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Principles of
Business Economics
Joseph G. Nellis
Professor of International Management Economics
Cranfield School of Management
Cranfield University
David Parker
Professor of Business Economics and Strategy
Aston Business School
Aston University
Pearson Education Limited 2002
Contents
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
OHT 0.2
OHT 1.1
CHAPTER 1
Business economics: an overview
Microeconomic Environment
deals with the operation of the firm in its immediate market
involves determination of prices, revenues, costs,
employment, etc
Macroeconomic Environment
deals with the general economic conditions of the larger
economy of which each firm forms a part.
involves the impact of political, legal and economic
decisions, both nationally and internationally.
OHT 1.2
Learning outcomes
OHT 1.3A
OHT 1.3B
OHT 1.3C
OHT 1.4A
Resource allocation.
Opportunity cost.
Marginal analysis.
Business objectives.
OHT 1.4B
Time dimension.
Externalities.
Discounting.
Property rights.
Resource allocation
OHT 1.5
OHT 1.6
OHT 1.7
OHT 1.8
OHT 1.9
Marginal Analysis
Business Objectives
OHT 1.10
Profit maximisation
OHT 1.11
Time dimension
The short run represents the operating period of
the business in which at least one factor of
production is fixed in supply.
The long run represents the planning horizon for
the business in which all factors of production may
be varied.
OHT 1.12
Discounting
The concept of discounting is concerned with the fact that
costs and benefits arising in future years are worth less to us
than costs and benefits arising today.
Discounting formula
NPV =
St
1 r
where NPV is the net present value of the cash flow over the
life of the project, S is the future sum, r is the rate of interest
or discount rate, and t the number of years elapsing before
the future sum is received.
OHT 1.13
Oligopolistic competition.
Monopoly.
OHT 1.14
OHT 1.15
OHT 1.16
The threat from potential new entrants into the market the
degree of market contestability or the extent to which firms
are able to enter the market and contest for consumers.
OHT 1.17
OHT 1.18
Cost leadership.
Differentiation.
Focus.
OHT 1.19
OHT 1.20A
OHT 1.20B
OHT 1.20C
OHT 1.20D
OHT 1.20E
OHT 1.20F
OHT 2.1
CHAPTER 2.
The analysis of consumer demand
Consumer surplus.
Concepts of elasticity.
Learning outcomes
OHT 2.2A
Learning outcomes
OHT 2.2B
OHT 2.3
OHT 2.4
OHT 2.5
OHT 2.6
OHT 2.7
Consumer equilibrium
MU z
MU a MU b
...
Pa
Pb
Pz
where
MU =marginal utility
P =price
a ,b ,...,z =various goods and services consumed
Consumer surplus
OHT 2.8
OHT 2.9A
Determinants of demand
The own price of the good itself (P0 ).
Determinants of demand
OHT 2.9B
Demand function
Qd f P0 , Ps , Pc , Aa ,b... z , Yd ,W , T , C , E , POP
OHT 2.10
OHT 2.11
OHT 2.12
Classification of products
Normal products.
Inferior products.
Giffen products.
Veblen products.
Classification of products
OHT 2.13
Normal products
Goods and services may be classified as normal products if the quantity
demanded rises as incomes rise and falls as incomes fall.
Inferior products
Certain products are classified as inferior because the demand for them falls as
incomes rise (and vice versa).
Giffen products
A special case of the inferior product arises when,as price rises ,more of the
good in question is bought resulting seemingly in an upward sloping demand
curve,contrary to the normal law of demand.
Veblen products
It has been suggested that luxury type products also display perverse price
demand relationships,though for different reasons to that of the Giffen
products case.These are sometimes referred to as Veblen products,
Concepts of elasticity
OHT 2.14
OHT 2.15
Q2 Q1 / 1 Q2 Q1
2
P2 P1 / 1 P2 P1
2
Q2 Q1
P2 P1
OHT 2.12
P2 P1
Q2 Q1
OHT 2.17
Point
Ed
Q2 Q1 / Q1
P2 P1 / P1
Q2 Q1 P1
x
P2 P1 Q1
OHT 2.18
Degrees of elasticity
Products with a price elasticity of demand
of less than 1 are said to have a relatively
inelastic demand with respect to price
they are said to be price inelastic .
OHT 2.19
OHT 2.20
OHT 2.21A
OHT 2.21B
OHT 2.22
OHT 2.23
OHT 2.24
Marginal revenue
Marginal revenue (MR) is defined as the change in ()
total revenue (TR) as a firm sells one more or one less
unit of its output (Q ).
TR
MR =
Q
Average revenue (AR)is the total revenue (TR) divided by
output (Q )or the revenue earned on average for each
unit sold.
TR
AR =
Q
J. Nellis and D. Parker, Principles of Business Economics.
OHT 2.25
OHT 2.26A
OHT 2.26B
OHT 2.27A
OHT 2.27B
OHT 2.27C
OHT 2.27D
OHT 2.27E
Arc Ed
Q2 Q1 x P2 P1
P2 P1 Q2 Q1
OHT 2.27F
Q2 Q1 x P1
P2 P1 Q1
OHT 2.27G
OHT 2.27H
OHT 2.27I
OHT 2.27J
OHT A2.28
OHT A2.29
OHT A2.30
Budget constraint
PxQx + PyQym
The slope of the budget line is determined by the relative prices of the two goods
and the position of the line by the consumers income.
Figure A2.3 The budget constraint
OHT A2.31
OHT A2.32
OHT A2.33
Figure A2.6 Substitution and income effects of a price change for a normal good
OHT A2.34
OHT 2.35A
(2.1)
OHT 2.35B
TR
TR
MR
Q
Q
2
2
(substituting
for
TR
=
aQ
bQ
)
aQ
bQ
=
Q
= a - 2bQ
2.2)
J. Nellis and D. Parker, Principles of Business Economics.
OHT 3.1
CHAPTER 3.
The Analysis of production costs
3.1
Learning outcomes
OHT 3.2A
OHT 3.2B
Learning outcomes
OHT 3.3
Production function
OHT 3.4A
OHT 3.4B
OHT 3.5
OHT 3.6
OHT 3.7
(2)
Units of
labour input
(n)
10
10
10
10
10
10
1
2
3
4
5
6
(3)
(4)
Total
Average physical
physical product product of labour
(TPP)
(APP) = (3) (2)
8
20
35
40
42
43
8
10
11.7
10
8.4
7.2
OHT 3.8
(5)
Marginal physical
product of labour
(MPP)
8 (8-0)
12 (20-8)
15 (35-20)
5 (40-35)
2 (42-40)
1 (43-42)
OHT 3.9
Marginal cost
The change in total costs of production as output is changed
incrementally is referred to as the marginal cost .Given a total cost
function,it is technically the first derivative that is, the slope of the
total cost curve at each level of output (insert equation) ).Where the
total cost curve is linear,the marginal cost is a constant,and it is
easier to refer to the marginal cost of output.
Incremental cost
The incremental cost per unit is the total change in costs caused by
the output increment (this is equal to the sum of the marginal costs
over the increment in output), divided by the change in output.In
other words,incremental cost equals the average marginal cost
over the range of outputs.
OHT 3.10
100
100
100
100
100
100
10
20
30
40
50
60
110
120
130
140
150
160
8
20
35
40
42
43
(5)
Average cost
per unit = (3) (4)
$
13.7
6.0
3.7
3.5
3.6
3.7
OHT 3.11
OHT 3.12
0
1
2
3
4
5
6
7
8
9
Variable
cost
($)
VC
(2)
Fixed
cost
($)
FC
(3)
Total
cost
($)
TC
(4) = (2) + (3)
Marginal
cost
($)
MC
(5)
Average
variable cost
($)
AVC
(6) = (2)/(3)
0
20
30
36
40
48
60
80
112
156
48
48
48
48
48
48
48
48
48
48
48
68
78
84
88
96
108
128
160
204
20
10
6
4
8
12
20
32
44
20
15
12
10
9.6
10
11.4
14
17.3
OHT 3.13
Average
fixed cost
($)
AVC
(7) = (3)/(1)
Average
total cost
($)
ATC (8) = (4)/(1)
= (6) + (7)
48
24
16
12
9.6
8
6.9
6
5.3
68
39
28
22
19.2
18
18.3
20
22.6
OHT 3.14
OHT 3.15
OHT 3.16
OHT 3.17
OHT 3.18
OHT 3.19
OHT 3.20
Labour.
Investment.
Procurement.
Research and development.
Capital.
Diversification.
Product promotion.
Transport and distribution.
By-products.
OHT 3.21
Labour force.
Suppliers.
Social infrastructure.
OHT 3.22
Labour
Other inputs
OHT 3.23
OHT 3.24
OHT 3.25
Economies of scope
Organising production
OHT 3.26
OHT 3.27
OHT 3.28
OHT 3.29
OHT 3.30
OHT 3.31
OHT 3.32
OHT 3.33
OHT 3.34
OHT 3.35A
OHT 3.35B
OHT 3.35C
OHT 3.35D
OHT3.35E
OHT 3.35F
OHT 3.36G
OHT 3.35H
OHT 3.35I
MRTS kforL
MPL
MPK
OHT 3.35J
MPL
PL
MPK
PK
Or, alternatively
MPL MPK
PL
PK
J. Nellis and D. Parker, Principles of Business Economics.
OHT 3.36
OHT A3.37
An isoquant curve shows in graphical form the different combinations of factor
inputs (such as capital and labour) that can be used to produce a given quantity of
a product per time period with a given state of technology
An isoquant map is a collection of ranked isoquant curves that shows OHT 3.38
in graphical form a firms increasing output per time period when
moving outward from the origin using larger quantities of two factor
inputs (such as capital and labour).
OHT3.39
MRTS CapitalforLabour
MPLabour
MPCapital
Isocost lines
OHT A3.40
OHT 3.41
MRTS KforL
MPL
PL
MPK
PK
MPL
MPK
PL
PK
OHT A3.42
OHT A3.43
MRTS KforL
MPL
PL
MPK
PK
Or, alternatively
MPL MPK
PL
PK
J. Nellis and D. Parker, Principles of Business Economics.
OHT A3.44