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Economics for Business

Dr. Lucia Corno
Lecture 1
Chapter 1-2-3
13th January 2015

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OFFICE: Francis Bancroft Building, Third floor, 3.44c

EMAIL: l.corno@qmul.ac.uk
WEB: https://sites.google.com/site/luciacorno/
Lectures: Tuesdays, 2-3 pm, from January 13 to March 31
Seminars: Tuesdays or Wednesdays, from January 20 to
April 1
Teaching Assistant: Alessandra Scandura
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Course Materials
Business Economics, by N. Mankiw, M. Taylor and A.
Ashwin, Cengage, 2013

The course web page in Qmplus contains the syllabus and

detailed lecture notes for each lecture
Assessment based on two online tests MCQs (20% each)
and final exam (60%)
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Module description

Focus on businesses and households decisionmaking

Every single day, every time you make a decision, you
behave like an economist!

Covers both micro and macro-economics

Micro: focus on how households/ firms makes decisions
Macro: focus on the environment in which firms have to

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1. Economic principles
2. Supply and demand
3. Elasticities
4. Firm behaviour
5. Production, pricing and market structures
6. Macroeconomic aggregates
7. Aggregate demand and aggregate supply
8. Unemployment
9. Inflation
10.Fiscal, monetary and supply-side policies
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Economics is: Making decisions

+ Scarcity
A business men faces many decisions (i.e. how many
people to employ, wages..) => allocate scarce resources
among competing uses

A society faces many decisions as well (i.e. what job will be

done and who will do those) with scarce resources

Scarcity = limited nature of societys resources

Economics is the study of how society manages its scarce
resources => that is how the society (Firms+ households)
makes decisions
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Economics is: Making decisions +

Scarcity II
The management of the scare resources is down to
individuals and/or group decisions

People want to get the most from scarce resources

whether they are buyers, producers or sellers

Economics has many facets BUT there are key

principles about
(i) how people and business make decisions (principles 1-4)
(ii) how people and businesses interact (principles 5-7)
(iii) how economy work (principles 8-10)

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How do people and business

make decisions?
Principles 1-4

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Principle 1
Decision making involves trade-offs

Different types of trade offs in everyday's life (i.e. for managers,

employees, society)
Society faces trade offs between efficiency and equity
Efficiency: The property of a society to get the most it can from scarce
Technical efficiency (produce more)
Productive efficiency (lowest cost)
Allocative efficiency (consumers view)
Social efficiency
Efficiency refers to the size of the economic cake and equity refers to
how the cake is divided

Equity: benefits of resources are distributed fairly among societys

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

Making decisions require compare costs and benefits

BUT in some cases costs go behind the pure monetary

The opportunity cost is
whatever is given up to obtain some item
It measures the value of what is foregone/sacrified (i.e.
time, pleasure, etc)

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Principle 3
Rational people and businesses think at the margin

Many decisions are made at the margins => Ex: working

an extra hours, spend a little bit of time with the family, etc..
Marginal changes = small incremental adjustments to an
existing plan of action
Marginal Costs (MC) versus Marginal Benefits (MB)
Firms are interested in the marginal costs => Ex: airplane
company need to decide the cost of a flight ticket

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Principle 4
People and businesses respond to incentives

People compare the costs (C) and benefits (B) when making
Take an action if and only if the marginal benefits are at least
as great as the marginal costs
Their behavior can change is C and B change = > people
respond to incentives
Many public policies aim at altering behaviors through
Ex: tax on petrol => Take a bus versus driving the car? => tax
on petrol increases the cost of using the car and incentivize
people to take public transports
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How do people and business

Principles 5-7

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Principle 5
Trade can make everyone better off

Trade between two countries can make each

economy better off
Countries as well as businesses benefit from the
ability to trade with one another
Trade allows business and countries to specialize
in what they do best and to enjoy a greater variety
of goods and services

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Principle 6
Markets are usually a good way to organize
economic activity

Communist countries adopted central planning: the

government organize economic activity in a way that promoted
economic well-being
In a market economy, the decisions of a central planner are
replaced by the decisions of millions of firms and households
Despite the fact that free markets contain buyers and sellers
interested in their own wellbeing => markets have promoted
economic well-being
Adam Smiths invisible hand: everyone is motivated by selfinterest but the invisible hand guides this self-interest into a
general economic well-being
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Principle 7
Governments can improve market outcomes
Market failure is when the market on its own fails to produce an
efficient allocation of resources
Externalities are the uncompensated impact of a person or
firms action on the well-being of a third party (i.e. pollution,
Market power is when an economic agent is able to influence
market prices
Governments can intervene to improve markets (ex: by taxing
pollution, or increasing competition in case of market power)

2. CAN PROMOTE EQUITY (ex: income tax)

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How does the economy as a

whole work?
Principles 8-10

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Principle 8
An economys standard of living depends on its
ability to produce goods and services

Standard of living measured by Gross domestic product

per head (GDP) = the amount of final goods and services

produced within a country in a given period of time divided
by the population
Variation in living standards is attributable to differences in
countries productivity = amount of goods and services
produced from each hours of a workers time
In Nations where workers can produce more, most people
enjoy a higher standard of living
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GDP per capita

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Principle 9
Prices rise when the government prints too much

Inflation is the overall increase in prices

Printing money leads to price rises, because the value of
money falls

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Principle 10
Society faces a short-run trade-off between
inflation and unemployment

In the short-run there is a trade off between unemployment

and inflation as shown in the Phillips curve

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