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Po b lecture 3 macro economics and regulation students

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B415 POB Lecture 3

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Po b lecture 3 macro economics and regulation students

  1. 1. Principles of Business Macro economics and regulations – Part 1
  2. 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. 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. 4. Economics: Simple or Complex? Basic economics 101: It’s the most complicated simple subject there is. Rush Limbaugh
  5. 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. 6. Who does it involve & how does it work? Economic Agents Traditional View Individuals Businesses Organisations Government
  7. 7. 7 Economic Factors of Production Source: Bovee et al, 2013
  8. 8. What are we missing? Technology Innovation ? Also consider the role of: Education Culture International Trade History & Politics
  9. 9. Macro Vs Micro Economics Source: Bovee et al, 2013
  10. 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. 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. 12. GDP – A Good Indicator? View video: https://www.youtube.com/watch?v=QUaJMNtW6GA#t=16
  13. 13. Types of Unemployment Source: Bovee et al, 2013
  14. 14. Consumer Prices Index Source: Bovee et al, 2013
  15. 15. Gross National Income Data Source: Bovee et al, 2013
  16. 16. A Divided World Source: Daniels et al, 2013
  17. 17. GNI per Capita, 2011 Source: Daniels et al, 2013
  18. 18. GNI Per Capita, 2011, Adjusted for Purchasing Parity Source: Daniels et al, 2013
  19. 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. 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. 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. 22. A deep dive into Supply and Demand View video: https://www.youtube.com/watch?v=qt0Hw5EYlqw
  23. 23. Understanding Demand Source: Bovee et al, 2013
  24. 24. Understanding Supply Source: Bovee et al, 2013
  25. 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. 26. The Relationship between Supply and Demand Source: Bovee et al, 2013
  27. 27. Types of Competition in a Free Market Source: Bovee et al, 2013
  28. 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. 29. The Competition Commission Source: https://www.gov.uk/government/organisations/competition-and-markets-authority/ about
  30. 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. 31. Theory of Absolute Advantage Production Possibilities under Conditions of Absolute Advantage Source: Bovee et al, 2013
  32. 32. Theory of Comparative Advantage Production Possibilities under Conditions of Comparative Advantage Source: Bovee et al, 2013
  33. 33. Comparative Advantage: Explained View video: https://www.youtube.com/watch?v=FpTBjRf8lGs
  34. 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. 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. 36. End of presentation © Pearson College 2013

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