls and competition commission
Assume ownership by nationalization
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Defined as one that once produced can be consumed by everyone e.g. street lighting
Characteristics:1.Non rival in consumption ( use does not
diminish supply)2.Non excludable Other e.gs. National defence, justice
system, roads
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Private Good-One that is wholly consumed by an individual e.g. a can of beer, a seat in a theatre
The goods/service are comprehensively and exclusively used up
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Costs incurred or benefits received by other members of society not taken into account by producers and consumers
Third –party effects Negative externalities e.g. environmental
pollution, animal testing for cosmetics, development control ( Case of Manchester Airport)
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Arises when a private transaction produces unintended benefits for economic agents who are not party to it
Problem?1.Occur at the discretion of individuals as
private transactions2.Some may choose not to do itRationale for govt intervention
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E.g. Case of Small pox eradication in 1977 Achieved by a vaccination program of WHO
and funded by most govts If vaccination left to market then:1.Balancing of costs vs benefits2.Risk of catching disease3.Some cant afford4.Wider benefit-vaccinated person cannot be
a carrier
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Framework in which buyers and sellers interact
How demand and supply behave How price reacts and why Cost allocation Role of government and why?