Economics of the business environment

Economics of the business environmentLessons 1 and 2

March study group meeting

2Copyright © 2009 Capgemini. All rights reserved.Copyright 2010

This document summarises lessons 1 and 2 of the economics module

Things to note about this pack A lot of the theory in this only works if you assume things

Ben knows more than all of us so expect him to tell us where this is wrong at any point.

Ignore the notes we were sent in the file. I have and have read the book which is so much more helpful although have read notes as well to make sure we do not miss anything.

The notes jump around all over the place so I have tried to make things appear in a more logical order although everything only belongs each lesson

Ask any bloody questions you can, no matter how stupid you think it is. I guarantee someone else is thinking the same thing. i.e. What hell is the person talking about?

This is actually the kicker on our global template. How horrible is burgundy and yellow! Well don’t to the marketing team…


Contents Executive summary 4 Background 5 September 2008 intake results 6

- Assessment of the hosting process 7- Information and support 9- Passport forms 11- Lessons learned 12

CU SPoC results 13- Roles in the hosting process 14- Expectations of SPoCs 15- Passport forms 16- Interviews and information packs 18

Summary and recommendations 20 Appendices (Including survey questions)24

TO BE DONE


Lesson 1 – Internal economics of business – The long and the short run

The nature of productivity and costs in the short run

Bear with me, there is a point to all of this!

•A period of time where one factor is fixed. Assume capital is fixed and labour is a variable.

Short run

•All factors of production are assumed to be variable

Long run

In assessing productivity we need to distinguish between:- Total product – Total output produced by a firms workers- Marginal product – Addition to total product after employing one more unit of an input factor e.g. 1 more worker

Reading: Book - Chapter 3 – sections 3.1 to 3.4 Book – Chapter 7 – pages 151 – 156 Lesson 1 of the notes provided by WBS


The nature of productivity and costs in the short run

When we begin to over resource the production process there is no more capital to utilise

Below is a table to demonstrate a few key concepts:

Labour Input Output

Marginal product Comments

WorkersTotal product of labour

X Y (=Y / X)1 40 40 Worker does all of the tasks2 90 45 2nd woker helps and drives another van

3 145 483rd worker specialises in admin to reduce burden on the other two

4 205 514th worker specialises in supply chin e.g. picking orders

5 255 51

6 295 49

At this point there is to many workers for the avialbale resources and therfore start to become ineffi cient

7 325 468 345 439 355 39

10 360 36

1

2

1 – This is task specialisation – Where productionis split into components and assigned and the worker becomes an expert in a specific task.

2 – The refers to an economic concept – The law of diminishing returns – As more of a variable (e.g. labour) factor of production is added to a fixed factor then returns to the variable factor will diminish (i.e. people become inefficient)


Costs in the short run – Page 54 of the book

Some formula for you

This is based on a simplistic model. This is only to highlight the fundamentals of the theory

•Three types of costs:•Variable•Fixed•Total – Simply fixed + variable

Average Variable Costs•= total variable costs / nos of units produced

Average fixed costs• = total fixed costs / nos of units produced

•Average total costs •= total costs/ nos of units produced

•Marginal cost•= change in total cost . Change in output

Costs and formula

•1 = Fixed costs•2 = Short run variable costs (SRVC) – Slows as output increases and variable costs

•3 Short run total costs (SRTC) Simply add 1 and 2 together.

•Marginal cost – Since this is the cost of producing 1 more unit the change in output should be 1 otherwise why bother.

What does it mean if you plot these on a graph


Costs in the short run – Page 54 of the book

By knowing these you can make production decisions in the short run

Background and Objectives

•The key points are as follows:•The AVC and ATC will always be U - shaped. This represents the law of diminishing returns mentioned earlier

•Towards the left output is low – small workers using fixed capital.

•Employ more = increased output, however, as more workers productivity falls and cost per unit increases.

•This makes the marginal cost curve increase.•As labour becomes less productive costs of additional units must increase.

•Marginal cost curve must cut through AVC and ATC due to relationship. When marginal lower or higher than average then will move down accordingly.

•Fixed costs will always go lower as you spread the overhead. As spread over larger output will reduce,

What does this graph show

Average Marginal costs

Output

What does this graph show•Simply put – the formula we mentioned previously plotted on a graph. The formula are not important but knowing what this show is.


Lesson 2 - Demand curves – Book page 4 and 25

The decisions are based on knowing how the curves will move based on decisions. This is actually simple production rules of a business with some fancy names and a graph

•Basically shows the maximum amount of a product that can be produced given a finite amount of resources.

This is mentioned a lot in the notes but not a lot in the book

• Illustrates the relationship between price and quantity demanded of a particular product.

Demand curves

Positive Negative


Four reasons for movement in demand curves – Book page 26

We can now begin to produce the law of demand

•Four types of costs:•Price of substitutes and complements

•Price increase or decrease encourages a switch into/ out of other products•Income

•Price rise/ falls reduce/ increase purchasing power and therefore shift the demand curves•Tastes and preferences

•Demand increases as consumers are informed about nature and availability of product. E.g. Market creates strong brand so demand increases.

•Price expectation•Beliefs about how prices in future will change e.g. new technology on the market

•Normal goods – demanded more when consumer income increases and less when it falls e.g. expensive wine

•Inferior goods – Demanded more when income levels fall and demanded less when they rise e.g. supermarket own label products

Types of costs


Measuring demand responsiveness – Book page 32

Elasticity is how demand or quantity is affected by price movement or vice versa

•Law of demand says that as long as the four points remain constant, there must be a negative relationship between price and quantity.

•Elasticity is a measure of responsiveness of demand to a change in price

•This is determined by a number of factors:1. Substitutes2. Time3. Definition of the market

•There are two ways to measure:

•1 - % change in demand / % change in price•2 – (change in demand / change in price) x (price x quantity demanded)

Costs and formula


Types of elasticity – Book page 34

Elasticity decreases as you move decreases as you move down a negative demand curve

•1 – Where elasticity is less than 1 demand is described as inelastic. i.e. change in price = a small change in demand

•2 – When elasticity = 1 demand has unit elasticity or demand is equally responsive to change in price

•3 – where elasticity is greater than 1 demand is said to be elastic and therefore responsive to a change in price

•4 – When elasticity is 1 or infinity the market is perfectly elastic and therefore demand is very responsive to price.

Once elasticity is calculated there are four types


The product life cycle and elasticity – Book page 40

Elasticity moves in conjunction with the product life cycle

•1 – Launch – Goods are unique and therefore inelastic

•2 – Growth – Competition increases and demand begins to increase and therefore elasticity increases.

•3 Maturity – Competition at its highest and therefore high price elasticity and therefore little control by firm over pricing. This is a market focus.

•4 – Decline – Prices begin to be more inelastic as consumers and producers begin to exit the market.

The product life cycle


That’s all folks

In my opinion this is the worst module but it is not so bad when you read the book

•1 – This is simplistic and high level

•2 – The book really helps this

•3 – Demand curves are based on price and output

•4 – They are affected by market forces and internal forces e.g. labour wages.

•5 – There are lots of formula in the book and notes which I have not mentioned but I have not mentioned here as I am not sure how much we need to memorise them or just apply the concepts behind them.

What to remember

Economics of the business environment

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