Business Economics (MGT5022) SEM1 2021 - 2022

1. 1
Lecture 1
• Learning outcomes: by the end of this
session you should be able to-
– understand the role of firms, consumers and
government in markets.
– explain the concept of ‘opportunity cost’.
– differentiate between ‘positive’ and ‘normative’
economics.
– differentiate between ‘macroeconomics’ and
’microeconomics’.

2. 2
Recommended reading:
– Begg, D. (2013) Foundations of Economics. pp 3-16
– Begg, D. (2011) Economics. McGraw-Hill Higher
Education. Chapter 1.
– Krugman, P., Wells, R. and Graddy, K. (2008)
Economics. Worth Publishers. Chapter 1
See also the books recommended in the module
reading list, as they tend to cover pretty much the same
material.

3. 3
Economics Defined
• “The study of how society decides what, how,
and for whom to produce”
Begg (2000)
• Explains how scarce resources are allocated
between competing claims on their use.
• A scarce resource:
– is one for which demand at a zero price would
exceed available supply
– implies that all a society’s resources are scarce in
relation to the limitless wants present in every
society - which leads to consumerism, i.e. excessive
consumption, with negative effects on the
environment.

4. The Economic Problem
• Unlimited Wants
• Scarce Resources –
Land, Labour,
Capital
• Resource Use
• Choices
A wind farm. Copyright: Getty Images, available
from Education Image Gallery

5. 5
How might this ‘resource’ be used?

6. 6

7. 7
Alternative use of a tractor in Cuba: ‘vehiculo collectivo’

8. The Economic Problem
• What goods and services should an economy
produce? – should the emphasis be on agriculture,
manufacturing or services, should it be on sport and
leisure or housing?
• How should goods and services be produced? –
labour intensive, land intensive, capital intensive?
How to be efficient?
• Who should get the goods and services
produced? – even distribution? more for the rich? for
those who work hard? Depends very much on one’s
values
• Environmental sustainability – How to generate
wealth without damaging the environment?

9. 9
Scarce Resources
• Which of the following are scarce
resources?
– water in the desert
– water in a rainforest
– graduates
– fresh air
– roads in Central London
– hours a day for work, rest and play.

10. 10
Scarcity Forces Choices to Be
Made
• Opportunity cost
– the cost of an action measured in terms of the best
foregone alternative action
– the quantity of other goods that must be sacrificed
to obtain another unit of a good
• What is the opportunity cost of attending
university as a full-time student?

11. 11
Influences on Resource
Allocation
• Which individuals or agencies decide what,
how and for whom to produce?
• Firms
– central purpose generally is organisation of
production for a profit
• Consumers
– consumer sovereignty: ultimate control over what
markets produce (but do consumers really enjoy
sovereignty?)
• Government
• Markets
– process of interaction between firms, consumers
and government.

12. 12
Government and Resource Allocation
• Resource allocation handled in different ways in different
societies
– Command economy
• the government decides what, for whom and how to produce
– Free market
• Government does not control what is produced, nor prices,
nor output levels.
• Adam Smith; pioneer of free markets
– Wealth of Nations (1776)
– individuals in free markets pursue their own interests (the
baker bakes for himself, not to help others), and are led
‘as by an invisible hand’ to do things in a way that benefits
society as a whole.
– Although this book considers the role of self-interest in the
functioning of markets, in The Theory of Moral Sentiment
(1759) Smith describes how people need other people to
be happy so as to be happy themselves.

13. 13
Free Markets
• Friedrick von Hayek: “only markets, not
governments, can gather and disperse price
knowledge effectively”
• His chief political idea—that free markets and
political liberty were indissociable—lent strength to
the revival of classical ‘economic liberalism’
• He is the ‘godfather’ of the Thatcher-Reagan
revolution, inspiring a wave of deregulation and
privatisation, not without controversy, e.g. utilities
and the NHS
• His intellectual opposite would be Karl Marx
(evoked by those who favour nationalisation), or,
to a lesser degree, John Maynard Keynes (in
favour of state intervention to boost aggregate
demand).

14. Who’s who?
14

15. 15
Government and Resource
Allocation
– Mixed economy
• the government and private sector
interact
– Economy in transition
• role of government being eroded with
allocation determined by private firms
and consumers.

16. Market orientation
?
?
Command
economy
Free
market
economy
Mixed
economy
Economy in Transition
The UK is often described as having a ‘mixed
economy’
Think of examples of
• a command economy
• a free market economy

17. 17
Role of the market
• Market: brings together buyers and sellers of
goods and services.
• Markets involve a process of price adjustments
in reconciling buyer and seller decisions. For
example:
– Households’ decisions about consumption of
alternative goods (e.g. air travel versus rail)
– firms’ decisions about what and how to produce (e.g.
beef production vs pig production)
– workers’ decisions about how much and for whom to
work (e.g. a student’s decision as to how much part-
time work to do)

18. 18
Micro and Macro Economics
• Economics divided broadly into two general
topic areas:
– microeconomics & macroeconomics
• Microeconomics: offers a detailed treatment
of individual decisions about particular
commodities (includes decisions by firms!).
• Example of microeconomic question:
– When does a firm choose to raise prices?
– What makes consumers switch between two
products?
– Why was the price of wheat soaring globally?

19. 19
Macroeconomics:
• Emphasises the interactions in the economy as
a whole.
• The study of structure and performance of
national economies
– and government policies used to affect economic
performance.
• Example of macroeconomic questions:
– What will the UK economic growth rate be in
2020s?
– Will Brexit result in lower growth for the UK?

20. 20
Key issues in macroeconomics
• What determines a nation’s long-run
economic growth?
– e.g. as measured by growth in Gross Domestic
Product (GDP)
• What causes a nation’s economic activity to
fluctuate?
• What causes unemployment?
• What causes prices to rise?
• Can government policies be used to improve
a nation’s economic performance?
• How does being part of a global economic
system affect nations’ economies?

21. 21
Normative and Positive
Economics
• Positive economics
– deals with objective explanation
– concerned with matters of fact, not opinion
– e.g. if a tax is imposed on a good its price will tend to
rise
• Normative economics is based on subjective
value judgements
– e.g. a tax SHOULD be imposed on tobacco to
discourage smoking
– it is more important to devote resources to health than
to education

22. 22
Go raibh
maith agat