B415 POB Lecture 3

1. Principles of Business
Macro economics and regulations – Part 1

2. Overview
2
• Overview of what the economy is and how to understand its
main levers i.e. Micro vs Macro and interest rates, inflation,
employment etc
• Define and describe key economic measures and monitoring
activities e.g. CPI and GDP
• What is the role of scarcity in creating economic value and
looking at opportunity costs
• What are the key factors of production and how does this flow
through the value chain to create economic value
• Explain the forces of supply and demand detailing the impact
on the economy
• Provide an overview of the different types of competition in a
free-market system i.e. pure competition, monopoly,
oligopoly etc.
• Overview of absolute and comparative advantage theories in
international business

3. Learning Outcomes
3
• Define economics and explain why scarcity is
central to economic decision making
• Explain the interaction between demand and
supply
• Determine the different types of competition in a
free-market system
• Demonstrate an understanding of the
fundamentals of international trade theory

4. Economics: Simple or Complex?
Basic economics
101: It’s the most
complicated simple
subject there is.
Rush Limbaugh

5. Lets start with the economy; what is it?
“The sum total of all the economic
activity within a given region”
Bovee et al, 2013
“The state of a country or region in
terms of the production and
consumption of goods and services
and the supply of money.” Google,
Definition, 2014
“An economy or economic system
consists of the production, distribution
or trade, and consumption of limited
goods and services by different
agents in a given geographical
location.” Wikipedia, 2014

6. Who does it involve & how does it work?
Economic Agents Traditional View
Individuals
Businesses
Organisations
Government

7. 7
Economic Factors of Production
Source: Bovee et al, 2013

8. What are we missing?
Technology Innovation
?
Also consider the role of:
Education Culture
International
Trade
History &
Politics

9. Macro Vs Micro Economics
Source: Bovee et al, 2013

10. Macro Vs Micro Economics
Microeconomics
The study of how consumers,
businesses, and industries
collectively determine the
quantity of goods and services
demanded and supplied at
different prices
Macroeconomics
The study of “big picture”
issues in an economy,
including competitive
behavior among firms, the
effect of government
policies, and overall resource
allocation issues

11. Key Economic Indicators as per ONS
GDP
Consumer Prices
Index
Interest Rates
Unemployment
Public Sector
Borrowing
Government
Receipts &
Expenditure
National
Accounts
Personal
Finances
Prices,
Output &
Productivity

12. GDP – A Good Indicator?
View video: https://www.youtube.com/watch?v=QUaJMNtW6GA#t=16

13. Types of Unemployment
Source: Bovee et al, 2013

14. Consumer Prices Index
Source: Bovee et al, 2013

15. Gross National Income Data
Source: Bovee et al, 2013

16. A Divided World
Source: Daniels et al, 2013

17. GNI per Capita, 2011
Source: Daniels et al, 2013

18. GNI Per Capita, 2011, Adjusted for
Purchasing Parity
Source: Daniels et al, 2013

19. 19
Role of Scarcity in Creating Economic Value
Scarcity value is the economic factor that increases an item's
relative price based more upon its relatively low supply. Whereas
the prices of newly manufactured products depends mostly on the
cost of production (the cost of inputs used to produce them, which
in turn reflects the scarcity of the inputs), the prices of many
goods—such as antiques, rare stamps, and those raw materials in
high demand—reflects the scarcity of the products themselves
The Cookie Jar Experiment by Worchel,
Lee and Adewole, 1975
The fewer the
cookies the
more they are
valued!

20. The Effect of Scarcity
Scarcity has two powerful effects:
1. It creates competition for resources
2. It forces trade-offs on the part of every
participant in the economy.
 Opportunity cost
 The value of the most appealing alternative
not chosen

21. The Forces of Supply and Demand
Demand Supply
Buyers’
willingness and
ability to purchase
products at various
price points
A specific
quantity of a
product that the
seller is able and
willing to
provide at
various prices

22. A deep dive into Supply and Demand
View video: https://www.youtube.com/watch?v=qt0Hw5EYlqw

23. Understanding Demand
Source: Bovee et al, 2013

24. Understanding Supply
Source: Bovee et al, 2013

25. The Equilibrium Point
• The point at which quantity supplied equals
quantity demanded
• Because the supply and demand curves are
dynamic, so is the equilibrium point
• As variables affecting supply and demand
change, so will the equilibrium price.

26. The Relationship between Supply and Demand
Source: Bovee et al, 2013

27. Types of Competition in a Free Market
Source: Bovee et al, 2013

28. Types of Competition in a Free Market
Competition
Rivalry among
businesses for
the same
customers
Monopoly
A situation in
which one
company
dominates a
market that it can
control prices
Oligopoly
A market situation in
which a very small
number of suppliers,
sometimes only two,
provide a particular
good or service
Pure
competition
A situation in which
many buyers and sellers
exist that no single
buyer or seller
can individually
influence market
prices
Monopolistic
competition
A situation in which
many sellers
differentiate their
products from those
of competitors

29. The Competition Commission
Source: https://www.gov.uk/government/organisations/competition-and-markets-authority/
about

30. International Free Trade Theories
Absolute Advantage Comparative Advantage
Smith argued that it was
impossible for all nations to
become rich simultaneously by
following mercantilism because
the export of one nation is
another nation’s import and
instead stated that all nations
would gain simultaneously if
they practiced free trade and
specialized in accordance with
their absolute advantage.
The law of comparative
advantages has been
formulated by David Ricardo
who investigated in detail
advantages and alternative or
relative opportunity in his 1817
book On the Principles of
Political Economy and Taxation
in an example involving
England and Portugal.
Adam
Smith
David
Ricardo

31. Theory of Absolute Advantage
Production Possibilities under Conditions of Absolute Advantage
Source: Bovee et al, 2013

32. Theory of Comparative Advantage
Production Possibilities under Conditions of Comparative Advantage
Source: Bovee et al, 2013

33. Comparative Advantage: Explained
View video: https://www.youtube.com/watch?v=FpTBjRf8lGs

34. Essential work for next week
• Please consult the OLE for details of:
– Essential readings*
– Seminar/workshop preparation work*
– Recommended further readings
– Any additional learning
* Essential readings and preparation work must always be completed in time
for the next session
34

35. Appendix – Sources for illustrations
Slide 4:
www.foxnews.com
Slide 5:
www.mapsengland.com
Slide 6:
www.mrscultz.com
Slide 8:
www.ascensionwhispers.com
Slide 10:
www.randomoriginal.com
Slide 19:
www.cashingonkids.com
Slide 22:
www.howthemarketworks.com

36. End of presentation
© Pearson College 2013