Lesson 4: Essential Economic Principles

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Watch this with a 10-15 minute audiotrack at http://vimeo.com/novusprogram/lesson4

This lesson will explain some of the basic economic concepts that a business owner needs to understand. These concepts apply both to large-scale situations (also known as macroeconomics) and to individual situations (known as microeconomics). While those topics are discussed in more detail in other lessons, this one provides a foundation.

The Novus project is a combination of video tutorials designed to be used in conjunction with a free business simulation software program. The Novus Business and IT Program contains 36 business and IT training videos, covering basic finance, accounting, marketing, economics, business strategy, Word, Excel, and PowerPoint. Users will have an opportunity to apply the lessons in the Novus Business Simulator. Over six rounds, the user or teams will have to make decisions on capital purchases, financing, production, financing, and human resources for a microbrewery. This channel has arranged the 36 video lessons into the order in which they are meant to be used with the simulator. To watch this slideshow as a video, please go to our Vimeo page at: https://vimeo.com/novusprogram. To download our free business simulation software, please go to our SourceForge page at: http://sourceforge.net/projects/novus/.

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Lesson 4: Essential Economic Principles

  1. 1. Essential Economic Principles Objective: To understand the basic economic concepts that govern businesses and how they can influence the behaviors of consumers and suppliers.Novus Business and IT Training Program
  2. 2. Economic Basics• Scarcity – What we want is more than what we have• Economics – How do we use limited resources?Novus Business and IT Training Program 1
  3. 3. Types of Economies • Planned • Market • MixedNovus Business and IT Training Program 2
  4. 4. Inputs and Outputs TYPES OF RESOURCES (Inputs) LABOR NATURAL TOOLS RESOURCES GOODS and SERVICES (Outputs)Novus Business and IT Training Program 3
  5. 5. Consumers and Suppliers• Consumers – those who buy• Suppliers – those who sell• Businesses can be both Consumer of Supplier flour of bread• Workers are suppliersNovus Business and IT Training Program 4
  6. 6. The Flow of Income Outputs of Production $$$ Consumer Spending $$$ Salaries, Wages Inputs for Production
  7. 7. Economic Basics• Supply and Demand – The most basic economic concept – Supply = what is available in the market – Demand = what consumers wantNovus Business and IT Training Program 6
  8. 8. Supply and Demand EquilibriumNovus Business and IT Training Program 7
  9. 9. What Determines Demand?• Income• Preferences• Weather• Time of Year• Relative Price• Consumer ExpectationNovus Business and IT Training Program 8
  10. 10. What Changes Market Demand?• Distribution of Wealth• Community Habits• Number of Buyers• Population GrowthNovus Business and IT Training Program 9
  11. 11. Supply, Demand and Price• Higher demand+same supply= higherequilibrium price• Lower demand+ samesupply=lower equilibrium price• Higher supply+ same demand =lower equilibrium price• Lower supply + samedemand =higher equilibrium priceNovus Business and IT Training Program 10
  12. 12. Higher Demand = Higher Price Normal Winter Colder Winter Demand Supply Demand SupplyPrice P-2 P-1 Q-1 Q-2 Quantity Novus Business and IT Training Program 11
  13. 13. Opportunity Cost• Relationship between scarcity and choice• Different than financial cost• Not having A because you chose B• Applies to consumers and suppliersNovus Business and IT Training Program 12
  14. 14. Trade Improves the Quality of Life• Everyone has different resources, skills, knowledge, etc.• If people specialize in what they are best at, they can trade with others to make better use of everyone’s resources.• Example - Time to prepare 1 kg of butter or cheese: Butter Cheese You 3 Hours 1 Hour Your Neighbor 2 Hours 4 Hour
  15. 15. Summary Producers Supply and Opportunity and Specialization Demand Cost ConsumersNovus Business and IT Training Program 14

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