BUSINESS Delivered by: Sithari Herath BSc. Fin(sp) (USJP), ACCA, - - PowerPoint PPT Presentation
ECONOMICS FOR BUSINESS Delivered by: Sithari Herath BSc. Fin(sp) (USJP), ACCA, CIMA Economics for Business - IFD -L1 1 Module Assessment 2 EXAMS AT THE END OF THE SEMESTER (CLOSED BOOK 3 HOURS EACH) ASSESSMENT 1 50% ( CONSISTS OF
1 Economics for Business - IFD -L1
Delivered by: Sithari Herath
2 EXAMS AT THE END OF THE SEMESTER (CLOSED BOOK –3 HOURS EACH)
QUESTIONS)
QUESTIONS)
Economics for Business - IFD -L1
3 Economics for Business - IFD -L1
Economy and Economics “Economy” -An Economy (or Economic system) is an
entity (or a system) by which the production anddistribution
resources is made in asociety . The Economy consists of households, Firms (businesses), Government and other institutions of agiven society . E.g. Sri Lankan Economy , USA Economy , UkraineEconomy .
“Economics” -A social science that studies how
individuals, governments, firms and nations make choiceson allocating scarce resources to satisfy their unlimitedwants.
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John Maynard Keynes
(1883 – 1946)
Lionel Robbins
(1898 – 1984)
First book inEconomics 1776 An Inquiry into theNature and causes of the Wealth of Nations
Adam Smith
1723-1790
Father of Economics
AlfredMarshal
(1842 – 1924)
Economists
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House Holds Firms Government
Foreign Sector
Foreign house holds Foreign firms Foreign governments
Economic agents
Economics agents take decisions (about resourceallocation) in an economy .
1 2 3
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Resources – In economics, resources means all the human, natural and manufactured or manmade recourses which are at our disposal and which we use to create wealth. Resources include land, labour , capital and enterprise. Wealth – the goods and services which a nation creates. Goods– Consumer goods like cars and food, capital goods like factories, tools, computers, lorries and roads. Services– entertainment, laundries, accounting and legal advice which are available for consumption. Economic Welfare –is the provision of a minimal level of well-being (wealth) and social support for all citizens. Higher the wealth higher thewelfare.
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Land– This includesall of the natural resources that are available for exploitation; for example, oil, mineral deposits, cotton, wood,water , seeds, sea wind and sunlight (anything provided by nature which can be employed productively). T ypes of Resources
1
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Labour– This includes all forms of human effort, both physical and mental, directed towards the production of goods and the provision of services, i.e. workers, lawyers, police officers, waiters, actors. T ypes of Resources
PhysicalLabour Mental Labour
2
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Capital– This includes all manufactured or man- made aids to production created by society , not as an end in themselves, but to improve the quality and quantity of the goods and serviceswe produce. i.e. tools, manufacturing machinery , warehouses, factories, the road and rail networks,computers. T ypes of Resources Fixed Capital– Fixed capital is defined as capital which is not consumed and does not change form during the process ofproduction. Working Capital– this includes partly processed raw material (i.e. steel), work in progress (i.e. car doors, body parts for cars) and unsold goods (i.e. unsold cars).
3
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Enterprise – An entrepreneur
group who will organize production, bear risk taking decisions regarding what to produce, the location of production and the techniques of production to be employed, in the hope of making profit. T ypes of Resources
4
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Factors of production and theirrewards
Production Factor Reward Land Rent Labour Wage/ Salaries Capital Interest Enterprise Profit 4 3 1 2
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Money – Money is anything used to exchange goods and services (wealth created by using resources). In economics money does not qualify as a productive resource, having no value in itself.
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The fundamental economicproblem
Inadequacy of Resources when compared with Unlimited Human Wantsis, “SCARCITY”.
Human Wants Human Wants Resources
L L C E
Resources are Adequate
No Scarcity
Resources are Inadequate
Scarcity
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Developing Economies Eg:Somalia
Experience “Scarcity”, when fulfilling their basic wants.
Developed Economies Eg:USA
Experience “Scarcity", when fulfilling their luxury wants.
The fundamental economic problem
Scarcity is common to everyone
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Scarcity and Choice
Wants /Alternatives
1 2 3 4 5
Scarce Resources Selecting an Alternative from a set of available alternative is, 'Choice’. Reject Select
Scarcity Choice OpportunityCost
What and how much to produce? How to produce? Whom to produce?
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Opportunity cost measures thecost
in term of forgone
Wants /Alternatives
1 2 3 4 5
Scarce Resources Reject Select
Scarcity Choice OpportunityCost
NextBest Alternative
In other words,cost
terms of the next best alternative forgone.
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The production possibility curve illustratesthe potential outputof an economy , and the
decisions, under following assumptions.
a technically efficient manner . Production PossibilityCurve
C A B Product1 Product2 D PPC Efficient Production Inefficient Production Impossible to produce due to Scarcity
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Production PossibilityCurve
Units ofCapital (000) Units offood (million) 20 15 15 12 17 20 15 17 20 20 15 12 A B PPC Units of Food (million) Units of capital (000)
+2
Raising the output of food by 2 million units will have an opportunity cost of 3,000 units of capital.
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Turnover 100,000 Cost of sales 30,000 Gross Profit 70,000 Depreciation 5,000 Other costs 30,000 Net profit 35,000 Accountant’s Profit Turnover 100,000 Cost ofsales 30,000 Gross Profit 70,000 Depreciation Opportunity cost of owner’s time 40,000 Other costs 30,000 Net profit Nil Economist’sProfit
Opportunity Cost Vs FinancialCost Financial accounts do not usually reflect opportunitycost.
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Super Normal Profit Normal Profit Loss
Normal profit is the
enterprise. The firm makes supernormal profit by generating revenues which exceeds allcosts, including the
entrepreneur.
Budget 1 £000 Budget 2 £000 Budget 3 £000 Sales 500 250 240 (-)Cost 350 200 195 Accounting Profit 150 50 45 (-) Opportunity cost to Entrepreneur 50 50 50 Economic Profit/Loss 100 (5)
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Rational economic behaviour is making economic decisions by carefully weighing up or measuringthe costs and benefits of different courses ofaction.
Economic agents (consumers, firms and government) make their decisions when,
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What to produce and in what quantities ?
What goods and services should be produced, and in what quantities, using the scarce resources at their disposal.
How andwhere to produce ?
Decide upon the methods of production and combination of resources to be used (labour intensive or capital intensive) and the locations in which production isto be sited.
Whom toproduce?
Decide how to distribute or share the output of goods and services we have produced among the population. 1 2 3
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Economics for Business - IFD -L1
The way in which economic problems are solved varies fromsociety to society depending on the economic system inoperation. The Free Market EconomicSystem The Planned EconomicSystem The Mixed EconomicSystem
1 2 3
Economics for Business - IFD -L1
Resource allocation decision is madeby individuals (house holds &firms)
HouseHolds Firms
Alternative names
Definition Afree market economy is an economy in which the allocation for resources is determined
Economic problems are solvedby ,
Economics for Business - IFD -L1
House Holds/Consumers Firms/Producers Demand Supply
Market
Price
Motive – to satisfy wants Motive – to make profits Market Mechanism
Solving EconomicProblems 1
What to produce and in what quantities ?
Resource would be allocated according to the preference ofconsumers.
Economics for Business - IFD -L1
How and where to produce? Solving EconomicProblems Firms or producers decide the production (how) methodand location (where) which minimize costs.
Firms/Producers
How to produce (productionmethods) Firms will constantly try to find ways to cut production costs, for example taking advantage of mass production methods or the implementation of new technology . Where to produce(location) The location of production willbe influenced by factors like nearness to market, raw materials, transport networks. 2
Economics for Business - IFD -L1
Whom toproduce? Solving EconomicProblems Wealth is distributed depends on income earned by individuals (house holds/consumers) 3
House Holds/Consumers
Income
Employment Inheritance
Market
Wealth
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Advantages The power consumers possess to influence the way in which resources are used is known as consumer sovereignty . Consumer sovereignty 1 Any imbalance of supply and demand will be eliminated through fluctuations inprice. 2 Competition between firms creates number of important benefits for society . 3
High intensive for individuals to workhard. 4
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Disadvantages Under production of merit goods and over production of demerit goods. 2 Inequalities ofwealth. 1 Merit goods are goods (or services) which are meritorious in their consumption confers benefits not only upon the consumer , but also upon the rest of society (create external benefits). E.g. healthcare, education. Demerit goods are goods (or services) which may have negative repercussions for both the individual and society (create external costs). E.g. drugs, alcohol, cigarette.
Economics for Business - IFD -L1
Disadvantages Non production of publicgoods. 3 Public goodsare goods (or services) which must be provided communally because their consumption is non-excludable and non-rivalry . E.g. street lighting, defense, provision of pavements. External costs E.g. environmental pollution. 5 Competition may give way to monopoly and potential exploitation of the consumer 4
Economics for Business - IFD -L1
Disadvantages Consumers are partly or wholly ignorant of products which they purchase. E.g. hi-fi, cars, personal computers. 6 Profit maximization at the expense ofemployment. 7
Economics for Business - IFD -L1
Resource allocation decision is made by the government. Economic problems are solvedby , Alternative names
Definition A planned economy is an economy in which the state (government) assumes ownership and control of economic resources and makes decisions about their use on behalf of the population. Government
Economics for Business - IFD -L1
Solving EconomicProblems 1
What to produce and in what quantities ?
Using a hierarchy of planning committees, State planners decide upon priorities for production and allocateresources accordingly to the various ends which theydesire. 2 Whom toproduce? 3 Government
Motive – Social welfare
How and where to produce? Planning committees (E.g. factory/ worker committee or agricultural cooperative) decide the production (how) method and location (where) which maximize socialwelfare. Wealth will be distributed among all citizens (who can pay/ cannot pay) without discrimination.
Economics for Business - IFD -L1
Advantages Reduce inequality of wealthdistribution. 1 Provision of public goods and merit goods. 2 No consumerexploitation. 3 State control of prices reduces the problem of inflation. 4
Economics for Business - IFD -L1
Disadvantages Price controls by the State may create imbalances (surpluses/ shortages)of supply and demand. 1 2 High degree of inflexibility and resistance to change, once plans have beenset in motion. Less intensive for individuals to workhard. 3 The lack of competitive mechanism will inevitably lead to reduce choiceand possible lower quality goods and services. 4
Economics for Business - IFD -L1
HouseHolds
Firms Government Definition A mixed economic system is an economic system that features characteristics of both capitalism and socialism. A mixed economic system allows a level of private economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims. Economic problems are solvedby , Privatesector Publicsector
Economics for Business - IFD -L1
Solving EconomicProblems 1
What to produce and in what quantities ?
Government may ban certain forms ofproduction. E.g. heroin How and where to produce? 2 In addition to directly allocating resources to specific ends, the central authorities will intervene to influence the behaviour of the private sector enterprises. Production method (how toproduce) Imposition of controls on the type of production techniques employed by firms to protect employees, consumers and the environment. Location (where toproduce) Location decision might be influenced through financial incentives (e.g. tax concessions, grants or low rent premises) to encourage private sector firms to set up in areas of unemployment.
Economics for Business - IFD -L1
Solving EconomicProblems Whom toproduce? 3 State does following to reduce inequality of wealth distribution;
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Economic growth
productive potentialof the economygrows.
Economic growth is the persistentrise in real output of theeconomy .
Rise in Actualoutput Rise in PotentialOutput
B A Product1 PPC1 Product2 PPC2 B A Product1 Product2 PPC1
Output an economy currently produce is actual output. Outputan economycan produce is actual output.
Economics for Business - IFD -L1
Achieving Economic Growth
The factors which encourage economic growth are; 1) Capital investment leading to the growth of the capital stock. 2) Technological progress. 3) Research and development. 4) Education and flexibleworkforce. 5) Investment in theinfrastructure. 6) Availability of finance. 7) Political stability. 8) Safe and comfortable working environment forworkers. 9) Discovery of new resources/ new ways to using existingresources.
Product1 Product2 PPC2 PPC 1
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Arguments against EconomicGrowth
Disadvantages of EconomicGrowth; 1) Depletion of resources 2) Environmental pollution 3) Increase Stress relatedillnesses
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Arguments for EconomicGrowth
Advantages of EconomicGrowth;
More goods andservices Raise Economic Welfare
Economics for Business - IFD -L1
Welfare Economics assesses how efficientlyresources are being used and how equitably wealth is being distributed.
Efficiency Equity
Equity refers to the extent to which resources or wealth are distributedfairly among individuals or different groups within society . Vertical Equity Horizontal Equity Allocative/Economic Efficiency The ability of the economy to produce those goods whichare best able to satisfythe wants of the population. Productive Efficiency This refers to production at the lowest possible cost. Implies that people with higher incomes should pay moretax. Implies that we give the same treatment to people in an identicalsituation.
Economics for Business - IFD -L1
create Knowledge
Economics for Business - IFD -L1
Economics for Business - IFD -L1